<PAGE>

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

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

                                    FORM 10-K

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

                                       OR

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

FOR THE TRANSITION PERIOD FROM               TO
                               -------------    ------------

COMMISSION FILE NUMBER: 333-44860

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

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

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

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

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

                                 Yes |X| No | |

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($.01 par value)                     6,908,716 as of March 28, 2002

================================================================================
<PAGE>

                                      INDEX

                                     PART I.

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>         <C>                                                                       <C>
Item 1.     Business                                                                  2

Item 2.     Properties                                                                27

Item 3.     Legal Proceedings                                                         27

Item 4.     Submission of Matters to a Vote of Security Holders                       27

                                    PART II.

Item 5.     Market for Registrants Common Equity and Related Stockholder Matters      27

Item 6.     Selected Financial Data                                                   28

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                     29

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                37

Item 8.     Financial Statements and Supplementary Data                               F-1

            Balance Sheets                                                            F-2
            Statements of Earnings                                                    F-3
            Statements of Stockholders' Equity                                        F-4
            Statements of Cash Flows                                                  F-6
            Notes to Financial Statements                                             F-8

                                    PART III

Item 10.    Directors and Executive Officers of the Registrant                        59

Item 11.    Executive Compensation                                                    63

Item 12.    Security Ownership of Certain Beneficial Owner's and Management           63

Item 13.    Certain Relationships and Related Transactions                            66

                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K          71
</TABLE>


                                       1
<PAGE>

                                     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 taxes
            at the corporate level on income we distribute to stockholders.
            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.

            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. Gonfiantini, 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 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.

            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 state of Nevada
            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, 2001, there were two mortgage loans, which exceeded
            10%, which the board approved. Most loans will have terms of two to
            three years. At December 31, 2001, less than 1% of our loan
            portfolio consisted of loans with original maturities of more than
            three years. We expect that approximately 90% of our mortgage loan
            balances will at any one time be secured by first 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


                                       2
<PAGE>

            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. The Manager targets 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
                  standard 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, all
            of our loans are at fixed rates of interest. As part of the
            acquisition or refinance of a particular mortgage loan, we may
            acquire an equity-like interest in the real property securing the
            loan in the form of a shared appreciation interest or other
            equity-like participation.

            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, 2001, 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 re-structure the balance
            sheet 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:

            -     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


                                       3
<PAGE>

                  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, 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


                                       4
<PAGE>

                  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 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 cause these nonconforming mortgage loans to 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
<PAGE>

                        TABLE 1: MORTGAGE LOAN PORTFOLIO
                            (AS OF DECEMBER 31, 2001)

<TABLE>
<CAPTION>
FOOT NOTES    DESCRIPTION OF LOAN                  INT. RATE    ORIGINAL NOTE        BALANCE      MAT     LTV   LIEN POSITION
                                                         LAND LOANS
<S>           <C>                                  <C>          <C>                <C>           <C>      <C>   <C>
              Residential Raw Land                   13.00%     $  2,100,000       $ 1,579,850    1/1/02  89%   2nd
    1         Residential Raw Land                   12.50%        3,500,000         3,500,000    6/1/02  33%   1st
    2         Residential Land Dev/Infrastructure    12.50%        7,000,000         4,485,000    8/1/02  32%   1st
              Residential Subdivision                13.00%        1,980,250         1,980,250    1/1/02  38%   1st
    2         Commercial/Residential Land            12.50%        3,260,000           515,000    1/1/03  20%   1st
              Residential Raw Land                   13.00%        5,000,000         5,000,000   11/1/02  50%   1st
    1         Residential Raw Land                   13.00%        2,500,000         1,020,000    7/1/03  28%   1st
              Residential Raw Land                   13.00%           97,000            97,000   10/1/04  49%   1st
              Residential Raw Land                   13.00%           42,500            42,500   12/1/03  57%   1st
                                                                ------------       -----------
              RESIDENTAL RAW LAND TOTAL                         $ 25,479,750       $18,219,600
                                                                ============       ===========

    1         Residential Land Development           13.00%        2,900,000         1,000,000    5/1/02  29%   1st
              Residential Land Development           12.25%     $  4,357,556       $ 4,357,556    7/1/03  41%   1st
    1         Residential Land Development           13.00%        1,400,000           900,000   10/1/02  38%   1st
              Residential Land Development           12.75%       13,469,105         8,214,105    5/1/03  44%   1st
              Residential Land Development           13.00%        5,638,950         5,638,950   12/1/03  60%   1st
                                                                ------------       -----------
              RESIDENTIAL LAND DEVELOPMENT TOTAL                $ 27,765,611       $20,110,611
                                                                ============       ===========

              Commercial Raw Land                    12.25%     $  1,000,000       $ 1,000,000    6/1/03  56%   1st
    3         Commercial Raw Land                    12.50%        5,700,000         2,461,000    6/1/02  59%   1st
              Commercial Raw Land                    13.00%        2,700,000         2,700,000    9/1/02  50%   1st
    3         Commercial Raw Land                    13.00%        2,500,000           735,000    5/1/02  50%   1st
              Commercial Raw Land                    12.50%        2,188,000         2,188,000    1/1/02  67%   1st
    3         Commercial Raw Land                    13.00%        5,350,000         3,768,195    2/1/03  49%   1st
    1         Commercial Raw Land                    13.00%        4,100,000            80,000    1/1/03  50%   1st
    8         Commercial Raw Land                    13.00%        9,973,920         8,537,928    7/1/04  56%   1st
              Commercial Raw Land                    13.00%           70,000            70,000    1/1/03  65%   1st
                                                                ------------       -----------
              COMMERCIAL RAW LAND TOTAL                         $ 33,581,920       $21,540,123
                                                                ============       ===========
</TABLE>


                                       6
<PAGE>

                  TABLE 1: MORTGAGE LOAN PORTFOLIO - CONTINUED
                            (AS OF DECEMBER 31, 2001)

<TABLE>
<CAPTION>
FOOT NOTES    DESCRIPTION OF LOAN                  INT. RATE    ORIGINAL NOTE        BALANCE      MAT     LTV   LIEN POSITION
                                                       CONSTRUCTION LOANS
<S>           <C>                                  <C>          <C>                <C>           <C>      <C>   <C>
              Spec SFR Construction                  13.00%     $  1,160,000       $ 1,160,000    5/1/03  42%   1st
    4         Spec SFR Construction                  12.00%          111,839           111,839    8/1/02  87%   1st
    4         Spec SFR Construction                  12.00%          117,482           117,482    8/1/02  91%   1st
    4         Spec SFR Construction                  12.00%          118,800           118,800    8/1/02  91%   1st
    6         Spec SFR Construction                  12.75%          860,854           860,854    9/1/03  70%   1st
    5         Spec SFR Construction                  13.00%          921,349           921,349    9/1/03  80%   1st
              Spec SFR Construction                  13.00%          150,000           150,000    9/1/02  61%   1st
    5         Spec SFR Construction                  13.00%        1,594,029         1,594,029   12/1/03  80%   1st
                                                                ------------       -----------
              SFR CONSTRUCTION TOTAL                            $  5,034,353       $ 5,034,353
                                                                ============       ===========

    9         Construct Office Bldg & Office Pads    17.50%     $    950,000       $   950,000    9/1/01  63%   1st
    8         Office Shell & Land                    13.00%        1,491,644         1,491,644   12/1/03  67%   1st
                                                                ------------       -----------
              COMMERCIAL CONSTRUCTION TOTAL                     $  2,441,644       $ 2,441,644
                                                                ============       ===========

              Motels/Weekly Rentals                  12.25%     $    375,000       $   375,000    4/1/02  57%   1st
              Motels/Weekly Rentals                  12.00%        1,579,915         1,579,915    4/1/03  60%   1st
              Office Building/Vacant Land            12.50%          155,000           155,000    3/1/05  34%   1st
                                                                ------------       -----------
              COMMERCIAL BUILDINGS TOTAL                        $  2,109,915       $ 2,109,915
                                                                ============       ===========
</TABLE>

<TABLE>
<CAPTION>
                                   NON-CONFORMING SINGLE-FAMILY AND SMALL MULTIFAMILY LOANS
<S>           <C>                                    <C>        <C>                <C>           <C>      <C>   <C>
              Single-Family Residence                13.00%     $     13,235       $    13,235   12/1/06  73%   2nd
              Single Family Residence                12.25%           22,000            22,000   10/1/02  36%   2nd
              Single Family Residence                12.00%          126,500           126,500    1/1/02  78%   1st
    6         Single Family Residence                12.50%          150,000           150,000    6/1/02  67%   2nd
   7/10       Single Family Residence                13.00%          773,000           773,000    9/1/01  58%   1st
   7/10       Single Family Residence                13.00%          160,000           160,000    9/1/01  70%   2nd
              Single Family Residence                13.25%        2,500,000         2,500,000   10/1/03  54%   2nd
                                                                ------------       -----------
              SINGLE FAMILY TOTAL                               $  3,744,735       $ 3,744,735
                                                                ============       ===========

              Nonconforming - Secured by Stock       12.50%     $    130,678       $   130,678    1/1/04        1st
                                                                ============       ===========

              TOTALS                                            $100,288,606       $73,331,659
                                                                ============       ===========
</TABLE>

1     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $6,500,000

2     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $6,465,250

3     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $6,964,195

4     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $348,121

5     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $2,515,378

6     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $1,010,854


                                       7

<PAGE>
7     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $933,000

8     Loans to same borrower or related parties secured by different parcels of
      real estate aggregating to $10,029,572

9     Loans defaulted and in foreclosure, interest accruing at default rate

10    Loans in default, awaiting refinance through other lender


              TABLE 2: TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
                            (AS OF DECEMBER 31, 2001)

<TABLE>
<CAPTION>
                                                      NUMBER      CARRYING
                                                        OF         AMOUNT
                 TYPE OF LOAN                         LOANS     OF MORTGAGES       PERCENT
                 ------------                         -----     ------------       -------
<S>                                                   <C>       <C>                <C>
1st Mortgages                                           38      $68,906,574         93.97%
2nd Mortgages                                            6        4,425,085          6.03%
                                                      -----     -----------        -------

                                                        44      $73,331,659        100.00%
                                                      =====     ===========        =======

Commercial                                               3      $ 2,109,915          2.88%
Construction                                            10        7,475,997         10.19%
Land                                                    23       59,870,334         81.64%
Other                                                    8        3,875,413          5.28%
                                                      -----     -----------        -------

                                                        44      $73,331,659        100.00%
                                                      =====     ===========        =======

Maturing on or before December 31, 2002 (1)             22       29,583,721         40.34%
Maturing on or between January 1, 2003 and
December 31, 2005                                       21       43,734,703         59.64%
Maturing on or between January 1, 2006 and
December 1, 2006                                         1           13,235          0.02%
                                                      -----     -----------        -------

                                                        44       73,331,659        100.00%
                                                      =====     ===========        =======
</TABLE>

(1)   $1,883,000 was past their principal maturity at December 31, 2001

            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


                                       8
<PAGE>
            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 expect that such holdings will comprise a substantial portion
            of our assets. At December 31, 2001, we did not own any such
            securities.

            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 Collaterized
            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 expect 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
            collaterized note program and bank warehouse credit lines. At
            December 31, 2001, the amount of such credit lines was $8.0 million,
            with no amounts outstanding at December 31, 2001. In October 1998,
            we began to offer to accredited investors on a monthly basis our
            Class A Collateralized Mortgage Notes secured by our mortgage loans
            for terms that may range from one month to twelve months. The
            maximum principal amount that could be outstanding at any time was
            limited by the board of directors to $20 million. As of December 31,
            2001 and 2000 $0 and $6,553,460 of these Class A Notes were
            outstanding, respectively. No Class A Notes were issued after August
            21, 2000.

            In January 2001, we began to offer our Class B Collaterized
            Investment Notes (the "Notes") with issuances taking place on a
            monthly basis. The maximum principal of Notes that can be
            outstanding at any time may not exceed $50 million. There is no
            minimum amount of Notes that may be sold. As of December 31, 2001
            $9,475,441 of these Notes were outstanding bearing interest at rates
            of 4.5% to 8.0%.

            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
            Mortgage 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
            Mortgage Trust. Our policy generally limits the


                                       9
<PAGE>
            amount of loans to one borrower or affiliated borrowers to 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, 2001 there were eight instances of loans to the same
            borrower or related parties secured by different parcels of real
            property. Two of these loans represent more than 10% of the
            portfolio. We generally seek personal guarantees from affiliates of
            the borrower when possible. We do not have specific requirements
            with respect to credit scores or payment histories. For income
            producing properties, the net annual estimated cash flow after
            vacancy, operating expense and mortgage debt service deductions 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
            the President. 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 is 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 disposition in


                                       10
<PAGE>

            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 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

<TABLE>
<CAPTION>
                                          DECEMBER 31, 2001             DECEMBER 31, 2000

                                       PRINCIPAL        % OF         PRINCIPAL        % OF
                                      $ OF LOANS      PORTFOLIO     $ OF LOANS      PORTFOLIO
                                      ----------      ---------     ----------      ---------
<S>                                   <C>             <C>           <C>             <C>
Total Portfolio                       $73,331,659      100.00%      $55,863,036      100.00%

Period of Delinquency
(Interest and/or Principal):
   30-59 days                             348,121        0.47%      $ 3,290,564        5.80%
   60 to 89 days                               --        0.00%               --        0.00%
   90 days or more                      3,462,850        4.72%               --        0.00%
                                      --------------------------  ---------------------------
   Total Delinquencies
     (excluding foreclosures)         $ 3,810,971        5.20%        3,290,564        5.80%
                                      ==========================  ===========================

Foreclosures Pending                  $   950,000        1.30%      $ 3,290,564        5.80%

Foreclosures Completed                $ 3,048,561        4.15%               --        0.00%

Losses sustained for period ending
on such date                          $   226,107        0.30%               --        0.00%
</TABLE>

            Specialty Mortgage 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 expected 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,


                                       11
<PAGE>

            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.

            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.

<TABLE>
<S>            <C>
Nevada         44% (approx. 17% in the Reno area and 27% in the Las Vegas area)
Arizona        32%
California     10%
Utah           8%
Colorado       6%
</TABLE>

            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 or slower 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. Through its servicing
            function, the Manager pre-selects borrowers that have an incentive
            to refinance and recaptures those mortgage loans by soliciting the
            borrowers directly rather than losing them to another mortgage
            lender.

            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
            expect to issue senior securities or to offer our securities in
            exchange for property.

            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


                                       12
<PAGE>
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.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain Federal income tax considerations 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 stockholders will hold
their common stock as a "capital asset" (generally, property held for
investment) under the Code. Investors are advised to consult their tax advisors
as to the specific tax consequences to them of purchasing, holding and disposing
of the common stock, including the application and effect of Federal, state,
local and foreign income and other tax laws.

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 expects that we will continue to operate in a manner
that permits us to maintain our qualifications as a REIT. This treatment permits
us to deduct dividend distributions to our stockholders for Federal income tax
purposes, thus generally eliminating the "double taxation" that typically
results when a 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.

                                       13
<PAGE>
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 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 test. 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 subsidiary; 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.

We intend to monitor closely the purchase, holding and disposition of our assets
in order to comply with the REIT Asset Tests. We expect that substantially all
of our assets will be Qualified REIT Real Estate Assets and intend to limit and
diversify our ownership of any assets not qualifying as Qualified REIT Real
Estate Assets to less than 25% of the value of our assets, to less than 5%, by
value, of any single issuer and to less than 20%, by value, of any taxable REIT
subsidiaries. In addition, we do not expect to own more than 10% of the vote or
value of any one issuer's securities.

                                       14
<PAGE>
If it is anticipated that these limits would be exceeded, we intend to take
appropriate measures, including the disposition of non-qualifying assets, to
avoid exceeding such limits.

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. 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 exclusion of 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 tax
returns by the IRS, we, by following certain requirements set forth in the Code,
may pay a deficiency dividend within a specified period which will be permitted
as a deduction in the taxable year to which the adjustment is made. 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 timely tax return.

                                       15
<PAGE>
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 the 75% or the 95% Gross Income Test,
            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,
            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 75% and 95% Gross Income Tests and the 100%
            prohibited transaction tax. We do not believe that we have or will
            engage in transactions 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 REO
            that is not further developed by us but which is 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 such 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) income not distributed in 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 to qualify as a REIT in any taxable year and certain relief
provisions of 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
<PAGE>
We may also voluntarily revoke our election, 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 will 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.

Affiliates. At present, we have no affiliates other than the Manager. The
Manager is taxed as a stand-alone regular corporation and 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 the Manager, including any incentive or
termination fees, are reasonable compensation for their services.

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 will generally be
subject to tax as long-term capital gain to stockholders, to the extent that the
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. 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 or FASIT's, any "excess inclusion" income derived
therefrom 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 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.

                                       17
<PAGE>
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. Any loss on the sale or exchange of common stock held by a
stockholder for six months or less will generally be treated as a long-term
capital loss to the extent of any designated capital gain dividends received by
such stockholder. If either common or preferred 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.

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 dividends
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.

Distributions, including constructive distributions, made to holders of the
preferred stock, other than tax-exempt entities, will generally be subject to
tax as described above. For federal income tax purposes, earnings and profits
will be allocated to distributions with respect to the preferred stock before
they are allocated to distributions with respect to common stock.

In general, no gain or loss will be recognized for federal income tax purposes
upon conversion of the preferred stock solely into shares of common stock. The
basis that a holder will have for tax purposes in the shares of common stock
received upon conversion will be equal to the adjusted basis of the holder in
the shares of preferred stock so converted, and provided that the shares of
preferred stock were held as a capital asset, the holding period for the shares
of common stock received would include the holding period for the shares of
preferred stock converted. A holder, however, generally will recognize gain or
loss on the receipt of cash in lieu of fractional shares of common stock in an
amount equal to the difference between the amount of cash received and the
holder's adjusted basis for tax purposes in the fractional share of preferred
stock for which was received. Furthermore, under certain circumstances, a holder
of shares of preferred stock may recognize gain or dividend income to the extent
that there are dividends in arrears on the shares at the time of conversion into
common stock.

Adjustments in the conversion price, or the failure to make such adjustments,
pursuant to the anti-dilution provisions of the preferred stock or otherwise may
result in constructive distributions to the holders of preferred stock that
could, under certain circumstances, be taxable to them as dividends pursuant to
Section 305 of the Code. If such a constructive distribution were to occur, a
holder of preferred stock could be required to recognize ordinary income for tax
purposes without receiving a corresponding distribution of cash.

                                       18
<PAGE>
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.

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 noteholders

   Characterization of Notes. Based on the advice of counsel, we treat the
Notes as debt for all tax purposes.

                                       19
<PAGE>
      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).

      b.    Taxation of interest income on the Notes. Because all Notes are
            expected to be issued at par, interest paid or accrued on the Notes
            generally will be treated as ordinary income to the noteholders, and
            will be includible in income in accordance with the noteholder's
            regular method of accounting.

      c.    Sale of Notes. Generally, if a noteholder sells or otherwise
            disposes of his Note, he will recognize gain or loss in an amount
            equal to the difference between the amount you realize on the sale
            and his adjusted tax basis in your 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 therefrom as
            capital gain or loss.

            In addition, someone that purchases a Note from a noteholder 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, (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 recently finalized

                                       20
<PAGE>
            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
            noteholder, or gross-up payments on the Notes, for any withholding
            taxes.

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.

                                       21
<PAGE>
            MANAGEMENT FEES

            Pursuant to a management agreement, Specialty Financial receives a
            management fee payable monthly in arrears consisting of:

            (i)   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.

            (ii)  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.

            (iii) 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 income of
            Specialty Mortgage Trust, before deduction of such incentive
            compensation, in excess of the annualized return to Specialty
            Mortgage Trust equal to 12%. The incentive compensation calculation
            and payment will be made quarterly in arrears. The term "return to
            Specialty Mortgage 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 its equity securities by us, 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 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 Mortgage 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 and delivered to
            us within 15 days after the end of each month. 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 month pursuant to the Manager's good
            faith estimate within 30 days after the end of each month. We pay
            the incentive fee with respect to each fiscal quarter within 15 days
            following the delivery to

                                       22
<PAGE>

            us of the Manager's written statement setting forth the computation
            of the incentive fee for such quarter. The Manager re-computes the
            quarterly incentive fee within 45 days after the end of each fiscal
            year, and any required adjustments are paid by us or the Manager
            within 15 days after the delivery of the Manager's written
            computation to us.

            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 Mortgage 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 1999, 2000 and 2001.

                   TABLE 4: COMPONENTS OF MANAGER COMPENSATION
                        FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                       BASE FEES
         ------------------------------------
                          LOAN         LATE
         ORIGINATION    SERVICING     PAYMENT        TOTAL        INCENTIVE       TOTAL
             FEES         FEES        CHARGES       BASE FEE    COMPENSATION   COMPENSATION
             ----         ----        -------       --------    ------------   ------------
<S>      <C>            <C>           <C>          <C>          <C>            <C>
1999      $  662,651    $148,252      $12,539      $  823,442      $18,480      $  841,922
2000      $  686,950    $179,129      $52,463      $  918,542           --      $  918,542
2001      $1,694,100    $267,469      $35,328      $1,996,897      $88,084      $2,084,981
</TABLE>

            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 Mortgage Trust as may be
            appropriate, including:

            (i)     representing Specialty Mortgage 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 Mortgage
                    Trust;

            (iii)   furnishing reports and statistical and economic research to
                    Specialty Mortgage Trust regarding Specialty Mortgage
                    Trust's real estate lending activities and the performance
                    of its portfolio of mortgage loans;

            (iv)    administering the day-to-day operations of Specialty
                    Mortgage Trust and performing administrative functions
                    necessary in the management of Specialty Mortgage Trust,
                    including the collection of revenues, the payment of
                    Specialty Mortgage Trust's expenses, debts and obligations
                    and the maintenance of appropriate computer services to
                    perform such administrative functions;

            (v)     counseling Specialty Mortgage Trust in connection with
                    policy decisions to be made by the Board of Directors;

            (vi)    assisting Specialty Mortgage Trust in its use of leverage to
                    finance mortgage loan acquisitions;

                                       23
<PAGE>

            (vii)   overseeing the servicing of Specialty Mortgage Trust's
                    mortgage loans;

            (viii)  establishing underwriting, appraisal and quality control
                    procedures for the mortgage loans of Specialty Mortgage
                    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 Mortgage Trust with data processing,
                    legal and administrative services to the extent required to
                    implement the business strategy of Specialty Mortgage Trust;

            (xi)    providing all actions necessary for compliance by Specialty
                    Mortgage Trust with all federal, state and local regulatory
                    requirements applicable to Specialty Mortgage 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 Mortgage
                    Trust to make required federal, state and local tax filings
                    and reports and generally enable Specialty Mortgage 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 Mortgage Trust with the
                    stockholders of Specialty Mortgage Trust 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 Specialty Mortgage 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 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.

            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

                                       24
<PAGE>

            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 Mortgage Trust. At December 31, 2001, 4%
            of our mortgage loan portfolio would be approximately $2.9 million.
            In addition, we have the right to terminate the management agreement
            at any time for cause. A majority of our unaffiliated directors
            (currently 5 of 6 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.

            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 5 of 6 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 effect
            spent by the Manager on our management.

                                       25
<PAGE>

            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
<PAGE>

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, 2001, other than litigation in the ordinary course
            of business involving foreclosures or other exercise of us 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 16, 2001, we held our Annual Meeting of Shareholders. The
            results of the meeting were as follows:

            (a)   The election of two Class I Directors, Nello Gonfiantini, III
                  and Stephen V. Novacek
            (b)   Appointment of Grant Thornton, LLP as the Independent Auditors
                  of the Company for the year 2001

PART II.

ITEM 5.     MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

            The preferred stock, pursuant to its terms converted to our common
            stock, par value $0.01 per share as of October 1, 2001.

                                       27
<PAGE>

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.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                       2001             2000            1999          1998
<S>                                                 <C>              <C>             <C>            <C>
STATEMENT OF EARNINGS DATA:

Interest and Dividend Income                         7,797,169        5,715,590       4,450,193      2,279,052
Interest Expense                                       744,020          626,332         263,633         76,877
Net Revenues                                         6,582,893        4,689,258       3,936,560      2,102,175
Net Earnings                                         6,085,129        4,543,772       3,809,424      2,025,870
Basic Earnings Per Share                                  0.79            (1.62)           (.73)          (.28)
Diluted Earnings Per Share                                0.77            (1.62)           (.73)          (.28)
Dividends - Preferred Stock                          4,540,231        5,070,963       4,039,923      2,111,145
Dividends - Common Stock                             2,046,810               --              --             --

BALANCE SHEET DATA (SHOWN AS OF PERIOD END)

Mortgage Loans, net                                 73,331,659       55,863,036      36,105,676     29,600,401
Allowance for Mortgage Loan Losses                  (1,020,321)        (750,000)       (350,000)      (100,000)
Real Estate Owned                                    3,228,139               --              --             --
Total Assets                                        76,742,366       58,667,243      44,132,700     29,835,306
Short-Term Borrowings                                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                  6,822,703          334,400         320,200        300,000
</TABLE>

                                       28
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

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

            SAFE HARBOR STATEMENT

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

            COMPANY OVERVIEW

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

            Our business objective and strategy is to build and hold a portfolio
            of mortgage loans for investment that generates net income for
            distribution to stockholders. Loans are made principally to
            borrowers in the states of Nevada, Arizona, California, Utah, and
            Colorado whose needs are generally not being served by traditional
            financial institutions. Our strategy is to focus on land loans,
            construction loans, commercial building loans and nonconforming
            single-family and small multifamily residential loans. We generally
            limit the amount of our investment in any single mortgage loan or in
            mortgage loans to one borrower to 10% of Specialty Mortgage Trust,
            Inc. total assets, although the board of directors may approve
            exceptions. As of December 31, 2001, there were two mortgage loans
            which exceeded 10%, which the board approved. Most loans will have
            terms of two to three years. Our mortgage loans may be secured by
            mortgages on unimproved as well as improved real property and
            non-income producing as well as income-producing real property. Some
            mortgage loans may be secured by borrower's leasehold interest in
            real property. Our loans generally produce higher yields than are
            obtained on traditional single-family residential mortgage loans,
            but are subject to higher risks of default and loss.

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

                                       29
<PAGE>

            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 2001, 2000 AND 1999

            At December 31, 2001, we owned $73.3 million of mortgage loans and
            $3.2 million of real estate owned. Our total assets were $76.7
            million. The assets were financed with $9.5 million of recourse
            short-term debt, and $65.0 million of equity. Our equity-to-assets
            ratio was 84.7% and our debt-to-equity ratio was 18.0%, our average
            quarterly return on equity for the year ended December 31, 2001 was
            11.0%

            At December 31, 2000, we owned $55.9 million of mortgage loans and
            $0.2 million of mortgage securities. Our total assets were $58.7
            million. The assets were financed with $6.6 million in recourse
            short-term debt, $4.5 million in short-term collateralized lines of
            credit and $45.3 million of preferred and common equity. Our
            equity-to-asset ratio was 77.2%; our debt-to-equity ratio was 29.5%,
            and our average quarterly return on equity for the year ended
            December 31, 2000 was 10.0%.

            The increase in assets was the result of cash receipts of $18.3
            million from the sale of preferred stock on June 30, and September
            30, 2001. The decrease in liabilities was the result of the Company
            not drawing on the line of credit at year-end, whereas at December
            31, 2000 the line of credit totaled approximately $4.5 million.
            Finally, we did not hold deposits on December 31, 2001 whereas we
            had a $.9 million deposit on December 31, 2000. The increase in
            stockholders' equity was the result of stockholders reinvesting
            dividends from earnings in the dividend reinvestment program for the
            year ending December 31, 2001, and the private placement of
            preferred stock.

            CHANGES IN FINANCIAL CONDITION

            2001 COMPARED TO 2000

            ASSETS

            Cash and Cash Equivalents. Cash and cash equivalents decreased by
            $2.6 million (97.8%) 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 close near the
            end of the year. Furthermore, in 2000, the Company had recorded
            $900,000 in cash held for the purchase and sale of stock on January
            1, 2001. In 2001, the Company had established an escrow account,
            which holds the money for investors for the purchase and sale of
            stock. The timing of loan funding and the timing of debt or equity
            issues generally determine the amount of cash held by the Company.
            It is our goal to keep cash invested in loans or other financial
            instruments and therefore keep cash balances low whenever possible.

            Real Estate Owned. Real estate owned increased by $3.2 million
            (100%) as of December 31, 2001, compared to prior year. Real estate
            owned represents property, which was acquired through foreclosure.
            As of December 31, 2001, Specialty Mortgage Trust had foreclosed on
            two loans. These properties are in various stages of development. As
            of

                                       30
<PAGE>

            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 increased by $17.2 million (31.2%) 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.

            LIABILITIES

            Dividends Payable. Dividends payable increased by $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 that paid dividends. The actual payout per share
            remained the same. The increase in stock was due to two closing of
            private placements shares 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 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. Lines of credit decreased by $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 we sold collateralized notes to fund loans
            rather than use higher cost lines of credit.

            Collateralized Notes. Collaterized notes increased $2.9 million
            (44.6%) as of December 31, 2001, compared to 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.

            2000 COMPARED TO 1999

            ASSETS

            Cash and Cash Equivalents. Cash and cash equivalents decreased by
            $5.4 million (67.3%) as of December 31, 2000, compared to 1999. The
            fluctuation in cash at anytime is a function of the Company's
            ability to fund new loans. As loans payoff, the proceeds are placed
            in a cash account and used to fund new loans or the cash is used to
            pay down bank lines of credit. The amount of cash held by the
            Company is generally determined by future loan fundings. It is our
            goal to keep cash invested in loans or other financial instruments
            and therefore keep cash balances low whenever possible.

            Mortgage Loans. Mortgage loans held for investment net of allowance
            for loan losses increased by $19.4 million (54.2%) as of December
            31, 2000, compared to 1999. This increase in mortgage loans was due
            to our efforts to acquire loans for our portfolio with the available
            capital.

                                       31
<PAGE>

            LIABILITIES

            Dividends Payable. Dividends payable increased by $307,000 (28.5%)
            as of December 31, 2000, compared to 1999. This represents a carry
            over dividend from December of the current year to be paid in
            January of the next year. Due to our REIT status, the Board of
            Directors must declare dividends for the fourth quarter in December
            of the earnings year. Therefore this dividend carries over the
            fiscal year and is due in January.

            Lines of Credit. Lines of credit increased by $4.5 million (100.0%)
            as of December 31, 2000, compared to 1999. 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. Additionally when we issue stock through private
            placements, the net proceeds have been used to first pay down bank
            lines of credit. These lines of credit are secured by mortgage loans
            pledged by Specialty Mortgage Trust.

            Collateralized Notes. Collaterized notes increased $1.3 million
            (25.6%) as of December 31, 2000, compared to 1999. This represents
            the private placement of mortgage-backed notes issued with
            maturities ranging from 1 to 12 months. These notes are secured by
            mortgage loans held in Specialty Mortgage Trust's portfolio.

            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.

            Our operating results include all of the reported income of our
            mortgage finance operation.

<TABLE>
<CAPTION>
                                            YEAR ENDED                                   YEAR ENDED
                                        DECEMBER 31, 2001                            DECEMBER 31, 2000
                                            OVER/UNDER                                   OVER/UNDER
                                        DECEMBER 31, 2000                            DECEMBER 31, 1999
                             ---------------------------------------       ---------------------------------------
                                 NET                                           NET
                               CHANGE          RATE          VOLUME          CHANGE         RATE          VOLUME
<S>                          <C>             <C>           <C>             <C>            <C>            <C>
INTEREST INCOME
         Mortgage Loans      2,175,681       587,324       1,588,357       1,225,581      (209,703)      1,435,824
         Cash Accounts         (71,038)      (67,219)         (3,819)          1,776        48,547         (46,771)
                             ---------       -------       ---------       ---------      --------       ---------
                  Total      2,104,643       520,105       1,584,538       1,227,357      (161,156)      1,388,513
                             =========       =======       =========       =========      ========       =========

INTEREST EXPENSE
         Line of Credit       (117,894)       15,544        (133,438)        106,138         9,629          96,509
         Collaterized Notes    235,582       (33,738)        269,320         256,561         5,719         250,842
                             ---------       -------       ---------       ---------      --------       ---------
                  Total        117,688       (18,194)        135,882         362,699        15,348         347,351
                             =========       =======       =========       =========      ========       =========

                             ---------       -------       ---------       ---------      --------       ---------
Change in net
   interest income           1,986,955       538,299       1,448,656         864,658      (176,504)      1,041,162
                             ---------       -------       ---------       ---------      --------       ---------
</TABLE>

                                       32
<PAGE>

            2001 COMPARED TO 2000

            Interest Income, Mortgage Loans. Interest income from mortgage loans
            increased $2.2 million (39.3%) 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, an increase in interest
            rates, and the use of short-term borrowings to fund a corresponding
            increase in loan demand.

            Total Interest Expense. Interest expense increased $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 collaterized notes to
            fund the increased loan demand.

            Total Expenses. Total expenses increased $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 collaterized notes,
            non cash compensation expense resulting from the grant of common
            stock options, professional fees in conjunction with SEC reporting,
            and management fees related to the operations of the Company.
            General and Administrative expenses are a small portion of our net
            revenues since the Manager pays for most expenses directly.

            2000 COMPARED TO 1999

            Interest Income, Mortgage Loans. Interest income from mortgage loans
            increased $1.2 million (28.4%) for the year ended December 31, 2000,
            as compared to the 1999. The increase was due primarily as a result
            of higher volumes of mortgage loans, in part decreased by the lower
            mortgage loan rates during the year. The increase in interest volume
            is mainly due to increased cash available from private placement of
            new stock and to a lesser degree the use of short-term borrowings.

            Total Interest Expense. Interest expense increased $363,000 (137.6%)
            for the year ended December 31, 2000, as compared to the 1999. The
            increase was primarily a result of increase in use short term
            borrowings.

            Total Expenses. Total expenses increased $21,000 (17.2%) for the
            year ended December 31, 2000, as compared to the 1999. This increase
            was primarily due to stock option compensation recorded. In
            addition, the company began an advertising campaign during the later
            part of 2000. Total expenses are a small portion of our net revenues
            since the Manager pays for most expenses directly.

                                       33
<PAGE>

            INTEREST RATE/MARKET/CREDIT RISK

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

<TABLE>
<CAPTION>
                                               2001          2000          1999
                                              -----         -----         -----
<S>                                           <C>           <C>           <C>
INTEREST INCOME
   Mortgage Loans                             12.65%        11.51%        12.08%
   Cash Accounts                               2.14%         4.89%         3.27%

INTEREST EXPENSE
   Line of Credit                              8.81%         7.96%         6.89%
   Collaterized Notes                          7.22%         7.75%         7.55%

      Net Interest Spread                      4.95%         3.38%         3.84%
</TABLE>

            LIQUIDITY AND CAPITAL RESOURCES

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

            Secondly, the payoff and prepayment of loans provides additional
            liquidity to our portfolio. Historically, we have experienced annual
            loan payoffs and prepayments of approximately 30% to 35% of our
            outstanding portfolio. Since our loan terms are usually one to three
            years, the rate of principal payoffs is significant. With a current
            portfolio of approximately $73.3 million we would anticipate annual
            cash flows from principal pay downs of approximately $20.0 million.
            As we continue to issue collateralized notes, our portfolio will
            increase as will the cash flow from principal pay downs. Again,
            normally these funds are used to originate new mortgage loans, but
            can be used in other ways.

            Lastly, we have two lines of credit with commercial banks to provide
            another level of liquidity. We can borrow up to $5 million on one of
            the lines to provide funding for new

                                       34
<PAGE>

            loans and $3.0 million on the other, for an aggregate of $8.0
            million. Both lines of credit extend through July 1, 2002. Both of
            the lines are collateralized by mortgage loans and borrowings under
            the lines bear interest at the applicable bank's prime or reference
            rate. We are required to comply with various operating and financial
            covenants in the lines. Such covenants include restrictions on (i)
            any change in business activities from those we are presently
            engaged in, and (ii) any change in executive and management
            personnel that would result in reduced qualifications and experience
            compared to present personnel. Such covenants also contain
            requirements for (i) minimum tangible net worth, and (ii) maximum
            debt-to-equity ratio. We are in compliance with these covenants.

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

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

            RISK MANAGEMENT AND THE ALLOWANCE FOR LOAN LOSSES

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

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

            Loans are initially graded when originated. They are re-graded on a
            quarterly basis and numerous factors are considered such as renewal,
            loans to the same borrower, identified facts demonstrate heightened
            risk of nonpayment, or if they become delinquent. The loan review,
            or grading process attempts to identify and measure problem and
            watch list loans. Problem loans are those loans with higher than
            average risk with workout and/or legal

                                       35
<PAGE>

            action probable within one year. These loans are reported quarterly
            to the directors for action to be taken. Watch list loans are those
            loans considered as having weakness detected in character, capacity
            to repay or balance sheet concerns and prompt management to take
            corrective action at the earliest opportunity. Problem and watch
            list loans generally exhibit one or more of the following
            characteristics:

            -     Adverse financial trends and condition

            -     Decline in the entire industry

            -     Managerial problems

            -     Customer's failure to provide financial information or other
                  collateral documentation

            -     Repeated delinquency, overdrafts or renewals.

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

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

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

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

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

            The second or "unallocated" component of the allowance for loan loss
            is a component that is intended to absorb losses that may not be
            provided for by the other component. There are several primary
            reasons that the other components discussed above might not be
            sufficient to absorb the losses present in portfolios, and the
            unallocated portion of the allowance for loan loss is used to
            provide for the losses that have occurred 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

                                       36
<PAGE>

            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, 2001.

            NON-PERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE

            Management encourages early identification of non-accrual and
            problem loans in order to minimize the risk of loss. This is
            accomplished by monitoring and reviewing credit policies and
            procedures on a regular basis.

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

            REAL ESTATE OWNED

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

            In accordance with Statement of Financial Accounting Standards No.
            121, Accounting for the Impairment of Long-lived Assets and
            Long-lived Assets to Be Disposed Of, the Company periodically
            compares the carrying value of real estate to expected future cash
            flows for the purpose of assessing the recoverability of the
            recorded amounts. If the carrying value exceeds future cash flows,
            the assets are reduced to fair value. There were no required
            reductions to the carrying value of real estate owned for the twelve
            months ended December 31, 2001.

            On December 31, 2001, our real estate owned totaled $3,228,139. The
            properties owned consist of 15 finished residential lots, 102
            undeveloped lots and 2 office buildings, which, were transferred
            from, mortgage loans to real estate owned upon foreclosure.

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

                                       37
<PAGE>

            credit and collateralized notes. Our financial instruments involve
            elements of interest rate risk. Our loan portfolio is also subject
            to real estate market risk.

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

            Loans provide for either monthly payments of interest only and a
            payment of principal in full at the end of the loan term, principal
            and interest payments with a balloon payment at the end of the loan
            term, or interest only with principal payments upon lot releases and
            principal in full at the end of the loan term. Because of the high
            yield of our loans, we do not believe that a 10% increase or
            decrease in general interest rates (from those prevailing at
            December 31, 2001) would have a significant impact on the fair value
            of our fixed rate loan portfolio. A significant increase in interest
            rates could, however, make it more difficult for our borrowers to
            sell or refinance their respective properties. This could have a
            material adverse effect on us, either through loan defaults or the
            need to grant extensions of the maturity dates, thereby delaying
            repayment. Additionally, a real estate market decline in Nevada,
            Arizona or California could have a material adverse impact on us. If
            real estate values were to decline, borrowers might find it
            difficult, if not impossible, to repay some or all of the principal
            and accrued interest in connection with a sale or refinancing of the
            underlying properties. A number of factors could lead to a real
            estate market decline including, but not limited to, a slowdown in
            the growth of the economy, increasing commercial interest rates and
            supply and demand factors. It is not possible for us to quantify the
            potential loss in earnings or cash flows that might result from a
            real estate market decline.

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

                                       38
<PAGE>

ITEM 8.     FINANCIAL STATEMENTS

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

      Board of Directors
      Specialty Mortgage Trust, Inc.

      We have audited the accompanying balance sheets of Specialty Mortgage
      Trust, Inc. as of December 31, 2001 and 2000, and the related statements
      of earnings, stockholders' equity, and cash flows for each of the three
      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 Mortgage
      Trust, Inc. as of December 31, 2001 and 2000, and the results of its
      operations and its cash flows for each of the three year 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-1
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
BALANCE SHEETS
DECEMBER 31,

<TABLE>
<CAPTION>
                                     ASSETS
                                                                     2001             2000
                                                                 -----------      -----------
<S>                                                              <C>              <C>
ASSETS
    Cash and cash equivalents                                    $    58,989      $ 2,619,717
    Accrued interest receivable                                      836,837          518,340
    Investments                                                           --          248,517
    Real estate owned, (held for sale)                             3,228,139               --
    Mortgage loans held for investment, net of
      allowance for loan losses of $1,020,321 and $750,000
      at December 31, 2001 and 2000, respectively                 72,311,338       55,113,036
    Deferred charges                                                 306,475          167,633
    Other assets                                                         588               --
                                                                 -----------      -----------

    Total assets                                                 $76,742,366      $58,667,243
                                                                 ===========      ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
    Dividends payable                                            $ 2,046,811      $ 1,387,283
    Accounts payable                                                  99,233           25,545
    Deposits                                                              --          923,406
    Accrued interest payable                                          16,699           26,077
    Lines of credit                                                       --        4,452,500
    Collateralized notes                                           8,395,919        5,663,505
    Collaterized notes - related party                             1,079,522          889,955
    Deferred revenue                                                  78,144            8,186
                                                                 -----------      -----------
        Total liabilities                                         11,716,328       13,376,457
                                                                 -----------      -----------

STOCKHOLDERS' EQUITY
    Class A Convertible Preferred Stock; $0.01 par
      value; 3,531,915 and 5,000,000 shares authorized;
      0 and 4,624,276 shares issued and outstanding as of
      December 31, 2001 and 2000, respectively, ($46,243,000
      liquidation preference at December 31, 2000)                        --           46,243
    Common stock; $0.01 par value; 46,468,085 and 45,000,000
      shares authorized; 6,822,703 and 334,400 shares issued
      and outstanding as of December 31, 2001 and 2000,
      respectively                                                    68,227            3,344
    Additional paid-in capital                                    64,957,811       45,242,156
    Retained earnings                                                     --               --
    Accumulated other comprehensive loss                                  --             (957)
                                                                 -----------      -----------
    Total stockholders' equity                                    65,026,038       45,290,786
                                                                 -----------      -----------
    Total liabilities and stockholders equity                    $76,742,366      $58,667,243
                                                                 ===========      ===========
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-2
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                       2001            2000             1999
                                                    ----------      ----------       ----------
<S>                                                 <C>             <C>              <C>
REVENUES
    Interest and dividend income
        Mortgage loans                              $7,713,354      $5,537,673       $4,312,092
        Cash accounts                                   52,191         123,229          121,453
        Discount on loans                               24,527          26,300           16,648
        Dividends                                        7,097          28,388               --
                                                    ----------      ----------       ----------
            Total interest and dividend income       7,797,169       5,715,590        4,450,193
                                                    ----------      ----------       ----------

    Interest expense
        Lines of credit                                 42,772         160,666           54,528
        Collateralized notes                           701,248         465,666          209,105
                                                    ----------      ----------       ----------
            Total interest expense                     744,020         626,332          263,633
                                                    ----------      ----------       ----------
            Net interest and dividend income         7,053,149       5,089,258        4,186,560
    Provision for loan losses                          496,427         400,000          250,000
                                                    ----------      ----------       ----------

            Net interest income after
                provision for loan losses            6,556,772       4,689,258        3,936,560

            Investment Gain                             10,392              --               --
            Other Income                                15,779              --               --
                                                    ----------      ----------       ----------
            Net revenues                             6,582,893       4,689,258        3,936,560
                                                    ----------      ----------       ----------

EXPENSES
    General and administrative                         389,757         133,903           93,664
    Management and directors' fees                     108,007          11,583           30,480
                                                    ----------      ----------       ----------
            Total expenses                             497,764         145,486          124,144
                                                    ----------      ----------       ----------
            Earnings before income taxes             6,085,129       4,543,772        3,812,416
    Income taxes                                            --              --            2,992
                                                    ----------      ----------       ----------

            NET EARNINGS                             6,085,129       4,543,772        3,809,424

    Preferred Stock Dividend                         4,540,231       5,070,963        4,039,923
                                                    ----------      ----------       ----------

            NET INCOME (LOSS) ATTRIBUTABLE
            TO COMMON STOCK                         $1,544,898      $ (527,191)      $ (230,499)
                                                    ==========      ==========       ==========

BASIC EARNINGS PER SHARE                                  0.79           (1.62)           (0.73)
                                                    ==========      ==========       ==========

DILUTED EARNINGS PER SHARE                                0.77           (1.62)           (0.73)
                                                    ==========      ==========       ==========
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-3
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             CLASS A CONVERTIBLE
                                               PREFERRED STOCK                   COMMON STOCK
                                          ------------------------         -----------------------
                                           SHARES          AMOUNT            SHARES        AMOUNT
                                          ---------       --------         ---------       -------
<S>                                       <C>             <C>              <C>             <C>
BALANCE, JANUARY 1, 1999                  2,169,588       $ 21,696           300,000       $ 3,000

Stock options exercised                          --             --            20,200           202

Preferred Stock issued (net
  of offering costs of $39,780)           1,430,196         14,302                --            --

Dividends reinvested for
Preferred Stock                              24,628            246                --            --

Mortgages and collateralized
  notes received for Preferred
  Stock                                     175,288          1,753                --            --

Net earnings                                     --             --                --            --

Dividends declared on
  Preferred Stock                                --             --                --            --
                                          ---------       --------         ---------       -------
BALANCE, DECEMBER 31, 1999                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

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
</TABLE>

<TABLE>
<CAPTION>
                                                                           ACCUMULATED
                                           ADDITIONAL                         OTHER
                                            PAID-IN           RETAINED    COMPREHENSIVE
                                            CAPITAL           EARNINGS         LOSS          TOTAL
                                          -----------       -----------   -------------   -----------
<S>                                       <C>               <C>           <C>             <C>
BALANCE, JANUARY 1, 1999                  $21,597,108       $   (85,275)      $  --       $21,536,529

Stock options exercised                           828                --          --             1,030

Preferred Stock issued (net
  of offering costs of $39,780)            14,247,878                --          --        14,262,180

Dividends reinvested for
Preferred Stock                               246,034                --          --           246,280

Mortgages and collateralized
  notes received for Preferred
  Stock                                     1,751,131                --          --         1,752,884

Net earnings                                       --         3,809,424          --         3,809,424

Dividends declared on
  Preferred Stock                            (315,774)       (3,724,149)         --        (4,039,923)
                                          -----------       -----------       -----       -----------
BALANCE, DECEMBER 31, 1999                 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                        22,291                --          --            22,433

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
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-4
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED

<TABLE>
<CAPTION>
                                             CLASS A CONVERTIBLE
                                               PREFERRED STOCK                   COMMON STOCK
                                          ------------------------         -----------------------
                                           SHARES          AMOUNT            SHARES        AMOUNT
                                          ---------       --------         ---------       -------
<S>                                       <C>             <C>              <C>             <C>
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                                        --             --                --            --

Collaterized 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
                                          =========       ========         =========       =======
</TABLE>

<TABLE>
<CAPTION>
                                                                           ACCUMULATED
                                           ADDITIONAL                         OTHER
                                            PAID-IN           RETAINED    COMPREHENSIVE
                                            CAPITAL           EARNINGS         LOSS          TOTAL
                                          -----------       -----------   -------------   -----------
<S>                                       <C>               <C>           <C>             <C>
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

Collaterized 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
                                          ===========       ===========     =======       ===========
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-5
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                   2001               2000               1999
                                                               ------------       ------------       ------------
<S>                                                            <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net earnings                                               $  6,085,129       $  4,543,772       $  3,809,424
                                                               ------------       ------------       ------------
    Adjustment to reconcile net earnings to net cash
      provided by operating activities:
        Amortization                                                 54,117             45,235             56,398
        Provision for loan losses                                   496,427            400,000            250,000
        Write off of Bad Debt                                        (1,107)
        Non-cash collateralized notes interest reinvested           611,854            355,013             38,467
        Non-cash stock compensation                                  70,558             21,093                 --
        Gain on investments                                         (10,392)                --                 --
        Changes in assets and liabilities:
            Deferred Charges                                          8,391                 --                 --
            Accrued interest receivable                            (318,497)          (175,007)           (89,981)
            Other assets                                               (588)             4,650             (4,650)
            Accounts payable                                         73,688              7,828            (31,845)
            Accrued interest payable                                 (9,378)            26,077            (31,996)
            Deferred revenue                                         69,958            (16,051)            19,018
                                                               ------------       ------------       ------------
                Total adjustments                                 1,045,031            668,838            205,411
                                                               ------------       ------------       ------------

                Net cash provided by operating activities         7,130,160          5,212,610          4,014,835
                                                               ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of mortgage loans held for investment              (40,186,112)       (47,451,201)       (22,968,157)
    Investment in real estate owned                                (404,577)                --                 --
    Principal repayments of mortgage loans held for
      investment                                                 19,668,928         27,693,835         17,961,772
    Purchase from (purchases of) investments                        259,866           (249,474)                --
                                                               ------------       ------------       ------------
                Net cash used in investing activities           (20,661,895)       (20,006,840)        (5,006,385)
                                                               ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from Preferred Stock offering, net                  15,317,321          5,685,511         14,262,180
    Proceeds from Common Stock options exercised                     21,452              1,340              1,030
    Deposits received for preferred stock offering                 (923,406)           698,406            225,000
    Cash dividends paid                                          (4,073,765)        (3,415,269)        (2,713,768)
    Net (payments)/proceeds on line of credit                    (4,452,500)         4,452,500         (6,518,000)
    Proceeds on collateralized notes                              9,104,634          4,627,694          4,523,000
    Principal payments on collateralized notes                   (3,821,379)        (2,452,414)          (784,000)
    Debt issue costs                                               (201,350)          (182,530)           (22,500)
                                                               ------------       ------------       ------------
                Net cash provided by financing activities        10,971,007          9,415,238          8,972,942
                                                               ------------       ------------       ------------

                NET INCREASE (DECREASE) IN
                  CASH AND CASH EQUIVALENTS                      (2,560,728)        (5,378,992)         7,981,392

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                    2,619,717          7,998,709             17,317
                                                               ------------       ------------       ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                       $     58,989       $  2,619,717       $  7,998,709
                                                               ------------       ------------       ------------
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-6
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31,

<TABLE>
<S>                                                            <C>                <C>                <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid for interest                                     $    151,649       $    245,242       $    253,403
                                                               ============       ============       ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
    Mortgage loans exchanged for the issuance of
      Preferred Stock                                          $         --       $         --       $  1,498,884
                                                               ============       ============       ============
    Mortgage loan foreclosure transfer to real
      estate owned                                             $  2,823,562                 --                 --
                                                               ============       ============       ============
    Collateralized notes exchanged for the issuance
      of Preferred Stock                                       $  2,973,128       $  1,194,300       $    254,000
                                                               ============       ============       ============
    Collateralized notes refinanced at maturity                $ 10,302,823       $  9,083,292       $  4,147,000
                                                               ============       ============       ============
    Collateralized notes interest reinvested                   $    611,854       $    355,013       $     38,467
                                                               ============       ============       ============
    Dividends declared but not paid                            $  2,046,811       $  1,387,283       $  1,079,875
                                                               ============       ============       ============
    Dividends reinvested for Preferred Stock                   $  1,853,748       $  1,348,286       $    246,280
                                                               ============       ============       ============
</TABLE>

The accompanying notes are an integral part of the statements.


                                      F-7
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The financial statements of Specialty Mortgage Trust, Inc. are prepared in
      conformity with accounting principles generally accepted in the United
      States of America (US GAAP). In preparing the financial statements in
      accordance with US GAAP, management is required to make estimates and
      assumptions that effect the reported amounts. Actual results could differ
      from those estimates. The following is a summary of significant accounting
      and reporting policies used in preparing the financial statements.

      a. NATURE OF BUSINESS

      Specialty Mortgage Trust, Inc. (the "Company") is a Maryland corporation,
      which acquires and holds mortgage loans secured by property located in
      Nevada, California, Arizona, Utah and Colorado. The Company's strategy is
      to focus on small commercial mortgage loans (generally less than 10% of
      total assets per loan), land loans, and non-conforming single-family and
      small multi-family (generally less than twenty units) residential mortgage
      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
      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 initial closing of the Company's private
      placement.

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

      b. CASH EQUIVALENTS

      For purposes of the Statement of Cash Flows, the Company considers money
      market accounts to be cash equivalents.

      c. INVESTMENTS

      The Company's investments in marketable equity securities are held for an
      indefinite period and thus are classified as available-for-sale.
      Available-for-sale securities are recorded at fair value on the balance
      sheet, with the change in fair value during the period excluded from
      earnings and included as a component of other comprehensive income.


                                      F-8
<PAGE>

      d. 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. The Company also adopted SFAS 123 for directors.

      e. ADVERTISING

      The Company expenses the costs of advertising as incurred. Total
      advertising expense for the years ended December 31, 2001, 2000 and 1999
      was $59,610, $10,000, and $0, respectively.

      f. 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.

      Substantially all the mortgage loans are originated by the Manager, in the
      name of the Manager, and simultaneously sold to the Company servicing
      retained.

      The Company follows the Financial Accounting Standards Board's Statement
      No. 114, Accounting by Creditors for Impairment of a Loan, and No. 118,
      Accounting by Creditors for Impairment of a Loan-Income Recognition and
      Disclosures. Under Statement No. 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. Statement
      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.
      Statement No. 118 clarifies interest income recognition and disclosures of
      Statement 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.

      g. REVENUE RECOGNITION

      Interest is recognized as revenue when earned according to the terms of
      the loan.

      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


                                      F-9
<PAGE>

      effective interest method over the contractual life of the loan. 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.

      h. DEFERRED CHARGES

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

      i. 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.

      j. ALLOWANCE FOR LOAN LOSSES

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

      k. FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Financial Accounting Standards Board's Statement No. 107, Disclosures
      about Fair Value of Financial Instruments, requires the determination of
      fair value of certain of the Company's assets. 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)   Investments. Carried at quoted market value.

            (c)   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. The allowance for loan losses should also be
                  considered in evaluating the fair value of mortgage loans.

            (d)   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.


                                      F-10
<PAGE>

      l. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

      In August 2001, the Financial Accounting Standards Board issued SFAS 144
      "Accounting for the Impairment or Disposal of Long-lived Assets." This
      statement supersedes SFAS 121, "Accounting for the Impairment of
      Long-lived Assets and for Long-lived Assets to be Disposed Of" and the
      accounting and reporting provisions of Accounting Principles Board Opinion
      No. 30, "Reporting Results of Operations - Reporting the Effects of
      Disposal of a Segment of a Business and Extraordinary, Unusual, or
      Infrequently Occurring Events and Transactions" for the disposal of a
      segment of a business. This statement retains the fundamental provisions
      of SFAS 121 for recognition and measurement of impairment, but amends the
      accounting and reporting standards for segments of a business to be
      disposed of. The provisions of this statement are required to be adopted
      no later than fiscal years beginning after December 15, 2001 and interim
      periods within these fiscal years, with early adoption encouraged. The
      Company is currently evaluating the impact of the adoption of SFAS 144 but
      does not expect its impact to be material.

      In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
      Retirement Obligations, which addresses financial accounting and reporting
      for obligations associated with the retirement of tangible long-lived
      assets and associated asset retirement costs. Beginning on January 1,
      2003, the new rules apply to legal obligations associated with the
      retirement of


                                      F-11
<PAGE>

      long-lived assets that result from the acquisition, construction and
      development and (or) normal operation of long-lived assets. Adoption of
      this Statement is not expected to have a material impact on the Company's
      financial position or results of operations.

      m. EARNINGS PER SHARE

      Basic Earnings Per Share (EPS) is computed by dividing income available to
      common stockholders by the weighted average number of common shares
      outstanding for the year. In arriving at income available to common
      stockholders, preferred stock dividends were deducted in each period
      presented. Diluted EPS reflects the potential dilution that could occur if
      dilutive securities were exercised or converted into common stock.

      n. RECLASSIFICATIONS

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

NOTE 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, 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 small commercial, land, nonconforming, and
small multi-family properties. Maturities on the mortgage loans range from one
to seven years.

Concentration of mortgage loans exist in northern Nevada and southern Nevada
with approximately 17% and 27% for 2001 and 26% and 34% for 2000. 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 consists 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:

<TABLE>
<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                        2001                2000
                                                        ----                ----
<S>                                                     <C>                 <C>
Land                                                     82%                 83%
Construction                                             10%                  4%
Commercial
building                                                  3%                  8%
Other                                                     5%                  5%
                                                        ---                 ---

Total                                                   100%                100%
                                                        ===                 ===
</TABLE>


                                      F-12
<PAGE>

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

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.

Group concentration of credit risk exists in borrowers of mortgage loans. At
December 31, 2001 and 2000, 45% and 41% of mortgage loans were concentrated in
multiple loans to eight and seven borrowers, respectively. The amount of loss is
limited to the recorded amounts of the loans of $34,766,370 and $22,788,309 at
December 31, 2001 and 2000, respectively. Multiple loans to one borrower or to
related entities generally contain cross default provisions. At December 31,
2000 and 2001, there were no instances of loans with cross default provisions in
excess of 10% of the portfolio. However, the portfolio had two loans which
exceeded 10% of total assets for $8,214,105 and $8,537,928 at December 31, 2001.
No other security other than the collateral property supports these financial
instruments. As such the Company has a significant borrower concentration of
credit risk that may be adversely affected by periods of economic decline.

NOTE 3. REAL ESTATE OWNED (HELD FOR SALE)

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

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

On December 31, 2001, Specialty Mortgage Trust, Inc. real estate owned totaled
$3,228,139. The properties owned costs of 15 finished residential lots, 102
undeveloped lots and 2 office buildings, which, were transferred from, mortgage
loans to real estate owned upon foreclosure.

NOTE 4. 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 12% to 13%. 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. The following table sets forth balances of mortgage
loans by product type:


                                      F-13
<PAGE>

<TABLE>
<CAPTION>
                                                  2001                   2000
                                              -----------            -----------
<S>                                           <C>                    <C>
Land                                          $58,870,334            $46,648,433
Construction                                    7,475,997              2,147,564
Commercial building                             2,109,915              4,315,066
Other                                           3,875,413              2,751,973
                                              -----------            -----------

                                              $73,331,659            $55,863,036
                                              ===========            ===========
</TABLE>

ALLOWANCE FOR LOAN LOSSES

The loan portfolio is the Company's primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
credit losses through periodic charges to earnings. 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, 2001 and 2000. During the year
ended December 31, 2001 and 2000, the Company has increased the provision for
loan losses $496,427 and $400,000 and recorded charge offs of $226,106 and $ 0,
respectfully.

DELINQUENT LOANS

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.

NOTE 5. BANK LINES OF CREDIT

At December 31, 2000, the Company maintained three revolving lines of credit.
One line of credit allowed the Company to borrow up to $2,500,000 to provide
funding for new loans. This line bears interest at the bank's base rate (9.5% at
December 31, 2000) and matured July 1, 2001. The other two lines of credit
allowed the Company to borrow up to $5,000,000 each. These lines bear interest
at the bank's prime rate (9.5% at December 31, 2000) and matured July 1, 2001
and October 1, 2001. On December 31, 2000, $4,452,500 was outstanding on these
lines of credit. All lines of credit were collateralized by a secured interest
in mortgage loans and require the Company to maintain certain financial
covenants including maintaining a debt to equity ratio of 1:1. The Company was
in compliance with these covenants as of December 31, 2000.


                                      F-14
<PAGE>

NOTE 5. BANK LINES OF CREDIT (CONTINUED)

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 to provide funding
for new loans. 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 mature 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 debt to equity
ratio of 1:1. The Company was in compliance with these covenants as of December
31, 2001.

NOTE 6. COLLATERALIZED NOTES

Prior to August 22, 2000, the Company issued in private placements its Class A
collateralized notes (the "Class A notes"). The Class A notes were
collateralized by the Company's mortgage loans in an aggregate principal amount
of at least two times the aggregate principal amount outstanding on the Class A
notes. The last of the Class A notes matured as of August 20, 2001. On January
18, 2001, The Company's registration statement covering the public sale of up to
$250,000,000 of collateralized investment notes (the "Class B notes") was
declared effective by the Securities and Exchange Commission. The Class B notes
are secured by at least one and one-half times the aggregate principal amount
outstanding on the Class B notes. The Class A and B notes are referred to
collectively as the "collateralized notes." The collateralized notes have
maturities ranging from one month to twelve months from the date of issue and
bear a fixed rate of interest (4.50% to 8.0% at December 31, 2001 and 6.00% to
8.75% at December 31, 2000). The effective yield of collateralized notes
outstanding at December 31, 2001 and 2000 was 6.93% and 8.42%, respectively.
December 31, 2001 and 2000, the collateralized notes were secured by $19,401,620
and $29,670,205, respectively, of mortgage loans pledged as collateral,
respectively.

There are several related parties who held Collateralized Notes with Specialty
Mortgage Trust. As of December 31, 2001 and 2000, they owned approximately
$1,080,000 and $890,000 in collateralized Notes, which represents approximately
11.4% and 13.9% of the total balance, respectively.


NOTE 7. CONVERSION OF PREFERRED STOCK TO COMMON STOCK

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


                                      F-15
<PAGE>

NOTE 8 - 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 682,270. Options granted may
be designated as either (a) incentive stock options (ISO's) under the Internal
Revenue Code of 1986, as amended, at 100% fair market value, or (b) nonqualified
options at a Board of Director 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.

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. There are no employees of the Company benefiting
under this plan. The participants of the plan are employees of the Manager an
members of the Board of Directors.

Presented below is a summary of the Company's stock options and the related
transactions for the years ended December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                        WEIGHTED
                                                                        AVERAGE
                                                                        EXERCISE
                                                          SHARES         PRICE
                                                         -------        --------
<S>                                                      <C>            <C>
BALANCE AT JANUARY 1, 1999                               105,000         $ 0.32

Granted                                                   20,000           5.00
Exercised                                                (20,200)          0.05
Forfeited/ expired                                            --             --
                                                         -------

BALANCE AT DECEMBER 31, 1999                             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
                                                         =======
</TABLE>


                                      F-16
<PAGE>

NOTE 8 - STOCK OPTIONS (CONTINUED)

<TABLE>
<CAPTION>
                           STOCK OPTIONS OUTSTANDING  STOCK OPTIONS EXERCISABLE
                           -------------------------  -------------------------
                             WEIGHED       WEIGHTED                  WEIGHTED
 RANGE OF                    AVERAGE       AVERAGE                    AVERAGE
 EXERCISE                  CONTRACTUAL     EXERCISE                  EXERCISE
  PRICES        SHARES         LIFE         PRICE       SHARES         PRICE
------------    -------    -----------     --------     ------       --------

   DECEMBER 31, 2001
   -----------------
<S>             <C>        <C>             <C>          <C>          <C>
    $  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
                =======                                  ======
</TABLE>

<TABLE>
<CAPTION>
   DECEMBER 31, 2000
   -----------------
<S>             <C>        <C>             <C>          <C>          <C>
    $  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
                =======                                  ======
</TABLE>

<TABLE>
<CAPTION>
   DECEMBER 31, 1999
   -----------------
<S>             <C>        <C>             <C>          <C>          <C>
    $  0.01      60,000           7.82      $  0.01      22,500       $  0.01
       0.05      15,000           8.09         0.05           -             -
       3.15       9,800           8.58         3.15       2,300          3.15
       5.00      20,000           9.81         5.00           -             -
                -------                                  ------

Totals          104,800                                  24,800
                =======                                  ======
</TABLE>

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, 2001, 2000 and 1999: Dividend yield
of 12.0%, expected volatility of 0.0%, and an expected holding period of five
years. The weighted average risk free interest rate of 2.2%, 5.4%, and 5.98%, as
of December 31, 2001, 2000, and 1999, respectively. Based on these assumptions,
compensation expense was $70,558 and $21,093 for the years ended December 31,
2001 and 2000, respectively. Compensation expense was immaterial for 1999.

The weighted average fair value of options granted during the years ended
December 31, 2001, 2000, and 1999, was $0, $1.36, and $1.04, respectively.


                                      F-17
<PAGE>

NOTE 9. CAPITAL TRANSACTIONS

      On April 1, 1999, the Company completed a private placement of 1,084,794
shares at $10 per share of its Class A Convertible Preferred Stock, par value
$0.01 per share, for cash of $9,443,940, mortgage loans of $1,330,000 and
collateralized notes of $74,000.

      On July 1, 1999, the Company completed a private placement of 520,690
shares at $10 per share of its Class A Convertible Preferred Stock, par value
$0.01 per share, for cash of $4,858,016, collateralized notes of $180,000 and
mortgage loans of $168,884.

      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.


                                      F-18
<PAGE>

NOTE 10. EARNINGS PER SHARE

      The following data shows the amounts used in computing earnings per share
      and the effect on income and the weighted average number of shares of
      dilutive potential common stock for the years ended December 31:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                   -----------------------------------------------
                                                       2001              2000              1999
                                                   -----------       -----------       -----------
<S>                                                <C>               <C>               <C>
Net earnings                                       $ 6,085,129       $ 4,543,772       $ 3,809,424
Less: Preferred Stock Dividends                     (4,540,231)       (5,070,963)       (4,039,923)
                                                   -----------       -----------       -----------

Income available to common stockholders used
in basic EPS                                         1,544,898          (527,191)         (230,499)
                                                   -----------       -----------       -----------

Weighted average number of common shares
used in basic EPS                                    1,955,043           326,064           314,244

Effect of dilutive securities
    Stock options                                       52,213                --                --
                                                   -----------       -----------       -----------
Weighted average of common shares and dilutive
potential common shares used in dilutive EPS         2,007,256           326,064           314,244
                                                   ===========       ===========       ===========

Antidilutive securities:
    Stock options                                       25,000           146,350            84,800
                                                   -----------       -----------       -----------

</TABLE>

For all years presented the Company's Preferred Stock is not included as it was
antidilutive.

NOTE 11. RELATED PARTY

The Manager is be responsible for the day-to-day operations of the Company and
performs such services and activities relating to the assets and operations of
the Company. 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.


                                      F-19
<PAGE>

NOTE 11. RELATED PARTY (CONTINUED)

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
effectively discounting the purchase price of the loan from the Manager. The
Manager will also receive a fee for loan servicing equal to one-half of one
percent per annum of the total mortgage loans serviced and any late payment
charges. These fees are earned directly by the Manager and deducted from the
interest or late payments to cover costs to manage the portfolio, effectively
reducing the yield to the Company. In addition, the Manager will receive, as
incentive compensation for each fiscal quarter, an amount equal to 50% of the
taxable net income before the dividend deduction of the Company in excess of the
annualized return to the Company equal to 12%. For the years ended December 31,
2001, 2000 and 1999, the Manager earned the following:

<TABLE>
<CAPTION>
                                           2001            2000           1999
                                        ----------       --------       --------
<S>                                     <C>              <C>            <C>
Loan origination fees                   $1,694,100       $686,950       $662,651
Loan servicing fees                        267,469        179,129        148,252
Late payment charges                        35,328         52,463         12,539
Incentive compensation bonus                88,084             --         18,480
</TABLE>

The Manager waived its rights to receive the management incentive bonus for the
4th quarter of 2000 of approximately $82,000.

NOTE 12. SUBSEQUENT EVENT

In January 2002, the Manager for Specialty Mortgage Trust lent $250,000 to a
borrower who was delinquent in interest and principal with a loan balance of
approximately $1,580,000 as of December 31, 2001, which brought this loan
current.


                                      F-20
<PAGE>

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

                      Name                                Position
            Nello Gonfiantini, III (1)       Chairman of the Board of Directors,
                                             President, Secretary

            George E. Bull(2)(3)             Director
            Roger M. Peltyn(2)(4)            Director
            Stephen V. Novacek(2)(4)         Director
            Ernest Martinelli(2)(3)          Director
            Harvey C. Fennell(2)(3)          Director

            Stephanie S. Schmitt (5)         Chief Financial Officer and
                                             Principal Accountant

            (1)   Founder and promoter of Specialty Mortgage Trust.

            (2)   Independent Director

            (3)   Member of the Audit Committee

            (4)   Member of the Manger Oversight Committee

            (5)   Officer

            Information regarding the business background and experience of
            Specialty Mortgage Trust's directors and executive officers follows:

            NELLO GONFIANTINI III, age 47, was the sole founder and promoter of
            Specialty Mortgage 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. Since June 1994, Mr.
            Gonfiantini has served as a director of Redwood Trust, Inc., a
            publicly traded REIT with mortgage assets currently in excess of $2
            billion. Mr. Gonfiantini has a BA and an MBA from the University of
            Denver.

            GEORGE E. BULL, age 53, 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

                                       59
<PAGE>

            managing 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 59, has been President of the structural
            engineering firm, Martin & Peltyn, Inc., Las Vegas, 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. 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 56, 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 73, 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 53, is the President of Dickson Realty, Inc.,
            Reno, and has been a realtor since 1987. Mr. Fennell specializes in
            land and commercial real estate sales. He is 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: Peat, Marwick, Main & Company. Mr. Fennell is the
            past President of the Sierra Nevada Chapter of the American Red
            Cross and served as

                                       60
<PAGE>

            Treasurer of the Reno Performing Arts Center and the Nevada Festival
            Ballet. He formerly served as a director of Home Federal Bank in
            Reno.

            STEPHANIE S. SCHMITT, age 33, has been the Chief Financial Officer
            and Principal Accountant of Specialty Mortgage 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 OFFICERS

            Specialty Mortgage 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
            six 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 II          Term Expires 2004

            Stephen Novacek               Term Expires 2004

            Class II Directors

            George Bull III               Term Expires 2002

            Ernest Martinelli             Term Expires 2002

            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

                                       61
<PAGE>

            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 preferred 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 Mortgage 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 Specialty Mortgage
            Trust'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.

            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 2001, the board of directors met 5 times, each time with full
            attendance. There has not yet been separate committee meetings.

            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.

                                       62
<PAGE>

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 Mortgage Trust,
            independent directors, $500 for each meeting attended in person. In
            addition, each 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. We refer you to "Executive
            Compensation Stock Option Plan Automatic Grants to Non-Employee
            Directors" in this annual report for more detail. 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 Mortgage 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, 2001, 2000 and
            1999, Specialty Financial earned $1,996,897, $918,542, $823,442
            respectively, in total base fees. Specialty Financial also received
            an incentive compensation bonus of $88,084, $0, $18,480 for the
            years ended, respectively.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER'S AND MANAGEMENT

            The following table sets forth certain information known to
            Specialty Mortgage Trust with respect to beneficial ownership of
            Specialty Mortgage Trust's capital stock as of December 31, 2001 by
            each person other than members of management known to Specialty
            Mortgage Trust to beneficially own more than five percent (5%) of
            Specialty Mortgage Trust's capital stock. Unless otherwise indicated
            in the footnotes to the table, the beneficial owners named have, to
            the knowledge of Specialty Mortgage Trust, sole voting and
            investment power with respect to the shares beneficially owned,
            subject to community property laws where applicable.

                                       63

<PAGE>
<TABLE>
<CAPTION>
                                            BENEFICIAL
                                             OWNERSHIP
                                         OF CAPITAL STOCK
                                     --------------------------
      NAME OF BENEFICIAL OWNER         SHARES        PERCENT
      ------------------------         ------        -------
<S>                                    <C>            <C>
Raymond J. Poncia (1)                  500,000        7.24%
Julius and Joanne Ballardini (2)       394,617        5.71%
Angelo and Joan Petrini (3)            390,772        5.66%
Nello Gonfiantini, Jr. (4)             353,128        5.11%
</TABLE>

            -----------------

            (1)   Consists of 250,000 shares of common stock held by the Raymond
                  J. Poncia, Jr. Family Trust of which Mr. Poncia is Trustee and
                  250,000 shares of common stock held by Hotel-Casino
                  Management, Inc. of which Mr. Poncia is president.

            (2)   Consists of 394,617 shares of common stock held by the Julius
                  and Joanne Ballardini Family Trust dated 4/14/92 of which Mr.
                  & Mrs. Ballardini are trustees.

            (3)   Consists of 353,232 shares of common stock held by the 1987
                  Petrini Family Trust of which Mr. and Mrs. Petrini are
                  Trustees and 37,540 shares of common stock held by Delta
                  Saloon Profit Sharing Plan of which Mr. Petrini is Trustee.

            (4)   Consist of 184,498 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 Jr. is trustee,
                  74,157 shares of common stock held by Mr. Gonfiantini, Jr.
                  individually, 43,182 shares of common stock held by Gonzo
                  Properties of which Mr. Gonfantini, 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 owned by the Gonfiantini Family.

            The following table sets forth certain information known to the
            Company with respect to beneficial ownership of the Company's
            Capital Stock as of December 31, 2001, 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.

                                       64
<PAGE>

<TABLE>
<CAPTION>
                                                               BENEFICIAL OWNERSHIP OF
                                                                   CAPITAL STOCK(1)
                                                               -----------------------
NAME OF BENEFICIAL OWNER                                         NUMBER      PERCENT
------------------------                                         ------      -------
<S>                                                              <C>          <C>
Nello Gonfiantini III (1)                                        421,577      6.77%
Ernest Martinelli (2)                                            200,000      2.87%
George E. Bull III (3)                                            62,500          *
Harvey Fennell (4)                                                56,809          *
Roger M. Peltyn (5)                                               26,867          *
Stephen V. Novacek (6)                                            15,197          *
Stephanie S. Schmitt                                                  --          *
All Directors and Executive Officers as a Group (7 persons)      782,950      11.33%
</TABLE>

            -----------------
            *     Less than one percent.
            (1)   Consists of 329,531 shares of common stock held in the Nello
                  Gonfiantini III 1981 Trust of which Nello Gonfiantini III is
                  Trustee, and 43,182 shares of common stock held by Gonzo
                  Properties of which Nello Gonfiantini III is a partner, and
                  48,864 which is 25% of 195,455 shares of common stock held by
                  Gonfiantini Family of which Nello Gonfiantini III 1981 Trust
                  of which Nello Gonfiantini III is Trustee, as a tenant in
                  common, but does not include 682,380 shares of common stock
                  beneficially owned by person related by blood or marriage to
                  Nello Gonfiantini III with respect to which he has neither
                  voting nor investment power.
            (2)   Consists of 2,500 shares of common stock issuable upon the
                  exercise of options and 147,500 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 by The
                  Martinelli Family Partnership of which Mr. Martinelli is
                  general partner.
            (3)   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.
            (4)   Consists of 7,500 shares of common stock issuable upon the
                  exercise of options, and 14,418 shares of common stock held by
                  the Harvey and Nancy Fennell Family Trust of which Mr. Fennell
                  is co-trustee and 34,891 shares of common stock held by
                  Dickson Realty Profit Sharing Plan of which Harvey Fennell is
                  Co-Trustee.
            (5)   Consists of 26,867 shares of common stock held by the Peltyn
                  Family Trust of which Mr. Peltyn is a trustee.
            (6)   Consists of 2,500 shares of common stock issuable upon the
                  exercise of options and 12,697 shares of common stock owned by
                  Stephen V. Novacek.

                                       65
<PAGE>

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 Mortgage Trust as may be
            appropriate, including:

            (i)     representing Specialty Mortgage 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 Mortgage
                    Trust;

            (iii)   furnishing reports and statistical and economic research to
                    Specialty Mortgage Trust regarding Specialty Mortgage
                    Trust's real estate lending activities and the performance
                    of its portfolio of mortgage loans;

            (iv)    administering the day-to-day operations of Specialty
                    Mortgage Trust and performing administrative functions
                    necessary in the management of Specialty Mortgage Trust,
                    including the collection of revenues, the payment of
                    Specialty Mortgage Trust's expenses, debts and obligations
                    and the maintenance of appropriate computer services to
                    perform such administrative functions;

            (v)     counseling Specialty Mortgage Trust in connection with
                    policy decisions to be made by the Board of Directors;

            (vi)    assisting Specialty Mortgage Trust in its use of leverage to
                    finance mortgage loan acquisitions;

            (vii)   overseeing the servicing of Specialty Mortgage Trust's
                    mortgage loans;

            (viii)  establishing underwriting, appraisal and quality control
                    procedures for the mortgage loans of Specialty Mortgage
                    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;

                                       66
<PAGE>

            (x)     providing Specialty Mortgage Trust with data processing,
                    legal and administrative services to the extent required to
                    implement the business strategy of Specialty Mortgage Trust;

            (xi)    providing all actions necessary for compliance by Specialty
                    Mortgage Trust with all federal, state and local regulatory
                    requirements applicable to Specialty Mortgage 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 Mortgage
                    Trust to make required federal, state and local tax filings
                    and reports and generally enable Specialty Mortgage 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 Mortgage Trust with the
                    stockholders of Specialty Mortgage Trust 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 Specialty Mortgage 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.

            MANAGEMENT INCENTIVE FEE

            We pay to Specialty Financial as incentive compensation for each
            fiscal quarter, an amount equal to 50% of the net income of
            Specialty Mortgage Trust, before deduction of such incentive
            compensation, in excess of the annualized return to Specialty
            Mortgage Trust equal to 12%. The incentive compensation calculation
            and payment will be made quarterly in arrears. The term "return to
            Specialty Mortgage 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 Specialty Mortgage
            Trust means the taxable income of Specialty Mortgage Trust 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 Specialty Mortgage Trust'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
            Specialty Mortgage Trust, 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
            Specialty Mortgage Trust'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

                                       67
<PAGE>

            Specialty Mortgage 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 and delivered to
            us within 15 days after the end of each month. 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 within 30 days after the end of each month. We
            pay the incentive fee with respect to each fiscal quarter within 15
            days following the delivery to us of the Manager's written statement
            setting forth the computation of the incentive fee for such quarter.
            The Manager re-computes the quarterly incentive fee within 45 days
            after the end of each fiscal year, and any required adjustments are
            paid by us or the Manager within 15 days after the delivery of the
            Manager's written computation to us.

            For the years ended December 31, 2001, 2000 and 1999 we paid
            management incentive fees of $88,084, $0, and $18,480, 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. 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, 2001, 2000 and 1999 we paid
            loan-servicing fees of $267,469, $179,129, and $148,252,
            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 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, 2001, 2000 and 1999 the Manager
            retained loan origination fees of $1,694,100, $686,950, and
            $662,651, respectively.

                                       68
<PAGE>

            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.

            For the years ended December 31, 2001, 2000 and 1999 the Manager
            retained late charges of $35,328, $52,463, and $12,539, respectively

            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 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
            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 Mortgage Trust. At December
            31, 2001, 4% of our mortgage loan portfolio would be approximately
            $2.9 million. In addition, we have the right to terminate the
            management agreement at any time for cause. A majority of our
            unaffiliated directors (currently 5 of 6 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.

                                       69
<PAGE>

            COLLATERIZED NOTES

            There are several related parties who hold collaterized notes with
            Specialty Mortgage Trust. As of December 31, 2001, there were 5
            related parties who owned approximately $1,080,000 in collaterized
            notes, which represents approximately 11.4% of the total balance.

                                       70
<PAGE>

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

            (a)   Exhibits

                  Exhibit No.       Document
                  -----------       --------

                  3.1*              Articles of Incorporation

                  3.2*              Articles Supplementary

                  3.2a**            Articles of Amendment of Articles
                                    Supplementary

                  3.3*              Bylaws

                  3.3.1*            Amendment to Bylaws

                  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.

                  10.1*             Amended and Restated Management Agreement

                  10.2*             The Master Loan Participation and Servicing
                                    Agreement

                  11                Statement Regarding Computation of per share
                                    earnings for the three months ended December
                                    31, 2001 and December 31, 2000

                  12                Schedules II and IV for the years ended
                                    December 31, 2001, 2000 and 1999

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

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

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

                                       71
<PAGE>

                                   SIGNATURES

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

                                   SPECIALTY MORTGAGE TRUST, INC.

Dated: March 28, 2002              By:
                                       -------------------------------------
                                       Nello Gonfiantini III
                                       Chairman, President, and Secretary

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

Dated: March 28, 2002              By:
                                       -------------------------------------
                                       Stephanie S. Schmitt
                                       Chief Financial Officer

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

                                       72