<PAGE>   1
 
   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1998
    
                                                      REGISTRATION NO. 333-45543
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
   
                                AMENDMENT NO. 3
    
                                       TO
                                   FORM S-11
                          REGISTRATION STATEMENT UNDER
                           THE SECURITIES ACT OF 1933
                             ---------------------
                             AMRESCO CAPITAL TRUST
      (Exact Name of Registrant as Specified in its Governing Instruments)
                             ---------------------
            700 NORTH PEARL STREET, SUITE 2400, DALLAS, TEXAS 75201
                                 (214) 953-7700
  (Address, Including Zip Code, and Telephone Number, including Area Code, of
                   Registrant's Principal Executive Offices)
                             ---------------------
                                 MARK D. GIBSON
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             AMRESCO CAPITAL TRUST
                       700 NORTH PEARL STREET, SUITE 2400
                              DALLAS, TEXAS 75201
                                 (214) 953-7700
 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
                             ---------------------
                                   COPIES TO:
 
<TABLE>
<S>                             <C>                             <C>
   MICHELLE P. GOOLSBY, ESQ.       L. KEITH BLACKWELL, ESQ.          PETER T. HEALY, ESQ.
WINSTEAD SECHREST & MINICK P.C.          AMRESCO, INC.               O'MELVENY & MYERS LLP
    5400 RENAISSANCE TOWER          700 NORTH PEARL STREET          EMBARCADERO CENTER WEST
        1201 ELM STREET               SUITE 2400, LB 342        275 BATTERY STREET, 26TH FLOOR
      DALLAS, TEXAS 75270             DALLAS, TEXAS 75201       SAN FRANCISCO, CALIFORNIA 94111
        (214) 745-5400                  (214) 953-7700                  (415) 984-8833
</TABLE>
 
                             ---------------------
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
---------------------
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.  [ ]
---------------------
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
---------------------
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
====================================================================================================================
                                                      PROPOSED MAXIMUM       PROPOSED MAXIMUM
     TITLE OF SECURITIES          AMOUNT BEING         OFFERING PRICE       AGGREGATE OFFERING        AMOUNT OF
      BEING REGISTERED            REGISTERED(1)          PER SHARE               PRICE(2)        REGISTRATION FEE(3)
--------------------------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>                    <C>                    <C>
Common Shares of Beneficial
  Interest, par value $0.01
  per share..................   23,000,000 shares          $16.00              $368,000,000           $108,560
====================================================================================================================
</TABLE>
 
(1) Includes 3,000,000 shares which may be purchased by the Underwriters to
    cover over-allotments, if any.
(2) Estimated based on a bona fide estimate of the proposed maximum offering
    price solely for the purpose of calculating the registration fee pursuant to
    Rule 457(a) of the Securities Act of 1933, as amended.
(3) The required filing fee has been previously paid.
                             ---------------------
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>   2
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
 
   
                 SUBJECT TO COMPLETION -- DATED APRIL 20, 1998
    
PROSPECTUS
--------------------------------------------------------------------------------
                               20,000,000 Shares
 
   
                                 [AMRESCO LOGO]
    
 
                      Common Shares of Beneficial Interest
--------------------------------------------------------------------------------
All of the 20,000,000 common shares of beneficial interest, par value $.01 per
share ("Common Shares"), of AMRESCO Capital Trust (the "Company") offered hereby
(the "Offering") are being offered by the Company. The Company is a newly
organized Texas real estate investment trust formed to take advantage of certain
mid- to high-yield lending and investment opportunities in real estate related
assets, including various types of commercial mortgage loans, mortgage-backed
securities and commercial real properties. The Company will elect to be taxed as
a real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"), and generally will not be subject to federal taxation
on its income to the extent that it distributes its net income to its
shareholders and maintains its qualification as a REIT. The Company's operations
will be managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. ("AMRESCO"). AMRESCO (together with its affiliated entities, the
"AMRESCO Group"), is a publicly-traded diversified financial services company
specializing in real estate lending, specialized commercial finance, and the
acquisition, resolution and servicing of nonperforming and underperforming
commercial real estate loans.
 
   
SEE "RISK FACTORS" ON PAGES 16 TO 33 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY, INCLUDING:
 
- Conflicts of interest between the Company and members of the AMRESCO Group
  could result in decisions not in the best interest of the Company's
  shareholders.
    
   
- The Management Agreement provides for base management fees payable to the
  Manager without consideration of the performance of the Company's portfolio
  and also provides for incentive fees based on certain performance criteria,
  which could result in the Manager recommending for investment by the Company
  riskier or more speculative investments.
    
   
- The Company will be wholly dependent upon the Manager and other members of the
  AMRESCO Group for its operations.
    
   
- The Company and the Manager were organized in January 1998 and March 1998,
  respectively, and, therefore, neither the Company nor the Manager has any
  operating history, any substantial assets or any prior experience in managing
  and operating a REIT, which could adversely affect the Company's results of
  operations.
    
   
- The Company has issued non-binding commitments to purchase only $101.0 million
  or approximately 36.4% (based on the committed amount) of the estimated net
  proceeds of the Offering, assuming an initial public offering price of $15 per
  share. The Company will have broad discretion in the allocation of the net
  proceeds of the Offering. Delays in investing the net proceeds of the Offering
  will adversely affect operations of the Company.
    
   
- The Company intends to invest in various types of commercial mortgage loans
  (including construction and rehabilitation loans, bridge loans, participating
  loans and second-lien loans) which may be subject to significant credit risk,
  resulting in possible losses.
    
   
- Each of the proposed Initial Assets is a non-recourse commercial mortgage
  loan. In the event of a default under any such Mortgage Loan, the Company's
  recourse would be limited to the value of the collateral, which may be less
  than the outstanding balance of such loan.
    
- The Company intends to invest in mortgage-backed securities, including
  non-investment grade mortgage-backed securities, which may be subject to a
  greater risk of loss than investments in senior, investment grade securities.
   
- The Company intends to invest in commercial real properties, including net
  leased properties which may be subject to risk of non-payment by the
  applicable tenant, particularly in the event of an economic downturn, and
  sub-performing and non-performing properties, which may not generate
  sufficient revenues to meet operating expenses and debt service obligations.
    
   
- The yield on the Company's investments will be sensitive to changes in
  prevailing medium-term and long-term interest rates and, in some cases,
  changes in prepayment rates, which could result in a mismatch between the
  Company's borrowing rates (which will typically be shorter-term rates) and
  asset yields and a reduction in the Company's income from such
  investments. (Cont. on next page)
    
--------------------------------------------------------------------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
     SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
          PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
             REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
<TABLE>
<CAPTION>
========================================================================================================================
                                                                                    Underwriting
                                                                  Price to          Discounts and        Proceeds to
                                                                   Public          Commissions(1)        Company(2)
------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>                 <C>
Per Common Share............................................          $                   $                   $
------------------------------------------------------------------------------------------------------------------------
Total(3)....................................................          $                   $                   $
========================================================================================================================
</TABLE>
 
(1) The Company and AMRESCO have agreed to indemnify the Underwriters against
    certain liabilities, including liabilities under the Securities Act of 1933,
    as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
    approximately $1,300,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
    purchase up to 3,000,000 additional Common Shares on the same terms and
    conditions as set forth above. If all such additional Common Shares are
    purchased, the total Price to Public will be $        , the total
    Underwriting Discounts and Commissions will be $        and the total
    Proceeds to Company will be $        . See "Underwriting."
--------------------------------------------------------------------------------
The Common Shares are being offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the Common Shares to the Underwriters is expected to be made through the
facilities of The Depository Trust Company, New York, New York, on or about
  , 1998.
   
PRUDENTIAL SECURITIES INCORPORATED
    
                       CREDIT SUISSE FIRST BOSTON
   
                         ABN AMRO INCORPORATED
    
                                  J.C. BRADFORD & CO.
                                      NATIONSBANC MONTGOMERY SECURITIES LLC
       , 1998                                            PIPER JAFFRAY INC.
<PAGE>   3
 
(Continued from previous page)
 
   
- The Company currently intends to operate at a ratio of total debt to equity of
  less than 3:1 (although the actual ratio may be higher or lower and the
  Company's Declaration of Trust does not limit the amount of indebtedness the
  Company can incur). Such leverage is likely to increase the volatility of the
  Company's income and net asset value and could result in operating or capital
  losses.
    
- The Company intends to use hedging strategies, including interest rate swaps,
  interest rate collars, caps or floors, forward contracts and U.S. Treasury and
  Eurodollar futures and options, which have significant transaction costs (and
  therefore will reduce the Company's overall returns on its investments) and
  may not be effective in mitigating interest rate and prepayment risks.
- The Manager may be entitled to a significant termination fee upon termination
  of the Management Agreement which, if paid, could substantially reduce cash
  available for distribution to shareholders.
- The Company will have broad discretion in the types of real estate related
  assets which may be included in its portfolio, in the types and percentages of
  any type of assets included in such portfolio, and may change its investment
  and operating policies and strategies (including the Company's policies
  regarding the incurrence of debt) at any time without the consent of the
  shareholders of the Company, which creates uncertainty for shareholders and
  could cause losses to the Company.
   
- Certain of the Underwriters (or their affiliates) have in the past, and may in
  the future, provide investment banking services and financings to members of
  the AMRESCO Group and an affiliate of at least one Underwriter has committed
  to provide a financing facility to the Company in connection with the
  Offering. As a result, there may be conflicts of interest between purchasers
  of Common Shares in the Offering and the Underwriters.
    
- The Company may be taxed as a corporation if it fails to qualify as a REIT,
  which would substantially reduce the amount of cash available for distribution
  to shareholders.
- Shareholders may, under certain circumstances, be subject to significant
  potential dilution from future equity offerings, including offerings of
  preferred shares.
- Ownership of Common Shares by any shareholder (other than AMRESCO Holdings,
  Inc. or any other member of the AMRESCO Group) is limited to 9.8% of the total
  outstanding shares of beneficial interest of the Company, which may make it
  more difficult to change control of the Company even where such change may be
  in the best interest of the Company's shareholders.
- The Company's activities, structure and operations may be adversely affected
  by changes in the tax laws applicable to REITs.
 
Simultaneously with the closing of, and in addition to, the Offering, the
Company will sell 2,222,233 Common Shares (2,555,567 if the Underwriters'
over-allotment option is separately exercised in full) to AMREIT Holdings, Inc.
("Holdings"), a member of the AMRESCO Group, at the initial public offering
price pursuant to a private placement. See "Private Placement." After such sale,
Holdings will own 10% of the then outstanding Common Shares. In addition, at the
request of the Company, the Underwriters have reserved an aggregate of up to
1,000,000 (or 5%) of the Common Shares offered hereby for sale at the initial
public offering price to Trust Managers, directors, officers and employees of
the Company and members of the AMRESCO Group.
 
   
Prior to the Offering, there has been no public market for the Common Shares. It
is currently anticipated that the initial public offering price for the Common
Shares offered hereby will be between $14 and $16 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Shares have been approved for inclusion in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "AMCT."
    
 
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF COMMON SHARES TO STABILIZE THE MARKET PRICE, PURCHASES OF
COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON SHARES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>   4
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
PROSPECTUS SUMMARY..........................    1
  The Company...............................    1
  Business and Strategy.....................    2
  Summary Risk Factors......................    2
  Targeted Investments......................    7
  The Initial Assets........................    8
  The Manager...............................    9
  The Management Agreement..................   10
  Dividend Policy and Distributions.........   11
  The Offering..............................   12
  Conflicts of Interest.....................   12
  Organization and Relationships............   14
RISK FACTORS................................   16
  Conflicts of Interest May Result in
     Decisions That Do Not Fully Reflect the
     Shareholders' Best Interest............   16
     Terms of Transactions With Members of
       the AMRESCO Group May Not be Fair....   16
     Investment Opportunities May Be Limited
       if Such Opportunities Are Also
       Attractive to the AMRESCO Group......   16
     Competition by the AMRESCO Group May
       Adversely Affect the Company.........   16
     Conflicts of the Officers and Employees
       of the Manager May Cause Them Not to
       Act in the Company's Best Interest...   17
     Structure of Management Compensation
       Could Jeopardize the Invested
       Portfolio............................   17
     Agreements and Transactions May Not be
       Favorable to the Company.............   17
  Dependence on the Manager and the AMRESCO
     Group for Operations and the Lack of
     Experience of the Manager May Adversely
     Affect Operating Results...............   17
  Inability to Acquire or Delays in
     Acquiring Targeted Investments Will
     Reduce Income to the Company...........   18
  Competition for Targeted Investments Could
     Reduce Income to the Company...........   18
  Co-Investments May be Riskier Than
     Investments Made Solely by the
     Company................................   19
  Risks of Loss on Mortgage Loans...........   19
     Foreclosure May Not be Sufficient to
       Prevent Losses.......................   19
     Commercial Mortgage Loans May Involve a
       Greater Risk of Loss Than
       Single-Family Mortgage Loans.........   19
     Mezzanine Loans, Construction Loans,
       Rehabilitation Loans and Bridge Loans
       Involve Greater Risks of Loss........   19
     Participating Loans, Mezzanine Loans,
       Construction Loans, Rehabilitation
       Loans and Bridge Loans Involve Higher
       Administrative Costs.................   20
     Distressed Mortgage Loans May Have
       Greater Default Risks Than Performing
       Loans................................   20
     Limited Recourse Loans May Limit the
       Company's Recovery to the Value of
       the Mortgaged Property...............   20
     Volatility of Values of Mortgaged
       Properties May Affect Adversely the
       Company's Mortgage Loans.............   20
     One Action Rules May Limit the
       Company's Rights Following
       Defaults.............................   21
  Risks of Loss on the Initial Assets.......   21
     Repayment May Depend on Successful
       Completion of the Project............   21
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
     Decrease in Property Values May
       Adversely Affect the Borrower's
       Ability to Repay the Loan or Result
       in Reduced Profits to the Company....   21
     Returns on Loan One and Loan Four May
       be Reduced due to Second Lien
       Status...............................   21
     Potential Environmental Problems
       Associated With Loan Three May
       Adversely Affect the Company.........   21
     Concentrations of Asset Types May
       Increase Risk........................   22
     Non-recourse Nature of the Initial
       Assets May Limit the Company's
       Recovery on the Initial Assets.......   22
  Risks Related to Investments in MBS.......   23
     Subordinated Interests are Subject to
       Greater Credit Risks Than More Senior
       Classes..............................   23
     Yields on Subordinated Interests May Be
       Affected Adversely By Prepayments and
       Interest Rate Changes................   23
     Certain Investments May Generate
       Taxable Income Exceeding Cash Flow...   23
  Risks Related to Investments in Real
     Estate.................................   24
     Tenant Defaults and Bankruptcy May
       Cause Losses.........................   24
     Reliance on Third Party Operators May
       Adversely Affect Results.............   24
     Conditions Beyond the Company's Control
       May Affect Adversely the Value of
       Real Estate..........................   24
     Real Estate is Illiquid and its Value
       May Decrease.........................   24
     The Company's Insurance Will Not Cover
       All Losses...........................   24
     Property Taxes Decrease Returns on Real
       Estate...............................   25
     Compliance With Americans with
       Disabilities Act and Other Changes in
       Governmental Rules and Regulations
       May Be Costly........................   25
     Real Estate with Hidden Environmental
       Problems Will Increase Costs and May
       Create Liability for the Company.....   25
     Real Estate With Known Environmental
       Problems May Create Liability for the
       Company..............................   25
     Foreign Real Estate is Subject to
       Currency Conversion Risks and
       Uncertainty of Foreign Laws..........   25
  Interest Rate Fluctuations May Adversely
     Affect the Company's Investments and
     Operating Results......................   26
     Interest Rate Mismatch Could Occur
       Between Invested Portfolio Yield and
       Borrowing Rates Resulting in
       Decreased Yield......................   26
     Inverted Yield Curve Adversely Affects
       Income...............................   26
     Increased Interest Rates Could Decrease
       Demand for Mortgage Loans............   26
     Increased Prepayment Rates Could
       Adversely Affect Yields..............   26
  Leverage Increases Exposure to Loss.......   26
  Inability to Implement Leveraging Strategy
     May Reduce Profits.....................   27
  Hedging Transactions Can Limit Gains and
     May Increase Exposure to Losses........   27
  Termination of the Management Agreement
     Could Adversely Affect the Company's
     Investments and Operating Results......   28
</TABLE>
    
 
                                        i
<PAGE>   5
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
  The Company's Broad Discretion Creates
     Uncertainty............................   28
  Conflicts of Interest of Certain
     Underwriters May Affect Offering.......   29
  Failure to Maintain REIT Status Would Have
     Adverse Tax Consequences...............   29
  Sales by Shareholders Could Adversely
     Affect the Market Price of the Common
     Shares.................................   30
  Future Offerings by the Company of Debt
     and Equity Could Dilute the Interests
     of Holders of Common Shares............   31
  Restrictions on Ownership of the Common
     Shares Could Discourage a Change of
     Control................................   31
  Restrictions on or Impediments to Change
     of Control Could Adversely Affect the
     Value of the Common Shares.............   31
  Changes in Tax Laws Applicable to REITs
     May Adversely Affect the Company.......   32
  Failure to Develop a Stable Market May
     Result in Depressed Market Price.......   32
  Software Deficiencies Could Adversely
     Affect the Company.....................   32
  Failure to Maintain Exclusion From the
     Investment Company Act Would Restrict
     the Company's Operating Flexibility....   32
  Adverse Tax Treatment of Excess Inclusion
     Income Could Adversely Affect
     Shareholders...........................   32
USE OF PROCEEDS.............................   34
DIVIDEND POLICY AND
  DISTRIBUTIONS.............................   34
CAPITALIZATION..............................   35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  LIQUIDITY AND CAPITAL RESOURCES...........   36
  Warehouse Line............................   36
  Repurchase Agreement......................   37
BUSINESS AND STRATEGY.......................   37
  General...................................   37
  Industry Trends...........................   37
  Objective and Strategy....................   38
  Operating Policies and Guidelines.........   39
     Investment Policies....................   39
     Capital and Leverage Policies..........   41
       Warehouse Line.......................   41
       Repurchase Agreement.................   42
       Securitizations......................   42
       Unsecured Financings.................   43
     Credit Risk Management Policy..........   43
     Financial Risk Management Policy.......   44
     Relationship With AMRESCO..............   45
       Right of First Refusal...............   45
       Correspondent Agreement..............   45
       Acquisition or Co-Investment
          Opportunities.....................   46
     Compliance Policies....................   47
     Future Revisions in Policies and
       Strategies...........................   47
  Description of Targeted Investments.......   48
     Mortgage Loans.........................   48
       Participating Loans..................   48
       Construction Loans and Rehabilitation
          Loans.............................   48
       Mezzanine Loans......................   48
       Bridge Loans.........................   49
       Distressed Mortgage Loans............   49
       Real Estate Pools....................   49
     Mortgage-Backed Securities.............   50
       CMBS.................................   50
       RMBS.................................   53
     Commercial Real Estate.................   54
       Net Leased Real Estate...............   54
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
       REO Properties and Other Distressed
          Real Estate.......................   55
     Other Investments......................   55
       Investment in Other Entities.........   56
       Foreign Investments..................   56
  The Initial Assets........................   56
     Loan One...............................   56
     Loan Two...............................   57
     Loan Three.............................   58
     Loan Four..............................   59
     Loan Five..............................   59
  Employees.................................   62
  Facilities................................   62
  Legal Proceedings.........................   62
MANAGEMENT OF THE COMPANY...................   62
  Executive Officers and Trust Managers of
     the Company............................   62
  Executive Compensation....................   67
  Share Option Plan.........................   67
  Share Options Outstanding.................   68
THE MANAGER.................................   69
  Description of the AMRESCO Group..........   69
     Commercial Mortgage Banking............   70
       General..............................   70
       Real Estate Capital Markets..........   70
       Commercial Real Estate Lending.......   71
       Commercial Loan Servicing............   71
     Commercial Finance.....................   71
       General..............................   71
       Franchise Lending....................   72
       Specialty Lending....................   72
       Single-Family Residential
          Construction Lending..............   72
     Asset Management.......................   72
       General..............................   72
       Asset Portfolio Management and
          Investment........................   72
       Special Servicing....................   73
       Servicing Risks; Borrower
          Delinquencies and Claims..........   73
  The Management Agreement..................   73
  Termination...............................   76
  Management Compensation...................   76
  Expenses..................................   78
  Certain Relationships; Conflicts of
     Interest...............................   79
  Limits of Responsibility..................   81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
  OWNERS AND MANAGEMENT.....................   81
FEDERAL INCOME TAX
  CONSEQUENCES..............................   82
  General...................................   82
  Taxation of the Company...................   83
  Requirements For Qualification............   84
     Organizational Requirements............   84
       Qualified REIT Subsidiary............   85
       Ownership of a Partnership
          Interest..........................   85
     Income Tests...........................   85
     Asset Tests............................   89
     Annual Distribution Requirements.......   89
  Failure to Qualify........................   91
  Taxation of Shareholders..................   91
     Taxation of Taxable U.S.
       Shareholders.........................   91
     Taxation of Tax-Exempt Shareholders....   93
     Taxation of Non-U.S. Shareholders......   94
  Information Reporting Requirements and
     Backup Withholding Tax.................   96
  Proposed Tax Legislation and Possible
     Other Legislative Actions Affecting Tax
     Consequences...........................   96
ERISA CONSIDERATIONS........................   97
  Employee Benefit Plans, Tax-Qualified
     Retirement Plans, and IRAs.............   97
</TABLE>
    
 
                                       ii
<PAGE>   6
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
  Status of the Company Under ERISA.........   98
DESCRIPTION OF SHARES OF BENEFICIAL
  INTEREST..................................  100
  General...................................  100
  Common Shares.............................  100
     Voting Rights..........................  100
     Dividends..............................  100
     Liquidation Rights.....................  100
     Other Terms............................  101
     Meetings of Shareholders...............  101
  Preferred Shares..........................  101
  Registration Rights.......................  101
  Restrictions on Transfer..................  101
  Dividend Reinvestment and Share Purchase
     Plan...................................  104
CERTAIN PROVISIONS OF TEXAS LAW AND OF THE
  DECLARATION OF TRUST AND BYLAWS...........  104
  Board of Trust Managers...................  104
  Removal of Trust Managers.................  104
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                              PAGE
                                              ----
<S>                                           <C>
  Staggered Board...........................  105
  Business Combinations.....................  105
  Amendment to the Declaration of Trust.....  106
  Amendment of Bylaws.......................  107
  Termination of the Company................  107
  Special Meetings of the Shareholders......  107
  Advance Notice of Trust Manager
     Nominations and New Business...........  107
  Possible Anti-Takeover Effect of Certain
     Provisions of Texas Law and of the
     Declaration of Trust and Bylaws........  107
  Transfer Agent and Registrar..............  107
  Reports to Shareholders...................  108
SHARES ELIGIBLE FOR FUTURE SALE.............  109
UNDERWRITING................................  111
PRIVATE PLACEMENT...........................  113
LEGAL MATTERS...............................  113
EXPERTS.....................................  113
ADDITIONAL INFORMATION......................  114
GLOSSARY....................................  114
</TABLE>
    
 
                                       iii
<PAGE>   7
 
                               PROSPECTUS SUMMARY
 
   
     The following summary should be read in conjunction with and is qualified
in its entirety by the more detailed information appearing elsewhere in this
Prospectus. Capitalized and other terms used herein shall have the meanings
assigned to them in the Glossary, which starts at page 114. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. As used in this Prospectus, the
"Company" means either (i) AMRESCO Capital Trust, a Texas real estate investment
trust, or (ii) AMRESCO Capital Trust, a Texas real estate investment trust,
collectively with its affiliated entities (which does not include the Manager or
any other member of the AMRESCO Group), as the context may require.
    
 
                                  THE COMPANY
 
   
     The Company is a newly organized Texas real estate investment trust formed
to take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial Mortgage Loans (including, among others, Participating Loans,
Mezzanine Loans, Construction Loans, Rehabilitation Loans and Bridge Loans),
mortgage-backed securities ("MBS"), commercial real estate (including Net Leased
Real Estate, real estate acquired at foreclosure or by deed-in-lieu of
foreclosure or other underperforming or otherwise distressed real estate) and
certain other real estate related assets. The Company will elect to be taxed as
a REIT. The Company generally will not be subject to federal income taxation to
the extent that it distributes its net income to its shareholders and maintains
its qualification as a REIT. See "Federal Income Tax
Consequences -- Requirements For Qualification."
    
 
   
     The Company intends to pursue and capitalize upon certain investment
opportunities arising within the AMRESCO Group which are currently referred to
entities unaffiliated with AMRESCO. Such investment opportunities (which may
include co-investment opportunities with members of the AMRESCO Group) arise
from the existing business and operations of the AMRESCO Group, including
primarily the commercial mortgage brokerage operations conducted through
Holliday Fenoglio Fowler and the commercial mortgage lending business conducted
by AMRESCO Funding. Holliday Fenoglio Fowler is engaged in three primary lines
of business: real estate related debt placement, real estate investment banking
and real estate dispositions. Based on the most recently available National Real
Estate Investor's Top Lender Survey (which is based on 1996 originations), the
Company believes that Holliday Fenoglio Fowler is the largest commercial
mortgage brokerage company in the United States (including originations of
Fowler Goedecke, which was acquired by Holliday Fenoglio Fowler in January
1998). AMRESCO Funding provides mid- to high-yield commercial Mortgage Loans
(including Participating Loans, Mezzanine Loans and Bridge Loans) the structures
of which typically do not meet the underwriting criteria of traditional
institutional lenders. See "The Manager -- Description of the AMRESCO Group."
    
 
   
     Upon the closing of the Offering, AMRESCO will grant to the Company the
Right of First Refusal with respect to the first $100 million of Targeted
Mortgage Loans which are identified by or to any member of the AMRESCO Group
during any calendar quarter and all MBS (other than MBS issued in
securitizations sponsored in whole or in part by any member of the AMRESCO
Group). The Company believes the Right of First Refusal will minimize conflicts
and potential competition for Targeted Investments between the Company and the
AMRESCO Group. Also upon the closing of the Offering, the Company will enter
into the Correspondent Agreement with Holliday Fenoglio Fowler pursuant to which
Holliday Fenoglio Fowler will agree to present to the Company (on a
non-exclusive basis) Mortgage Loan origination and other real estate related
investment opportunities identified by Holliday Fenoglio Fowler which meet the
investment criteria and objectives of the Company. The Company believes that a
substantial portion of the real estate related assets in which it invests (the
"Invested Portfolio") will be identified through the AMRESCO Group pursuant to
the Right of First Refusal and the Correspondent Agreement. See "Business and
Strategy -- Operating Policies and Guidelines -- Relationship With AMRESCO,"
"The Manager -- Description of the AMRESCO Group" and "Risk
Factors -- Termination of the Management Agreement Could Adversely Affect the
Company's Investments and Operating Results."
    
 
                                        1
<PAGE>   8
 
   
     The day-to-day operations of the Company will be managed by AMREIT
Managers, L.P. (the "Manager"), a newly formed member of the AMRESCO Group,
subject to the direction and oversight of the Board of Trust Managers which,
upon closing of the Offering, will consist of seven members, four of whom will
be unaffiliated with the AMRESCO Group. See "Management of the Company." The
Manager will rely on the employees and other resources of the AMRESCO Group for
a significant portion of its operations. See "Risk Factors -- Dependence on the
Manager and the AMRESCO Group for Operations and the Lack of Experience of the
Manager May Adversely Affect Operating Results" and "The Manager."
    
 
                             BUSINESS AND STRATEGY
 
     The Company's principal business objective is to maximize shareholder value
by producing cash flow for distribution to its shareholders through investment
in mid- to high-yield real estate related assets which earn an attractive spread
over the Company's cost of funds. To achieve its principal business objective,
the Company's strategy is to:
 
   
     - invest in certain types of Mortgage Loans, MBS and commercial real estate
       which the Company expects to generate the highest risk-adjusted returns
       on capital invested, after considering all material relevant factors;
    
 
     - take advantage of expertise existing within, and investment and
       co-investment opportunities arising from the business and operations of,
       the AMRESCO Group by engaging the Manager, a member of the AMRESCO Group,
       to manage the day-to-day operations of the Company, and pursuant to the
       Right of First Refusal and the Correspondent Agreement;
 
     - utilize the expertise and resources (including the market research
       capabilities) of the AMRESCO Group to monitor trends and demands in the
       Mortgage Loan and real estate markets (and to adjust its Mortgage Loan
       products in response thereto) and to analyze the Company's investment
       opportunities and the economic conditions in the Company's proposed
       geographic markets to assist the Company in selecting investments which
       satisfy the Company's investment criteria and targeted returns;
 
     - through the Manager, utilize the expertise of the AMRESCO Group in the
       underwriting, origination and closing of Mortgage Loans and in the
       acquisition, management and servicing of Mortgage Loans, Mortgage Loan
       portfolios and MBS;
 
     - borrow against or leverage its Invested Portfolio (initially through the
       Warehouse Line and the Repurchase Agreement), to the extent consistent
       with the Company's leverage policies, in order to increase the size of
       the Invested Portfolio and increase potential returns to the Company;
 
     - attempt to offset the potential interest rate mismatch resulting from the
       differences between fixed rates or other limitations on coupon rate
       adjustments associated with its Invested Portfolio and the shorter-term
       variable nature of the Company's borrowings by structuring the key terms
       of its borrowings to generally correspond (in the aggregate for the
       entire Invested Portfolio, and not on an asset-by-asset basis) to the
       interest rate and maturity parameters of its Invested Portfolio;
 
   
     - implement various hedging strategies, including interest rate swaps,
       interest rate collars, caps or floors, forward contracts and U.S.
       Treasury and Eurodollar futures and options (to the extent permitted by
       the REIT Provisions of the Code), to minimize the effects of interest
       rate fluctuations on its Invested Portfolio and its borrowings if, given
       the cost of such hedges, the Manager determines such strategies are in
       the best interest of the Company; and
    
 
     - manage the credit risk of its Invested Portfolio by (i) underwriting its
       investments utilizing the processes developed and utilized by the AMRESCO
       Group, (ii) choosing its investments in compliance with the Company's
       investment policies, (iii) monitoring (through the servicing and asset
       management capabilities of the AMRESCO Group) the credit quality of the
       Invested Portfolio, and (iv) maintaining appropriate capital levels and
       allowances for credit losses.
 
                              SUMMARY RISK FACTORS
 
     Set forth below is a brief summary of certain material risks involved in an
investment in the Company. The following summary should be read in conjunction
with, and is qualified in its entirety by, the more detailed information set
forth in this Prospectus under the heading "Risk Factors."
 
                                        2
<PAGE>   9
 
   
     - Conflicts of Interest With the AMRESCO Group May Result in Decisions That
       Do Not Fully Reflect the Shareholders' Best Interest. The Company and the
       Manager have common officers and directors, which may present conflicts
       of interest between members of the AMRESCO Group and the Company,
       including conflicts relating to the price and terms of potential
       purchases by the Company from the AMRESCO Group of Targeted Investments
       and conflicts relating to competition between the Company and members of
       the AMRESCO Group for Targeted Investments. These conflicts of interest
       could result in decisions by the Manager or the Company that do not fully
       reflect the interests of the Company's shareholders. In addition, since
       the Management Agreement provides for Incentive Compensation to be paid
       to the Manager based on certain performance criteria, the Manager could
       have an incentive to recommend riskier or more speculative investments
       for purchase by the Company, which could result in greater risk of loss
       to the Company. The Management Agreement was not negotiated at arm's
       length and, therefore, may contain terms that are less favorable to the
       Company than if such agreement had been negotiated with a third party.
       Likewise, the sale of the Initial Assets from AMRESCO Funding to the
       Company was not negotiated at arm's length and, therefore, the purchase
       price for such assets (which is equal to the outstanding principal and
       accrued interest thereon) may not represent the fair market value of such
       assets.
    
 
   
     - Dependence on the Manager and the AMRESCO Group for Operations and the
       Lack of Experience of the Manager May Adversely Affect Operating
       Results. The Company will contract with the Manager pursuant to the
       Management Agreement to advise the Board of Trust Managers and direct the
       day-to-day business affairs of the Company. The Manager will rely on the
       employees and other resources of the AMRESCO Group for a significant
       portion of its operations. Thus, the Company's success will depend to a
       large degree on the skill of the officers and employees of the Manager
       and the other members of the AMRESCO Group. The ability of the AMRESCO
       Group to support, manage and control its continued growth and to provide
       services and support to the Manager to enable the Manager to perform its
       obligations under the Management Agreement is dependent upon, among other
       things, the ability of the AMRESCO Group to hire, train, supervise and
       manage its work force and to continue to develop the skills necessary to
       compete successfully in its business lines. Neither the Manager (which
       was formed in March 1998 and has no operating history and no significant
       assets) nor any other member of the AMRESCO Group, nor the Company (which
       was formed in January 1998 and has no operating history) has any prior
       experience in managing and operating a REIT, which could adversely affect
       the Company's business, financial condition and results of operations.
       Further, there can be no assurance that the past experience of the
       members of the AMRESCO Group upon which the Manager will rely for a
       significant portion of its operations will be sufficient to successfully
       manage the business of the Company. The past performance of the AMRESCO
       Group (or any member thereof) is not indicative of future results of the
       Company.
    
 
   
     - Failure to Acquire Targeted Investments Will Reduce Income to the
       Company. The Company currently has no Invested Portfolio. The Company has
       issued non-binding commitments to purchase or originate Targeted
       Investments with a maximum aggregate purchase price equal to
       approximately $101.0 million (based on the committed amount), or 36.4% of
       the estimated net proceeds of the Offering, and there is no assurance
       that the Company will purchase any of such Targeted Investments. Further,
       a majority of the Initial Assets are either Construction Loans or
       Rehabilitation Loans and, generally, only a portion of the committed
       amount of such loans will be funded at the time of purchase or
       origination. The Company will have broad discretion in the allocation of
       the net proceeds of the Offering. If the Manager fails to originate or
       acquire Targeted Investments on favorable terms and conditions and on a
       timely basis, the Company's income, and therefore its ability to make
       distributions to shareholders, will be adversely affected.
    
 
     - Competition for Targeted Investments Could Reduce Income to the
       Company. The Company will face significant competition for Targeted
       Investments. Some of its competitors will have greater financial
       resources than the Company. Such competition could result in lowered
       underwriting standards on Targeted Investments, which could result in
       higher risk of loss to the Company, or higher prices on
 
                                        3
<PAGE>   10
 
       Targeted Investments and, therefore, lower yields on such investments and
       lower income to the Company.
 
     - Co-Investments May be Riskier Than Investments Made Solely by the
       Company. The Company may co-invest in Targeted Investments from time to
       time, which co-investments may be with members of the AMRESCO Group or
       with entities not affiliated with AMRESCO. Such investments may involve
       risks not present in investments made solely by the Company, such as
       risks that the co-investors will become bankrupt or have economic or
       business interests or goals that are inconsistent with those of the
       Company, or that such co-investors will take action contrary to the
       Company's investment policies or objectives, including the Company's
       policies with respect to maintaining its qualification as a REIT, or
       inconsistent with the Company's interests.
 
   
     - Investments in Higher-Risk Mortgage Loans Could Result in Losses to the
       Company. The Targeted Investments include Participating Loans (including
       Mezzanine Loans, Construction Loans, Rehabilitation Loans and Bridge
       Loans), Distressed Mortgage Loans and other types of non-traditional
       Mortgage Loans which involve a higher degree of risk than Mortgage Loans
       meeting the traditional underwriting criteria of institutional lenders,
       and thus could result in reduced income or losses to the Company.
    
 
   
     - Repayment of Initial Assets May Depend Upon Successful Completion of
       Financed Projects. The Initial Assets consist primarily of Construction
       Loans and Rehabilitation Loans. The repayment of such Mortgage Loans may
       be dependent upon the successful and timely completion of the financed
       construction or rehabilitation. If the applicable borrower is unable to
       successfully complete the proposed construction or rehabilitation in
       accordance with the proposed budget and timeline or if the actual value
       of the completed project is less than estimated because of any change in
       market conditions or otherwise, the borrower may not have adequate funds
       to repay the loan on a timely basis.
    
 
   
     - Non-Recourse Nature of Initial Assets May Limit the Company's Recovery on
       the Initial Assets. Each Mortgage Loan included in the Initial Assets is
       (or is expected to be) non-recourse against the applicable borrower. In
       addition, each applicable borrower is expected to be a newly formed or
       to-be-formed special purpose entity with no operating history and no
       significant assets other than the property mortgaged or pledged to secure
       the Mortgage Loan. In the event of a default in the payment of any
       Mortgage Loan included in the Initial Assets, recourse will be limited to
       the mortgaged real estate and the pledged ownership interests in the
       applicable borrower. Accordingly, in the event of such default, the
       Company's recovery would be limited to the liquidation value of the
       property securing such Mortgage Loan, which value may be less than the
       outstanding balance of such loan.
    
 
     - Decrease in Values of Properties Underlying Initial Assets May Adversely
       Affect the Company. If the value of the property underlying any Initial
       Asset decreases, the borrower may not be able to secure take-out
       financing, which may adversely affect the borrower's ability to repay the
       Mortgage Loan in a timely manner or at all. Moreover, if such Mortgage
       Loan is a Participating Loan, the Company's expected return on such
       Mortgage Loan will be decreased if the value of the property underlying
       such Mortgage Loan decreases.
 
   
     - Ability to Foreclose on Certain Initial Assets May be Impaired. Since two
       of the five Initial Assets are Mezzanine Loans, the Company's ability to
       foreclose on such loans may be impaired, which could adversely affect the
       Company's ability to recover its investments in such Mezzanine Loans.
    
 
   
     - Economic Downturn or Recession Could Result in Losses on Mortgage
       Loans. The Company expects that a significant portion of its Invested
       Portfolio will consist of Mortgage Loans, which, particularly if economic
       conditions deteriorate, could subject the Company to risks of borrower
       defaults and bankruptcies, as well as other events and circumstances
       which could result in losses on the Company's investments. Moreover, the
       Company expects that a significant portion of the Invested Portfolio will
       consist of Participating Loans (including Mezzanine Loans, Construction
       Loans, Rehabilitation Loans and Bridge Loans), which typically entitle
       the Company to share in appreciation or cash flows from the underlying
       real estate, as well as direct ownership of real estate. The returns to
       the Company on these
    
 
                                        4
<PAGE>   11
 
       types of Mortgage Loans will likely be significantly reduced in the event
       of any economic downturn or recession in the markets in which the real
       estate owned or the real estate underlying such Mortgage Loans is
       located.
 
     - Investments in Subordinated Interests Will Subject the Company to Greater
       Risk of Loss. The Company expects that a significant portion of the
       Invested Portfolio will consist of Subordinated Interests in MBS which
       are subject to greater risk of loss of principal and interest than more
       senior, investment grade securities.
 
     - Investments in Net Leased Real Estate Will Subject the Company to Credit
       Risk. The Company intends to purchase Net Leased Real Estate on a highly
       leveraged basis. If the tenant of a net leased property owned by the
       Company experiences a downturn in its business, such tenant may be unable
       to make its lease payments when due, which in turn could render the
       Company unable to make timely payments on its related debt.
 
     - Reliance on Third Party Operators May Adversely Affect Results. The
       Company will engage experienced real estate operators to operate any
       properties in which it invests and will be dependent upon the abilities
       of such third parties to operate such real estate. The failure of any
       such operator to operate the Company's real estate successfully could
       have a material adverse effect on the results of operations of the
       Company.
 
     - Investments in Distressed Real Estate Will Subject the Company to Greater
       Risk. The Company also may invest in Distressed Real Estate, which may
       not generate sufficient revenues to meet operating expenses and debt
       service and could result in reduced income or losses to the Company.
 
     - Interest Rate Fluctuations May Adversely Affect the Company's Investments
       and Operating Results. The yield on the Company's Invested Portfolio will
       be sensitive to changes in prevailing medium-term to long-term interest
       rates and reshaping of the yield curve which could result in a mismatch
       between the Company's borrowing rates (which will typically be
       shorter-term rates) and the yield on its Invested Portfolio and,
       consequently, reduce or eliminate net income from the Company's
       investments. In addition, a significant increase in interest rates would
       likely reduce the demand for the Company's Mortgage Loans which would
       restrict the Company's ability to originate Mortgage Loans and could
       reduce the amount of cash available for distribution to the Company's
       shareholders.
 
   
     - Leverage Increases Exposure to Loss. The Company expects to increase the
       size of its Invested Portfolio by employing a significant amount of
       leverage. The Company presently intends to achieve a Leverage Ratio of
       2:1 within 24 months after the closing of the Offering, and thereafter to
       operate at a Leverage Ratio of less than 3:1, although the actual
       Leverage Ratio may be higher or lower, and the Company's Declaration of
       Trust does not limit the amount of indebtedness the Company can incur.
       Such leverage is likely to increase the volatility of the Company's
       income and net value of its Invested Portfolio and could result in
       operating or capital losses larger than would occur if such leverage were
       not employed.
    
 
   
     - Hedging Transactions Limit Gains and May Increase Exposure to Losses. The
       Company intends to use hedging strategies, including interest rate swaps,
       interest rate collars, caps or floors, forward contracts and U.S.
       Treasury and Eurodollar futures and options, which may have significant
       transaction costs (and therefore will reduce the Company's overall return
       on its investments) and may not be effective in mitigating interest rate
       and prepayment risks.
    
 
     - Termination of Agreements Could Adversely Affect the Company's
       Investments and Operating Results. The Company expects that a significant
       portion of its Invested Portfolio will be identified, originated or
       otherwise made available to it through the AMRESCO Group. If the
       Management Agreement is terminated (and no member of the AMRESCO Group is
       serving as manager of the Company), the Right of First Refusal and the
       Correspondent Agreement may be terminated by the AMRESCO Group, in which
       case, the AMRESCO Group may not continue to offer Targeted Investments to
       the Company, which could have a material adverse effect on the results of
       operations of the Company. Further, the Manager may be entitled to a
       significant termination fee if the Company
 
                                        5
<PAGE>   12
 
       does not renew, or elects to terminate, the Management Agreement which,
       if paid, could materially adversely affect the cash available for
       distribution to the Company's shareholders and may result in material net
       operating losses.
 
     - The Company's Broad Discretion Creates Uncertainty. The Company will have
       broad discretion (i) in the types of real estate related assets which may
       constitute Targeted Investments from time to time, (ii) in the types and
       percentages of any type of Targeted Investments included in the Invested
       Portfolio from time to time, and (iii) to change its investment and
       operating policies and strategies at any time without the consent of the
       shareholders. Such discretion creates uncertainty for shareholders and
       could cause losses to the Company.
 
     - Conflicts of Interest of Certain Underwriters May Affect
       Offering. Certain of the Underwriters (or their affiliates) have, in the
       past, and may in the future, provide investment banking services and
       financing to members of the AMRESCO Group. Prudential Securities Credit
       Corporation ("PSCC"), an affiliate of Prudential Securities Incorporated
       ("PSI"), the lead Underwriter, has committed to provide a $400 million
       Warehouse Line and a $100 million Repurchase Agreement to the Company
       upon the closing of the Offering for which PSCC will receive certain
       fees. In addition, in connection with the Warehouse Line, the Company
       will agree (as is customary in many similar warehouse lending
       arrangements with affiliates of investment banking firms), to engage PSI
       to act as underwriter and/or placement agent for any sale or
       securitization of Mortgage Loans financed with proceeds from the
       Warehouse Line. Accordingly, the Underwriters may have certain conflicts
       of interest in connection with the Offering.
 
     - Failure to Maintain REIT Status Would Have Adverse Tax Consequences. The
       Company will be taxed as a regular corporation if it fails to maintain
       its qualification as a REIT, which would reduce earnings and cash
       available for distribution to shareholders.
 
     - Future Offerings Could Dilute the Interests of Holders of Common
       Shares. Shareholders will be subject to significant potential dilution
       from future equity offerings, including offerings of preferred shares,
       which may have an adverse effect on the market price of the Common
       Shares.
 
     - Restrictions on Ownership of Common Shares Could Discourage a Change of
       Control. In order for the Company to meet the requirements for
       qualification as a REIT at all times, the Declaration of Trust prohibits
       any Person (other than Holdings or any other member of the AMRESCO Group)
       from acquiring or holding, directly or indirectly, shares of beneficial
       interest of the Company in excess of 9.8% (in value or number) of the
       aggregate of the outstanding shares of beneficial interest of the
       Company, without the approval of the Board of Trust Managers. Such
       restrictions may make it more difficult to change control of the Company
       even where such change may be in the best interest of the Company's
       shareholders.
 
     - Changes in Tax Laws Applicable to REITs May Adversely Affect the
       Company. The Company's activities, structure and operations may be
       adversely affected by changes in the tax laws applicable to REITs.
 
     - Failure to Develop a Public Market May Result in Depressed Market
       Price. Prior to the Offering, there has been no public market for the
       Common Shares, and there can be no assurance that an active trading
       market for the Common Shares offered will develop or, if developed, be
       sustained. In the absence of a public trading market, the market price of
       the Common Shares would be substantially impaired and an investor may be
       unable to liquidate his investment in the Company.
 
                                        6
<PAGE>   13
 
                              TARGETED INVESTMENTS
 
     The Company currently intends to originate or purchase primarily the
following types of assets:
 
   
          SENIOR MORTGAGE LOANS. The senior Mortgage Loans in which the Company
     intends to invest will include primarily Mortgage Loans that entitle the
     lender to receive a stated interest rate plus additional interest based on
     a percentage of the mortgaged property's revenues or cash flow, and/or a
     portion of the pledged real estate's revenues or cash flow, or a percentage
     of or a fixed amount of the net proceeds from any sale of the property
     ("Participating Loans") and may also include Mortgage Loans used to finance
     the initial construction of real property ("Construction Loans"), the
     acquisition and renovation or rehabilitation of existing real property
     ("Rehabilitation Loans"), Mortgage Loans used as temporary financing
     ("Bridge Loans"), and/or Permanent Mortgage Loans. See "Risk
     Factors -- Risks of Loss on Mortgage Loans." The Company may also invest in
     Mortgage Loans that are in default or for which default is likely or
     imminent or for which the borrower is making monthly payments in accordance
     with a forbearance plan.
    
 
          MEZZANINE LOANS. The Company intends to originate commercial Mortgage
     Loans, the repayment of which is subordinated to senior Mortgage Loans, and
     which are secured by either a second lien mortgage or a pledge of the
     ownership interests of the borrower. Alternatively, such Mortgage Loans can
     take the form of a joint venture interest or equity investment in the
     borrower (collectively, "Mezzanine Loans"). Mezzanine Loans generally
     afford a relatively higher yield and entail greater risks than senior
     Mortgage Loans. See "Risk Factors -- Risks of Loss on Mortgage Loans."
 
          MORTGAGE-BACKED SECURITIES. The Company intends to invest in interests
     in commercial and multifamily MBS, including primarily classes of MBS that
     are subordinated in right of payments of principal and interest to more
     senior classes ("Subordinated Interests"). Subordinated Interests generally
     afford a higher yield than more senior investment grade securities because
     they entail greater risk. The Company may also invest in various classes,
     including rated or unrated Subordinated Interests, of residential MBS. The
     Company does not currently intend to invest in Mortgage Derivative
     Securities such as IOs and POs, but is not prohibited from doing so in the
     future. See "Risk Factors -- Risks Related to Investments in MBS."
 
          EQUITY INVESTMENTS IN REAL ESTATE. The Company intends to invest in
     commercial real estate, including properties which are newly developed, to
     be built or leased on a long-term basis (ten years or more) to tenants who
     are typically responsible for paying a majority of the costs of owning,
     operating and maintaining the leased property during the term of the lease,
     in addition to the payment of a monthly rent to the landlord for the use
     and occupancy of the premises ("Net Leased Real Estate"). The Company
     expects to acquire Net Leased Real Estate on a leveraged basis that will
     provide sufficient cash flow to provide a return on its investment after
     debt service within the Company's target parameters. The Company also
     intends to participate with others (including members of the AMRESCO Group)
     in real property ownership through joint ventures, partnerships or limited
     liability companies. The Company may also acquire real estate at
     foreclosure sales or by deed-in-lieu of foreclosure and other Distressed
     Real Estate. The Company does not intend to directly operate any of the
     real estate owned by it, but rather intends to rely upon qualified and
     experienced real estate operators unaffiliated with the Company. See "Risk
     Factors -- Risks Related to Investments in Real Estate."
 
   
          OTHER INVESTMENTS. The Company will take an opportunistic approach
     toward its investments and, therefore, depending upon market conditions,
     the Company may invest from time to time in other real estate related
     assets, including, without limitation, foreign real estate and Mortgage
     Loans to borrowers in foreign countries or secured by foreign real estate
     (principally in the markets in which the AMRESCO Group conducts business or
     has invested or originated Mortgage Loans, including Canada, the United
     Kingdom and Mexico). The Company may also invest in interests in other
     REITs, registered investment companies, partnerships and other investment
     funds and real estate operating companies. See "Risk Factors -- Risks
     Related to Investments in Real Estate -- Foreign Real Estate is Subject to
     Currency Conversion Risks and Uncertainty of Foreign Laws."
    
 
                                        7
<PAGE>   14
 
     The Company has no policy requiring any specific percentage of the Invested
Portfolio to consist of any particular type of Targeted Investment, or limiting
any particular type of Targeted Investment to a specific percentage of the
Invested Portfolio. Rather, the Company's business decisions and investment
strategies will depend on changing market factors. The types of assets which
constitute Targeted Investments and the percentage of the Company's Invested
Portfolio that will be invested in a particular category of assets will vary
from time to time.
 
                               THE INITIAL ASSETS
 
   
     To date, the Company has identified five Mortgage Loans to purchase or
originate with the net proceeds of the Offering (the "Initial Assets"), subject
to, among other things, the review and approval of the Company's Investment
Committee. See "Risk Factors -- Risks of Loss on the Initial Assets." There can
be no assurance that any of such Mortgage Loans will be purchased or originated
by the Company. Each of the Initial Assets is currently owned (if the Mortgage
Loan is currently existing) or being negotiated (if the Mortgage Loan has not
yet been originated) by AMRESCO Funding. With respect to each Initial Asset
which is originated by AMRESCO Funding prior to the closing of the Offering, the
Company has issued a non-binding commitment to purchase such Initial Asset from
AMRESCO Funding, and AMRESCO Funding has agreed to sell such Initial Asset to
the Company, for an amount equal to the aggregate outstanding principal balance
thereof as of the date of purchase, plus accrued and unpaid interest to the date
of purchase. With respect to Initial Assets which are not originated prior to
the closing of the Offering, AMRESCO Funding has agreed to transfer its rights
to originate such Mortgage Loans to the Company after the closing of the
Offering, without charge, if the Company's Investment Committee determines that
the Company should originate the proposed loans.
    
 
   
     The first Mortgage Loan identified for purchase by the Company with the net
proceeds of the Offering ("Loan One") is a $6 million Rehabilitation Mezzanine
Loan secured by a second lien on a 956,114 (approximate) square foot mixed-use
development located in Columbus, Ohio. Loan One was closed on February 20, 1998.
The proceeds of Loan One were used by the borrower to fund a portion of the
purchase price of the mortgaged property. The remaining $17 million of the
acquisition price for the mortgaged property was furnished by Credit Suisse
First Boston Mortgage Capital LLC (an affiliate of one of the Underwriters),
which has a first lien on the mortgaged property. Loan One bears interest at 15%
per annum. Payments of interest only are due monthly commencing April 1, 1998,
until the loan is paid in full. All principal, and all remaining accrued and
unpaid interest on Loan One, are due on March 31, 2001. AMRESCO Funding has
committed to fund an additional $1 million to the borrower on May 1, 1998 for
renovations to the mortgaged property, subject to certain conditions. In
addition, AMRESCO Funding has a right of first refusal to fund an additional
redevelopment loan for the mortgaged property expected to be sought by the
borrower in April 1998 in the amount of approximately $23 million. See "Business
and Strategy -- The Initial Assets -- Loan One" for further information about
Loan One.
    
 
   
     The second Mortgage Loan which the Company has identified for purchase or
origination with the net proceeds of the Offering ("Loan Two") is a proposed
$12.8 million Participating Construction Loan for the acquisition of
approximately 10.2 acres of land located in a master planned residential
community near Houston, Texas and construction thereon of a 236 unit
multi-family apartment property. AMRESCO Funding has issued a terms letter (the
"Loan Two Terms Letter") to originate Loan Two, and AMRESCO Funding and the
proposed borrower are currently negotiating loan documents. Loan Two is proposed
to bear interest at an accrual rate of 11.5% per annum and be due and payable
monthly at a pay rate of 10% per annum. All principal, and all accrued and
unpaid interest, would be due 24 months after the closing of Loan Two. In
addition, the Company would be entitled to 60% of the net profits, if any, from
the sale or refinancing of the mortgaged property (calculated after Loan Two has
been paid in full) up to a maximum return to the Company of 18% per annum. The
Loan Two Terms Letter also provides that the Company would have a first right of
refusal on long-term take-out financing for the mortgaged property. See
"Business and Strategy -- The Initial Assets -- Loan Two" for further
information about Loan Two.
    
 
   
     The third Mortgage Loan which the Company has identified for purchase or
origination with the net proceeds of the Offering ("Loan Three") is a proposed
$40 million Rehabilitation Loan to refinance the
    
 
                                        8
<PAGE>   15
 
   
acquisition, and finance the renovation, of a 403,000 (approximate) square foot
office/research and development building located in Massachusetts. AMRESCO
Funding has issued a commitment for Loan Three (the "Loan Three Commitment"),
and AMRESCO Funding and the proposed borrower are currently negotiating terms
while AMRESCO Funding completes the underwriting process. The Loan Three
Commitment provides that the proposed Loan Three would bear interest at a rate
of 10.5% per annum and have an initial term of 24 months. See "Business and
Strategy -- The Initial Assets -- Loan Three" for further information about Loan
Three.
    
 
   
     The fourth Mortgage Loan which the Company has identified for purchase or
origination with the net proceeds of the Offering ("Loan Four") is a $14.7
million Participating Mezzanine Construction Loan for the construction of an 11
story multi-tenant office building and an adjoining five level parking structure
located in a suburb of Dallas, Texas. Loan Four was closed on March 30, 1998.
Loan Four bears interest at an accrual rate of 12% per annum. Accrued interest
is due and payable monthly at a pay rate of 10% per annum. All principal, and
all accrued and unpaid interest, are due and payable on March 30, 2001. In
addition, the Company is entitled to receive a shared appreciation interest in
the property, with a maximum 25% per annum return to the Company. See "Business
and Strategy -- The Initial Assets -- Loan Four" for further information about
Loan Four.
    
 
   
     The final Mortgage Loan which the Company has identified for origination or
purchase with the net proceeds of the Offering ("Loan Five") is a proposed $26.5
million senior Participating Mortgage Loan for the acquisition of a
four-building industrial office complex located on 173 acres in Portsmouth,
Rhode Island, and containing 769,551 (approximate) net rentable square feet, and
the completion of certain tenant improvements, renovations and lease-up of the
project. AMRESCO Funding has issued a commitment (the "Loan Five Commitment") to
originate Loan Five and AMRESCO Funding and the borrower are currently
negotiating loan documents while AMRESCO Funding completes its underwriting
process. Loan Five is proposed to bear interest at an accrual rate of 13.5% per
annum and be due and payable monthly at a pay rate of 10% per annum. All
principal, and all accrued and unpaid interest, would be due 36 months from the
closing of Loan Five. In addition, the Company would be entitled to receive a
shared appreciation interest in the property, with a maximum return of 20% per
annum to the Company. See "Business and Strategy -- The Initial Assets -- Loan
Five" for further information about Loan Five.
    
 
                                  THE MANAGER
 
     The Manager is a newly formed member of the AMRESCO Group. The AMRESCO
Group is a publicly-traded diversified financial services company with
approximately 1,600 employees and offices located throughout the United States
and in Canada and England. The AMRESCO Group is currently engaged in four
principal lines of business including commercial mortgage banking, asset
management, commercial finance and residential mortgage banking. See "The
Manager -- Description of the AMRESCO Group."
 
   
     As a result of the Manager's relationship with the AMRESCO Group and the
AMRESCO Group's investment in the Company, and pursuant to the Right of First
Refusal and the Correspondent Agreement, the Company expects to benefit from (i)
the market reputation and expertise of the AMRESCO Group in the underwriting,
origination and closing of Mortgage Loans and in the acquisition, management and
servicing of both performing and nonperforming Mortgage Loans, Mortgage Loan
portfolios and MBS, (ii) the significant number of Targeted Investments expected
to be identified to it by the AMRESCO Group, (iii) the relationships of Holliday
Fenoglio Fowler with potential borrowers and other institutional investors, and
(iv) opportunities to co-invest with members of the AMRESCO Group. See "Risk
Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Shareholders' Best Interest," "Risk Factors -- Dependence on the
Manager and the AMRESCO Group for Operations and the Lack of Experience of the
Manager May Adversely Affect Operating Results," "Risk Factors -- Co-Investments
May be Riskier Than Investments Made Solely by the Company" and "Risk
Factors -- Termination of the Management Agreement Could Adversely Affect the
Company's Investments and Operating Results."
    
 
                                        9
<PAGE>   16
 
                            THE MANAGEMENT AGREEMENT
 
     Upon the closing of the Offering, the Company will enter into the
Management Agreement with the Manager pursuant to which, subject to the
direction and oversight of the Board of Trust Managers, the Manager will be
responsible for the day-to-day operations of the Company. The Manager will be
required to perform such services and activities relating to the assets and
operations of the Company as may be required or appropriate in accordance with
the Company's policies and Guidelines that are approved from time to time and
monitored by the Board of Trust Managers. Such responsibilities will include:
(i) underwriting, originating and acquiring Targeted Investments; (ii) servicing
and managing the Invested Portfolio; (iii) asset/liability and risk management,
hedging of floating rate liabilities, and financing, management and disposition
of the Invested Portfolio, including credit and prepayment risk management; (iv)
capital management, structuring and analysis, capital raising and investor
relations activities; and (v) the provision of certain administrative and
managerial services such as accounting, legal, market research and information
technology services.
 
     The Manager will receive a base management fee (the "Base Management Fee")
payable and calculated quarterly in an amount equal to (i) 1% per annum of the
Average Invested Non-Investment Grade Assets for such calendar quarter, and (ii)
0.50% per annum of the Average Invested Investment Grade Assets for such
calendar quarter. The term "Average Invested Non-Investment Grade Assets" for
any quarter means the average of the aggregate book value of (i) all assets of
the Company on a consolidated basis (as reflected on the Company's balance
sheet), excluding the Company's investment in its nonconsolidated taxable
subsidiaries and (ii) all assets of the Company's nonconsolidated taxable
subsidiaries, excluding from (i) and (ii) all Average Invested Investment Grade
Assets, before reserves for depreciation or bad debts or other similar noncash
reserves, computed by dividing (a) the sum of such values for each of the three
months during such quarter (based on the book value of such assets as of the
last day of each month) by (b) three. The term "Average Invested Investment
Grade Assets" means, for any quarter, the average of the aggregate book value of
(i) all assets of the Company on a consolidated basis (as reflected on the
Company's balance sheet), excluding the Company's investment in its
nonconsolidated taxable subsidiaries and (ii) all assets of the Company's
nonconsolidated taxable subsidiaries, which either (a) have received an
Investment Grade Rating from all Rating Agencies which have rated such asset, or
(b) are unrated but are guaranteed by the U.S. government or any agency or
instrumentality thereof, before reserves for depreciation or bad debts or other
similar noncash reserves, computed by dividing (A) the sum of such values for
each of the three months during such quarter (based on the book value of such
assets as of the last day of each month) by (B) three. For example, if the
Company had $650 million of Average Invested Non-Investment Grade Assets and
$100 million of Average Invested Investment Grade Assets consistently during
each calendar quarter of any one year period, the Manager would be entitled to a
Base Management Fee for such year of $7 million. The Manager will not receive
any management fee for the period prior to the sale to the public of the Common
Shares offered hereby. See "The Manager -- Management Compensation."
 
     In addition to the Base Management Fee, the Manager will be entitled to
receive Incentive Compensation for each fiscal quarter in an amount equal to the
product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of
the Company (before the Incentive Compensation) per Common Share (based on the
weighted average number of shares outstanding) for such quarter plus (b) gains
(or minus losses) from debt restructuring and sales of property per Common Share
(based on the weighted average number of shares outstanding), exceeds (2) an
amount equal to (a) the weighted average of the price per share of the Offering
and the prices per share of all subsequent issuances of Common Shares by the
Company multiplied by (b) the Ten-Year U.S. Treasury Rate for such quarter plus
3.5%, multiplied by (B) the weighted average number of Common Shares outstanding
during such quarter. "Funds From Operations" as defined by NAREIT means net
income (computed in accordance with generally accepted accounting principals
("GAAP") excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds From
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions. See "The
 
                                       10
<PAGE>   17
 
Manager -- The Management Compensation" for a more detailed explanation of the
management compensation arrangements.
 
     The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will initially receive no cash compensation directly from the Company.
 
     The Manager will be reimbursed by the Company for (or charge the Company
directly for) the Manager's costs and expenses for performing due diligence and
certain other tasks with respect to assets purchased, originated or approved for
purchase or origination by the Company. Expense reimbursement will be made
quarterly. See "The Manager -- Expenses."
 
     The Base Management Fee and Incentive Compensation are payable in arrears.
The Base Management Fee and Incentive Compensation and reimbursable costs and
expenses will be calculated by the Manager within 45 days after the end of each
quarter, and such calculation will be promptly delivered to the Company. The
Company is obligated to pay such fees, costs and expenses within 60 days after
the end of each fiscal quarter.
 
   
     The Management Agreement will have an initial term (the "Initial Term") of
two years during which period it will not be terminable by the Manager or the
Company, except as a result of a breach by the Manager of its obligations
thereunder or other events constituting "cause" as defined therein. Upon
termination of the Management Agreement by the Company after the Initial Term
(except in the case of a termination by the Company for cause) or failure of the
Company to renew the Management Agreement after the Initial Term, the Company
will be obligated to pay the Manager a substantial termination fee. The
termination fee will be equal to the sum of the Base Management Fee (which would
be $7 million in the hypothetical circumstances described on page 10), plus any
Incentive Compensation earned by the Manager during the four calendar quarters
immediately preceding the termination. In addition, if the Management Agreement
is terminated and no member of the AMRESCO Group is serving as manager of the
Company, the Right of First Refusal may be terminated by the AMRESCO Group. See
"Risk Factors -- Termination of the Management Agreement Could Adversely Affect
the Company's Investments and Operating Results" and "The Manager -- The
Management Agreement." The Manager has the right, at any time after the Initial
Term, to terminate the Management Agreement upon 180 days prior written notice
to the Company. The Company has the right, at any time after the Initial Term,
to terminate the Management Agreement upon 90 days prior written notice to the
Manager.
    
 
                       DIVIDEND POLICY AND DISTRIBUTIONS
 
     To maintain its qualification as a REIT, the Company intends to make
quarterly distributions to its shareholders equal, on an annual basis, to at
least 95% of the Company's Taxable Income (computed without regard to the
dividends paid deduction and any net capital gains) ("REIT Taxable Income"). The
foregoing dividend policy is subject to revision at the discretion of the Board
of Trust Managers. All distributions in excess of those required for the Company
to maintain REIT status will be made by the Company at the discretion of the
Board of Trust Managers and will depend on the earnings of the Company, its
financial condition and such other factors as the Board of Trust Managers deems
relevant. The Board of Trust Managers has not established a minimum distribution
level.
 
                                       11
<PAGE>   18
 
                                  THE OFFERING
 
Common Shares Offered Hereby..............    20,000,000 shares(1)
 
Common Shares to be Outstanding After the
Offering..................................    22,222,333 shares(1)(2)(3)
 
   
Use of Proceeds...........................    The Company expects to use no more
                                              than $101.0 million (or 36.4%) of
                                              the estimated net proceeds of the
                                              Offering to acquire (and fully
                                              fund) the Initial Assets, up to
                                              $10 million of the estimated net
                                              proceeds of the Offering for
                                              general corporate purposes, and
                                              the remainder of the net proceeds
                                              of the Offering to acquire
                                              additional Targeted Investments
                                              from time to time. The Company
                                              intends to invest the net proceeds
                                              of the Offering temporarily in
                                              readily marketable interest
                                              bearing assets until appropriate
                                              Targeted Investments are acquired.
                                              Pending full investment in the
                                              desired mix of Targeted
                                              Investments, funds will be
                                              committed to short-term
                                              investments that are expected to
                                              provide a lower net return than
                                              the Company hopes to achieve from
                                              its Targeted Investments. See
                                              "Risk Factors -- Inability to
                                              Acquire or Delays in Acquiring
                                              Targeted Investments Will Reduce
                                              Income to the Company" and "Use of
                                              Proceeds."
    
 
Proposed Nasdaq National Market Symbol....    AMCT
---------------
 
(1) Assumes that the Underwriters' over-allotment option will not be exercised.
    See "Underwriting."
 
(2) Includes 2,222,233 Common Shares subscribed for by Holdings in the Private
    Placement and 100 Common Shares issued to AMRESCO in connection with the
    initial organization of the Company. See "Private Placement."
 
   
(3) Excludes an aggregate of 6,000 restricted Common Shares expected to be
    issued to the Independent Trust Managers during the first year after the
    closing of the Offering, as compensation for their first year of service on
    the Board of Trust Managers, and 3,333,350 Common Shares reserved for
    issuance under the Share Option Plan. Upon the closing of the Offering,
    options to acquire 3,092,233 Common Shares will be issued under the Share
    Option Plan to the Manager and to officers, Trust Managers and key employees
    of the Company, the Manager and certain other members of the AMRESCO Group,
    which options will vest ratably over a four-year period commencing on the
    first anniversary of the closing of the Offering. See "Management of the
    Company -- Share Options Outstanding" and "Management of the
    Company -- Executive Officers and Trust Managers of the Company."
    
 
                             CONFLICTS OF INTEREST
 
   
     Because of the Company's relationship with the Manager and the AMRESCO
Group, the Company will be subject to various potential conflicts of interest.
Three of the seven members of the Board of Trust Managers and all of the
Company's officers are employed by members of the AMRESCO Group. See "Risk
Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Shareholders' Best Interest" and "The Manager -- Certain
Relationships; Conflicts of Interest."
    
 
     The Company expects to acquire the Initial Assets from and may acquire
other Targeted Investments from, or co-invest with, members of the AMRESCO Group
from time to time. Transactions between the Company and members of the AMRESCO
Group that are within the Guidelines need not be specifically approved in
advance by a majority of the Independent Trust Managers. See "Business and
Strategy --
 
                                       12
<PAGE>   19
 
Operating Policies and Guidelines -- Relationship With AMRESCO" for a
description of the provisions of the Guidelines regarding transactions between
the Company and the AMRESCO Group. Although the Independent Trust Managers will
review the Guidelines periodically and monitor compliance with the Guidelines,
they will rely primarily upon the Manager, a member of the AMRESCO Group, to
advise it as to the fairness of the terms (including the purchase price) of any
such transaction.
 
   
     Except as contemplated by the Right of First Refusal, members of the
AMRESCO Group are not restricted from investing in Targeted Investments and,
therefore, the investment opportunities of the Company may be limited if any
such Targeted Investments would be attractive to other members of the AMRESCO
Group. Pursuant to the Right of First Refusal, AMRESCO will agree not to permit
any member of the AMRESCO Group to invest in Targeted Mortgage Loans (up to
specified limits) or certain MBS, unless the Company's Investment Committee
shall have first determined in each instance that the Company should not invest
in such asset or assets, or should invest in only a portion of such asset or
assets. See "Business and Strategy -- Operating Policies and
Guidelines -- Relationship With AMRESCO" and "Risk Factors -- Conflicts of
Interest May Result in Decisions That Do Not Fully Reflect the Shareholders'
Best Interest."
    
 
   
     Except as contemplated by the Right of First Refusal, neither the Manager
nor any of its officers or employees is limited or restricted from engaging in
any business which competes with the Company or rendering services of any kind
to any other Person who competes with the Company, except that the AMRESCO Group
has agreed that it will not sponsor, act as manager to or make any significant
equity investment in any other mortgage REIT with investment objectives
substantially similar to those of the Company, without the prior approval of the
Independent Trust Managers. See "Business and Strategy -- Operating Policies and
Guidelines -- Relationship With AMRESCO" and "Risk Factors -- Conflicts of
Interest May Result in Decisions That Do Not Fully Reflect the Shareholders'
Best Interest."
    
 
   
     All of Holliday Fenoglio Fowler's fees for its Mortgage Loan and real
estate brokerage and financing services are payable by the applicable borrower
or seller (but may from time to time be paid by the Company out of fees,
deposits or additional interest paid in the form of "points" by the applicable
borrower or seller to the Company for such purpose). Therefore, Holliday
Fenoglio Fowler will receive compensation for any Mortgage Loan or real estate
placed with or sold to the Company through Holliday Fenoglio Fowler regardless
of the quality of the Mortgage Loan or real estate. Pursuant to the terms of the
Management Agreement, the Manager may engage members of the AMRESCO Group to
provide services to the Company from time to time, if the Manager believes such
services would be of comparable or superior quality to those which could be
provided by third parties and can be provided at comparable cost. Pursuant to
the Guidelines, fees charged to the Company by members of the AMRESCO Group for
services provided must be reasonable and customary and no more than such member
of the AMRESCO Group would charge an unaffiliated third party for such services.
The President and Chief Executive Officer of the Company and the Manager is also
the President of Holliday Fenoglio Fowler. Of the other senior executive
officers of the Manager, only the Chief Investment Officer, the Chief Operating
Officer and the Controller are not also officers or employees of other members
of the AMRESCO Group. Such conflicts may result in decisions by the Manager that
are not in the best interest of the Company. See "Business and
Strategy -- Operating Policies and Guidelines -- Relationship With AMRESCO" and
"Risk Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Shareholders' Best Interest."
    
 
   
     In order to increase the amount of its Incentive Compensation, the Manager
may place undue emphasis on the maximization of Funds From Operations at the
expense of other criteria, such as preservation of capital, which could result
in increased risk to the Invested Portfolio. See "Business and
Strategy -- Operating Policies and Guidelines -- Relationship With AMRESCO" and
"Risk Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Shareholders' Best Interest."
    
 
     The Company believes that the foregoing conflicts of interest are minimized
as a result of (i) the requirement in the Bylaws that a majority of the Board of
Trust Managers consist of Independent Trust Managers, (ii) the periodic review
by the Independent Trust Managers of the activities of the Manager, (iii) the
significant equity investment in the Company to be made by the AMRESCO Group
pursuant to the Private Placement, and (iv) the Right of First Refusal. However,
there can be no assurance that the
 
                                       13
<PAGE>   20
 
   
aforementioned conflicts of interest will not have a material adverse effect on
the Company. See "Business and Strategy -- Operating Policies and
Guidelines -- Relationship With AMRESCO" and "Risk Factors -- Conflicts of
Interest May Result in Decisions That Do Not Fully Reflect the Shareholders'
Best Interest."
    
 
                         ORGANIZATION AND RELATIONSHIPS
 
     The Manager will manage the day-to-day operations of the Company, subject
to the supervision of the Board of Trust Managers. The relationship among the
Company, its subsidiaries, the Manager and certain other members of the AMRESCO
Group is depicted below:
 
                                    [CHART]
---------------
 
(1) Upon the closing of the Offering and the Private Placement, (i) Holdings
    will own 10% of the outstanding Common Shares, (ii) the Trust Managers,
    officers and key employees of the Company, the Manager and other members of
    the AMRESCO Group may own up to 5% of the Common Shares sold pursuant to the
    Offering, and (iii) the remainder of the outstanding Common Shares (other
    than 100 Common Shares issued to AMRESCO pursuant to the formation of
    AMRESCO Capital Trust) will be owned by the public investors. See "Private
    Placement."
 
(2) Upon the closing of the Offering, certain Trust Managers, officers and key
    employees of the Company, the Manager and other members of the AMRESCO Group
    will be issued options to purchase a number of Common Shares in an aggregate
    amount equal to approximately 3.9% of the number of Common Shares that will
    be outstanding upon the closing of the Offering. See "Management of the
    Company -- Share Options Outstanding." In addition, the Company intends to
    grant 1,500 restricted Common Shares annually to each Independent Trust
    Manager, in lieu of cash compensation.
 
                                       14
<PAGE>   21
 
   
(3) Upon the closing of the Offering, the Company will enter into the Management
    Agreement with the Manager and AMRESCO pursuant to which the Manager will
    formulate operating strategies and provide certain managerial and
    administrative functions for the Company, subject to the supervision of the
    Board of Trust Managers and AMRESCO will grant the Right of First Refusal to
    the Company. In addition, upon the closing of the Offering, the Company will
    grant to the Manager options to purchase 2,222,233 Common Shares (assuming
    the Underwriters' over-allotment is not exercised). See "Management of the
    Company -- Share Options Outstanding."
    
 
(4) Upon the closing of the Offering, the Company will enter into the
    Correspondent Agreement with Holliday Fenoglio Fowler.
 
(5) AMREIT I, Inc., a Delaware corporation, is a wholly-owned Qualified REIT
    Subsidiary of AMRESCO Capital Trust, through which the Company will conduct
    most of its mortgage lending and related activities in states other than the
    State of Texas.
 
(6) AMREIT II, Inc., a Nevada corporation, is a taxable subsidiary of AMRESCO
    Capital Trust. In order to comply with the REIT Provisions of the Code, the
    Company will own 100% of the non-voting common stock and 5% of the voting
    common stock of AMREIT II, Inc. The other 95% voting common stock of AMREIT
    II, Inc. will be owned by the Manager. See "Federal Income Tax
    Consequences -- Requirements For Qualification" and "Federal Income Tax
    Consequences -- Proposed Tax Legislation and Possible Other Legislative
    Actions Affecting Tax Consequences."
 
(7) All of the partnership interests of the Manager are owned by members of the
    AMRESCO Group. AMREIT Managers G.P., Inc. is a wholly-owned subsidiary of
    Holdings.
 
     The Company may, from time to time, form additional subsidiaries (which may
include wholly-owned Qualified REIT Subsidiaries, taxable subsidiaries and other
entities owned in part by the Company and in part by third parties, including
members of the AMRESCO Group) for purposes of carrying out its investment or
co-investment activities. See "Risk Factors -- Changes in Tax Laws Applicable to
REITs May Adversely Affect the Company," "Federal Income Tax
Consequences -- Requirements For Qualification" and "Federal Income Tax
Consequences -- Proposed Tax Legislation and Possible Other Legislative Actions
Affecting Tax Consequences." The Company may also form one or more partnerships,
the limited partnership interests in which would be convertible into Common
Shares, for the purpose of enabling the Company to acquire real estate or
interests therein from real estate owners on a tax deferred basis in exchange
for such real estate or interests therein. See "Business and
Strategy -- Description of Targeted Investments -- Commercial Real Estate."
 
     The Company's principal executive offices are located at 700 North Pearl
Street, Suite 2400, Dallas, Texas 75201. Its telephone number is (214) 953-7700.
 
                                       15
<PAGE>   22
 
                                  RISK FACTORS
 
     An investment in the Common Shares involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the Common Shares.
 
     When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "believe," "project," "intend," and
similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below.
 
  CONFLICTS OF INTEREST MAY RESULT IN DECISIONS THAT DO NOT FULLY REFLECT THE
  SHAREHOLDERS' BEST INTEREST
 
     TERMS OF TRANSACTIONS WITH MEMBERS OF THE AMRESCO GROUP MAY NOT BE FAIR. As
a result of the relationship between the Manager, the AMRESCO Group and the
Company, there are conflicts of interest between the operations of the AMRESCO
Group and the Company in the acquisition and disposition of assets. The Company
expects to acquire the Initial Assets from, and may acquire other Targeted
Investments from, or co-invest with, members of the AMRESCO Group from time to
time. Transactions with members of the AMRESCO Group that are within the
provisions of the Guidelines need not be specifically approved in advance by a
majority of the Independent Trust Managers. See "Business and
Strategy -- Operating Policies and Guidelines -- Relationship With AMRESCO" for
a description of the provisions of the Guidelines regarding transactions between
the Company and the AMRESCO Group. The Company does not intend to enter into
hedging transactions with members of the AMRESCO Group. Although the Independent
Trust Managers will review the Guidelines periodically and monitor compliance
with those Guidelines, it is anticipated that they will rely primarily on
information provided by the Manager. Such conflicts may result in decisions
and/or allocations of assets by the Manager that are not in the best interest of
the Company.
 
     INVESTMENT OPPORTUNITIES MAY BE LIMITED IF SUCH OPPORTUNITIES ARE ALSO
ATTRACTIVE TO THE AMRESCO GROUP. Pursuant to the Right of First Refusal, AMRESCO
will agree not to permit any member of the AMRESCO Group to invest in Targeted
Mortgage Loans (up to a specified limit) and certain MBS, unless the Company's
Investment Committee shall have first determined, in each instance, not to
invest in such asset or assets, or to invest in only a portion of such asset or
assets. Pursuant to the Correspondent Agreement, Holliday Fenoglio Fowler will
agree, so long as the Manager or any other member of the AMRESCO Group is acting
as manager of the Company, to present to the Company (on a nonexclusive basis)
investment opportunities arising within Holliday Fenoglio Fowler which meet the
investment parameters and objectives of the Company. See "Business and
Strategy -- Operating Policies and Guidelines -- Relationship With AMRESCO."
Except as contemplated by the Right of First Refusal and the Correspondent
Agreement, however, neither the Manager nor any other member of the AMRESCO
Group will have any obligation to make investment opportunities available to the
Company, even when such opportunities are consistent with the Company's
investment objectives and criteria. As a consequence, the investment
opportunities for the Company may be limited if such investment opportunities
would be attractive to the Manager or other members of the AMRESCO Group.
 
     COMPETITION BY THE AMRESCO GROUP MAY ADVERSELY AFFECT THE COMPANY. Except
as contemplated by the Right of First Refusal, neither the Manager nor any of
its officers, directors, employees or Affiliates is limited or restricted from
engaging in any business or rendering services of any kind to any other Person,
except that AMRESCO has agreed not to permit the Manager or any other member of
the AMRESCO Group to sponsor, manage or make any significant equity investment
in any other mortgage REIT with investment objectives substantially similar to
those of the Company. See "The Manager -- Certain Relationships; Conflicts of
Interest." Since neither the Manager nor any of its Affiliates is limited or
restricted from engaging in any business or rendering services except as
described above, the Manager and other members of
 
                                       16
<PAGE>   23
 
the AMRESCO Group may compete with the Company or provide services to others who
compete with the Company (except as described above) which could result in
decisions by the Manager not in the best interests of the Company.
 
     CONFLICTS OF THE OFFICERS AND EMPLOYEES OF THE MANAGER MAY CAUSE THEM NOT
TO ACT IN THE COMPANY'S BEST INTEREST. All of Holliday Fenoglio Fowler's fees
for its Mortgage Loan and real estate brokerage and financing services are
payable by the applicable borrower or seller (but may from time to time be paid
by the Company out of fees, deposits or additional interest paid in the form of
"points" by the applicable borrower or seller to the Company for such purpose).
Therefore, Holliday Fenoglio Fowler, a member of the AMRESCO Group and an
Affiliate of the Manager, will receive compensation for any Mortgage Loan or
real estate placed with or sold to the Company through Holliday Fenoglio Fowler
regardless of the quality of such Mortgage Loan or real estate. Pursuant to the
terms of the Management Agreement, the Manager may engage members of the AMRESCO
Group to provide services to the Company from time to time, if the Manager
believes such services would be of comparable or superior quality to those which
could be provided by third parties and can be provided at comparable cost.
Pursuant to the Guidelines, fees charged to the Company by members of the
AMRESCO Group for services provided must be reasonable and customary and no more
than such member of the AMRESCO Group would charge an unaffiliated third party
for such services. The President and Chief Executive Officer of the Company and
the Manager is also the President of Holliday Fenoglio Fowler. Of the other
senior executive officers of the Manager, only the Chief Investment Officer, the
Chief Operating Officer and the Controller are not also officers or employees of
other members of the AMRESCO Group. Such conflicts may result in decisions by
the Manager that are not in the best interest of the Company. The Management
Agreement does not specify a minimum amount of time that the Manager or its
officers and employees must devote to the business of the Company. The ability
of the Manager and its employees to engage in other business activities on
behalf of other members of the AMRESCO Group could reduce the time and effort
spent on the management of the Company which would adversely impact the
Company's performance. See "Management of the Company" and "The Manager."
 
     STRUCTURE OF MANAGEMENT COMPENSATION COULD JEOPARDIZE THE INVESTED
PORTFOLIO. In addition to its Base Management Fee, the Manager will have the
opportunity to earn Incentive Compensation under the Management Agreement for
each fiscal quarter based upon the Company's FFO for such quarter. In evaluating
Targeted Investments and other management strategies, the opportunity to earn
Incentive Compensation based on FFO may lead the Manager to place undue emphasis
on the maximization of FFO at the expense of other criteria, such as
preservation of capital, in order to achieve a higher Incentive Compensation and
could result in increased risk to the value of the Invested Portfolio. In
addition, the Incentive Compensation is calculated and earned based upon the
results of each quarter. Therefore, the Manager could earn Incentive
Compensation based upon one quarter's results even during a year when the
Company experiences a net loss for the year. The structure of the Base
Management Fee, which does not decrease with the size of the Company's Invested
Portfolio, provides an incentive for the Manager to highly leverage the Invested
Portfolio, even when such action may not be in the best interest of the Company.
See "The Manager -- Management Compensation."
 
   
     AGREEMENTS AND TRANSACTIONS MAY NOT BE FAVORABLE TO THE COMPANY. The
Management Agreement was not negotiated at arm's length and may be on terms that
are not as favorable to the Company as if it had been negotiated with a third
party. Likewise, the sale of the Initial Assets from AMRESCO Funding to the
Company was not negotiated at arm's length and, therefore, the purchase price to
be paid by the Company for such assets may not be the fair market value of such
assets. See "The Manager -- The Management Agreement" and "Business and
Strategy -- The Initial Assets."
    
 
     DEPENDENCE ON THE MANAGER AND THE AMRESCO GROUP FOR OPERATIONS AND THE LACK
OF EXPERIENCE OF THE MANAGER MAY ADVERSELY AFFECT OPERATING RESULTS. The Company
will be wholly dependent for the selection, structuring and monitoring of its
Invested Portfolio and associated borrowings on the diligence and skill of the
officers and employees of the Manager. The Manager, in turn, is dependent on its
ability to attract, retain and motivate qualified personnel. The Company does
not anticipate requiring the Manager to enter into employment agreements with
its officers or employees. The loss of key employees of the Manager could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
 
                                       17
<PAGE>   24
 
   
Moreover, the Manager will rely on the employees and other resources of the
AMRESCO Group for a significant portion of its operations. Thus, the Company's
success will depend to a large degree on the skill of the officers and employees
of the Manager and the other members of the AMRESCO Group. The AMRESCO Group has
recently diversified its business lines and increased its investments in asset
portfolios, and intends to acquire additional businesses which complement the
AMRESCO Group's core capabilities in financial services. The ability of the
AMRESCO Group to support, manage and control its continued growth and to provide
services and support to the Manager to enable the Manager to perform its
obligations under the Management Agreement is dependent upon, among other
things, the ability of the AMRESCO Group to hire, train, supervise and manage
its work force and to continue to develop the skills necessary to compete
successfully in its business lines. Neither the Manager (which was formed in
March 1998 and has no operating history and no significant assets), nor any
other member of the AMRESCO Group, nor the Company (which was formed in January
1998 and has no operating history), has any prior experience in managing and
operating a REIT, which could adversely affect the Company's business, financial
condition and results of operations. Further, there can be no assurance that the
past experience of the members of the AMRESCO Group upon which the Manager will
rely for a significant portion of its operations will be sufficient to
successfully manage the business of the Company. The past performance of the
AMRESCO Group is not indicative of future results of the Company.
    
 
   
     INABILITY TO ACQUIRE OR DELAYS IN ACQUIRING TARGETED INVESTMENTS WILL
REDUCE INCOME TO THE COMPANY. The Company has issued non-binding commitments to
purchase approximately $101.0 million (based on committed amount) of Initial
Assets in which it intends to invest with approximately 36.4% of the estimated
net proceeds of the Offering. There can be no assurance that the Company will
purchase any of such Initial Assets. Further, even if such assets are purchased
by the Company, because all of the Initial Assets are Construction Loans or
Rehabilitation Loans (except for Loan Five), only a portion of the committed
amount will be funded at the date of purchase or origination and, therefore, the
Company's Invested Portfolio (based on funding) will grow more slowly than it
would if such loans were full funded at the date of purchase or origination. The
Company's income and its ability to make distributions to its shareholders will
depend upon its ability to acquire Targeted Investments on acceptable terms and
at favorable spreads over the Company's borrowing costs. The Company expects
that a significant portion of its Invested Portfolio will be identified,
originated or otherwise made available to it through the AMRESCO Group. There
can be no assurance, however, that a sufficient quantity or quality of Targeted
Investments will be provided by the AMRESCO Group, or that any Targeted
Investments (which will typically be revealed to the Company on a nonexclusive
basis) will be acquired by the Company. The REIT Provisions of the Code place
certain restrictions on the Company's ability to invest in Participating Loans,
Mezzanine Loans and certain real estate, which may diminish the Company's
ability to compete with other investors for such Targeted Investments. See
"-- Failure to Maintain REIT Status Would Have Adverse Tax Consequences." The
Company presently intends to have the net proceeds of the Offering fully
invested in Targeted Investments within 12 months after the closing of the
Offering. The Company's results of operations may be adversely affected during
the period in which the Company is initially implementing its investment,
leveraging and hedging strategies since during this time the Company will be
primarily investing in short-term investments which are expected to provide a
lower net return than the Company expects to achieve from its Targeted
Investments. See "Use of Proceeds." To the extent the Company is unable to
acquire and maintain a sufficient volume of Targeted Investments, the Company's
income and the Company's ability to make distributions to its shareholders will
be adversely affected.
    
 
     COMPETITION FOR TARGETED INVESTMENTS COULD REDUCE INCOME TO THE COMPANY.
The Company will compete in the acquisition of Targeted Investments with a
significant number of other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, and
other entities, some of which have greater financial resources than the Company.
In addition, there are several REITs similar to the Company, and others may be
organized in the future. The effect of the existence of such additional
investors may be to increase competition for the available supply of Targeted
Investments. Increased competition for the acquisition of Targeted Investments
or a diminution in the supply could result in lowered underwriting standards,
which could result in higher risk of loss to the Company, or higher prices and,
thus, lower yields on such Targeted Investments that could further narrow the
yield spread over borrowing
 
                                       18
<PAGE>   25
 
costs. The availability of Targeted Investments is dependent upon, among other
things, the size of and level of activity in the commercial real estate lending
market, which depend on various factors, including the level of interest rates,
regional and national economic conditions and inflation and deflation in
commercial real estate values. To the extent the Company is unable to acquire
and maintain a sufficient volume of Targeted Investments, the Company's income
and the Company's ability to make distributions to its shareholders will be
adversely affected.
 
     CO-INVESTMENTS MAY BE RISKIER THAN INVESTMENTS MADE SOLELY BY THE COMPANY.
The Company intends to co-invest or participate with other entities (including
from time to time one or more members of the AMRESCO Group) in Targeted
Investments from time to time. Co-investments, partnership or joint venture
investments may, under certain circumstances, involve risks not otherwise
present, including the possibility that the Company's co-investors, partners or
co-venturers might become bankrupt, that such co-investors, partners or
co-venturers might at any time have economic or other business interests or
goals that are inconsistent with the business interests or goals of the Company,
and that such co-investors, partners or co-venturers may be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives, including the Company's policy
with respect to maintaining its qualification as a REIT. See "-- Failure to
Maintain REIT Status Would Have Adverse Tax Consequences." In addition, the
Company may in the future acquire investments without management responsibility
and, therefore, will not be in a position to exercise sole decision-making
authority regarding the investment.
 
     RISKS OF LOSS ON MORTGAGE LOANS
 
     FORECLOSURE MAY NOT BE SUFFICIENT TO PREVENT LOSSES. With respect to any
Mortgage Loans in which it invests, the Company will be subject to risks of
borrower defaults, bankruptcies, fraud and special hazard losses that are not
covered by standard hazard insurance. In the event of any default under Mortgage
Loans held by the Company, the Company will bear a risk of loss of principal to
the extent of any deficiency between the value of the collateral and the
principal amount of the Mortgage Loan, and may not receive interest payments on
such Mortgage Loans which could have a material adverse effect on the Company's
cash flow from operations. In the event of the bankruptcy of a Mortgage Loan
borrower, the Mortgage Loan to such borrower will be deemed to be secured only
to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the
Mortgage Loan will be subject to the avoidance powers of the bankruptcy trustee
or debtor-in-possession to the extent the lien may be unenforceable under state
law. Foreclosure of a Mortgage Loan can be an expensive and lengthy process
which could have a substantial negative effect on the Company's anticipated
return on the foreclosed Mortgage Loan. If the Company forecloses on a Mortgage
Loan secured by real property which is contaminated by hazardous substances, not
only will the real property be subject to a reduced value, but, if the Company
assumes ownership of the real estate, the Company could be subject to
environmental liabilities (which could exceed the value of the real estate)
regardless of whether the Company was responsible for the contamination.
Finally, there can be no assurance that any reserves which the Company may set
aside from time to time on its balance sheet for losses on Mortgage Loans will
be adequate to cover the Company's actual losses on its investments in Mortgage
Loans.
 
     COMMERCIAL MORTGAGE LOANS MAY INVOLVE A GREATER RISK OF LOSS THAN
SINGLE-FAMILY MORTGAGE LOANS. Commercial Mortgage Loans are considered to
involve a higher degree of risk than single-family Mortgage Loans because of a
variety of factors, including generally larger loan balances, dependency for
repayment on successful operation of the mortgaged property and tenant
businesses operating therein, the fact that such loans are usually non-recourse
to the borrower and loan terms that include either no amortization of principal
or amortization schedules longer than the stated maturity and provide for
balloon payments at stated maturity rather than periodic principal payments. In
addition, the value of commercial real estate can be affected significantly by
the supply and demand in the market for that type of property.
 
   
     MEZZANINE LOANS, CONSTRUCTION LOANS, REHABILITATION LOANS AND BRIDGE LOANS
INVOLVE GREATER RISKS OF LOSS. Mezzanine Loans, Construction Loans,
Rehabilitation Loans and Bridge Loans are considered to involve a higher degree
of risk than Permanent Mortgage Loans. In the case of Mezzanine Loans,
foreclosure by the mezzanine lender is often prohibited while the senior debt is
outstanding, and a foreclosure by the holder of
    
 
                                       19
<PAGE>   26
 
   
the senior Mortgage Loan could result in a Mezzanine Loan becoming unsecured.
The repayment of Construction Loans and Rehabilitation Loans is often dependent
on successful completion and operation of the project. Construction Loans and
Rehabilitation Loans are also subject to additional risk due to difficulties in
estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. Bridge Loans are
considered to involve a high degree of risk because, among other things,
repayment is often dependent upon the borrower obtaining a Permanent Mortgage
Loan. In addition, Mezzanine Loans, Construction Loans, Rehabilitation Loans and
Bridge Loans typically have higher Loan-to-Value Ratios than conventional
Mortgage Loans.
    
 
   
     PARTICIPATING LOANS, MEZZANINE LOANS, CONSTRUCTION LOANS, REHABILITATION
LOANS AND BRIDGE LOANS INVOLVE HIGHER ADMINISTRATIVE COSTS. Participating Loans,
Mezzanine Loans, Construction Loans, Rehabilitation Loans and Bridge Loans
typically require more extensive underwriting efforts than Permanent Mortgage
Loans which increases the lender's cost of originating such Mortgage Loans, or
considering such Mortgage Loans for origination. The Management Agreement
requires the Company to reimburse the Manager for expenses incurred in seeking
to originate Mortgage Loans approved by the Company for consideration, including
all due diligence expenses. If the Company incurs a significant amount of due
diligence expenses in connection with Mortgage Loans it does not acquire, the
Company's cash flow from operations may be materially adversely affected.
Moreover, if the Company's total costs to originate such Mortgage Loans become
excessive, the Company's returns on such Mortgage Loans may be materially
adversely affected. See "The Manager -- Expenses."
    
 
     DISTRESSED MORTGAGE LOANS MAY HAVE GREATER DEFAULT RISKS THAN PERFORMING
LOANS. The Company may hold Nonperforming Mortgage Loans and Subperforming
Mortgage Loans, as well as Mortgage Loans that have had a history of
delinquencies. These Mortgage Loans presently may be in default or may have a
greater than normal risk of future defaults and delinquencies, as compared to
newly originated, higher quality Mortgage Loans. Returns on an investment of
this type depend on accurate pricing of the investment (if the Mortgage Loan is
acquired), the borrower's ability to make required payments, the timeliness of
payments, or, in the event of default, the ability of the Mortgage Loan's
servicer to foreclose and liquidate the mortgaged property underlying the
Mortgage Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully, cost-effectively or in a timely fashion.
 
     LIMITED RECOURSE LOANS MAY LIMIT THE COMPANY'S RECOVERY TO THE VALUE OF THE
MORTGAGED PROPERTY. The Company anticipates that a substantial portion of the
Mortgage Loans that it will acquire or originate and of the Mortgage Loans
underlying MBS that it will acquire may contain limitations on the lender's
recourse against the borrower. In other cases, the lender's recourse against the
borrower may be limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the lender's
selection of remedies and the impact of those laws on that selection. In those
cases, in the event of a borrower default, recourse may be limited to only the
specific mortgaged property and other assets, if any, pledged to secure the
relevant Mortgage Loan. Even as to those Mortgage Loans that provide for
recourse against the borrower and its assets generally, there can be no
assurance that such recourse will provide a recovery in respect of a defaulted
Mortgage Loan greater than the liquidation value of the property securing that
Mortgage Loan.
 
     VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY AFFECT ADVERSELY THE
COMPANY'S MORTGAGE LOANS. Commercial real estate values and net operating income
derived therefrom are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by plant closings, industry
slowdowns and corporate consolidations, among other factors); local real estate
conditions (such as an oversupply of housing, retail, industrial, office or
other commercial space); changes or continued weakness in specific industry
segments; perceptions by prospective tenants, retailers and shoppers of the
safety, convenience, services and attractiveness of the property; the
willingness and ability of the property's owner to provide capable management
and adequate maintenance, to make capital expenditures and improvements and to
provide leasing concessions; construction quality, age and design; demographic
factors; retroactive changes to building or similar codes; and increases in
operating expenses (such as energy costs). The Company expects a substantial
portion of its Invested Portfolio
 
                                       20
<PAGE>   27
 
to consist of Participating Loans and Mezzanine Loans which typically entitle
the Company to a portion of the appreciation or cash flow from the mortgaged
property. In the event of any economic downturn or recession in the market in
which the real estate underlying any such Participating Loan or Mezzanine Loan
is located, or in the event of any other decrease in value of such property, the
returns to the Company will be significantly reduced.
 
     ONE ACTION RULES MAY LIMIT THE COMPANY'S RIGHTS FOLLOWING DEFAULTS. Several
states have laws that prohibit more than one "judicial action" to enforce a
Mortgage Loan, and some courts have construed the term "judicial action"
broadly. The servicer of the Mortgage Loan may be required to foreclose first on
properties located in states where such "one action" rules apply (and when
non-judicial foreclosure is permitted) before foreclosing on properties located
in states where judicial foreclosure is the only permitted method of
foreclosure. Such rules may increase the Company's costs to foreclose on a
Mortgage Loan and materially reduce the Company's return.
 
     RISKS OF LOSS ON THE INITIAL ASSETS. In addition to all of the risks of
loss on Mortgage Loans described under "-- Risks of Loss on Mortgage Loans," the
Initial Assets will be subject to the following risks:
 
   
     REPAYMENT MAY DEPEND ON SUCCESSFUL COMPLETION OF THE PROJECT. The Initial
Assets consist primarily of Construction Loans and Rehabilitation Loans. The
repayment of such Mortgage Loans may be dependent upon the successful and timely
construction or rehabilitation of the subject property. If the applicable
borrower is unable to successfully complete the proposed construction or
rehabilitation in accordance with the proposed budget and timeline, or if the
actual value of the completed project is less than estimated because of any
change in market conditions or otherwise, the borrower may not have adequate
funds to repay the loan on a timely basis.
    
 
   
     DECREASE IN PROPERTY VALUES MAY ADVERSELY AFFECT THE BORROWER'S ABILITY TO
REPAY THE LOAN OR RESULT IN REDUCED PROFITS TO THE COMPANY. In the event of any
economic downturn or recession in the markets in which the properties underlying
the Initial Assets are located, or in the event of any other decrease in the
values of such properties, the borrowers may not be able to secure long-term
take-out financing for the mortgaged properties, which may impair the abilities
of such borrowers to repay the loans, and, if the Company forecloses on a
defaulted Initial Asset, the liquidation value of the mortgaged property may not
be sufficient to repay the loan. Further, a portion of the Company's expected
returns on Loans Two, Four and Five will be derived from the payment by the
borrower to the Company of a portion of the net sale or refinancing proceeds of
the mortgaged property. In the event of any economic downturn or recession in
the markets in which the properties securing Loans Two, Four and Five are
located, or in the event of any other decrease in the values of such properties,
the returns to the Company would be significantly reduced.
    
 
   
     RETURNS ON LOAN ONE AND LOAN FOUR MAY BE REDUCED DUE TO SECOND LIEN STATUS.
Loan One and Loan Four are secured by second-liens on the mortgaged real estate.
In the case of Loan One, the Company would be prohibited from foreclosing on the
mortgaged real estate without the consent of the senior lender, and a
foreclosure by the senior lender could result in Loan One becoming unsecured
with respect to the real property collateral. In addition, if the borrower of
Loan One were to default on its payments to the senior lender, the Company would
not be able to accept payments on Loan One until such default were cured. In the
case of Loan Four, in the event of a default under the senior debt, the Company
would not be able to accept payments without the consent of the senior lender,
until such default is cured, if ever. In the cases of both Loan One and Loan
Four, the Company would have the right to buy the senior note and/or the right
to cure any default on the senior debt. The Company's inability to exercise its
remedies under Loan One and Loan Four as quickly and efficiently as it would if
it were the senior lender could adversely effect its ability to recover its
investments in such loans, if at all.
    
 
     POTENTIAL ENVIRONMENTAL PROBLEMS ASSOCIATED WITH LOAN THREE MAY ADVERSELY
AFFECT THE COMPANY. The property proposed to secure Loan Three is part of an 83
acre facility formerly owned by Continental Assurance Company and operated by
Raytheon Electronic Systems, a division of Raytheon Company ("Raytheon") from
1955 to 1995. An environmental site assessment which included extensive
subsurface soil and groundwater testing, was conducted by Raytheon in 1996. The
environmental site assessment disclosed the presence of asbestos-containing
materials ("ACM") in certain of the buildings located on the subject
 
                                       21
<PAGE>   28
 
property, hydrocarbon concentrations above reportable limits impacting what
appeared to be a limited area of soil, a release of No. 6 fuel oil from a
20,000-gallon underground storage tank that had been removed in 1992, and the
presence of oil and hazardous material ("OHM") containing metals and volatile
organic compounds, including polychlorinated biphenyls and polynuclear aromatic
hydrocarbons in drywells on the property. Significantly lower levels of OHM were
also detected in catch basins and within wetland sediments adjacent to the
property. Impact at the drywells has been abated by Raytheon through soil
removal actions conducted as Limited Response Actions performed under the
requirements imposed by Massachusetts Contingency Plan regulations. See
"-- Risks Related to Investments in Real Estate -- Real Estate With Hidden
Environmental Problems Will Increase Costs and May Create Liability for the
Company" and "-- Risks Related to Investments in Real Estate -- Real Estate With
Known Environmental Problems May Create Liability for the Company."
 
   
     The environmental site assessment concluded that the release of No. 6 fuel
oil did not pose an imminent hazard and that the groundwater contamination
associated with the release had a low potential to impact current public water
supplies. The assessment also indicated that Raytheon was to conduct a Limited
Response Action to remove the hydrocarbons detected in the property. As part of
the rehabilitation costs associated with the property, the proposed borrower on
Loan Three has budgeted approximately $550,000 to remediate the contamination
associated with the release of the No. 6 fuel oil and approximately $300,000 to
abate the ACM. Further due diligence regarding the environmental condition of
the property and compliance with the requirements of the Massachusetts
Contingency Plan requirements will be conducted during the underwriting of Loan
Three. However, should the due diligence not detect any other significant
environmental problems and Loan Three closes as currently anticipated, no
assurance can be given that such due diligence will have identified all areas of
potential impact to soil, groundwater or other media or that the actual costs to
remediate any contamination that is or has been detected will not exceed the
costs estimated at the time the loan is closed. The discovery of unknown
environmental conditions or increased costs could limit the ability of the
Company to recover all of its interest and/or principal on Loan Three and may
expose the Company to additional liability. As a condition to the origination of
Loan Three, the Company would require that the borrower indemnify the Company
for any environmental liability or other losses incurred by the Company as a
result of any environmental problem associated with the real property securing
Loan Three; however, there can be no assurance that the borrower will have the
ability to satisfy any such indemnification obligation. See "-- Risks Related to
Investments in Real Estate -- Real Estate With Hidden Environmental Problems
Will Increase Costs and May Create Liability for the Company," "-- Risks Related
to Investments in Real Estate -- Real Estate With Known Environmental Problems
May Create Liability for the Company" and "Business and Strategy -- The Initial
Assets -- Loan Three."
    
 
   
     CONCENTRATIONS OF ASSET TYPES MAY INCREASE RISK. All of the Initial Assets
identified by the Company to date (other than Loan Five) consist of Construction
Loans or Rehabilitation Loans. The lack of diversification in the Company's
proposed initial Invested Portfolio may increase the Company's risk of loss in
the event of an economic downturn. In addition, because all of the Initial
Assets (other than Loan Five) are Construction Loans or Rehabilitation Loans,
the committed amount will not be fully funded at the time of purchase or
origination of such loans and, therefore, the Invested Portfolio (based on
amounts funded) will grow more slowly than it would if such Mortgage Loans were
fully funded at the date of origination or purchase. See "-- The Company's Broad
Discretion Creates Uncertainty" and "-- Risks of Loss on Mortgage Loans --
Mezzanine, Construction, Rehabilitation and Bridge Loans Involve Greater Risks
of Loss."
    
 
   
     NON-RECOURSE NATURE OF INITIAL ASSETS MAY LIMIT THE COMPANY'S RECOVERY ON
THE INITIAL ASSETS. Each Mortgage Loan included in the Initial Assets is (or is
expected to be) non-recourse against the applicable borrower. In addition, each
applicable borrower is expected to be a newly formed or to-be-formed special
purpose entity with no operating history and no significant assets other than
the property mortgaged or pledged to secure the Mortgage Loan. In the event of a
default in the payment of any Mortgage Loan included in the Initial Assets,
recourse will be limited to the mortgaged real estate and the pledged ownership
interests in the applicable borrower. Accordingly, in the event of such default,
the Company's recovery would be limited to the liquidation value of the property
securing such Mortgage Loan, which value may be less than the outstanding
balance of such Mortgage Loan.
    
 
                                       22
<PAGE>   29
 
     RISKS RELATED TO INVESTMENTS IN MBS
 
     SUBORDINATED INTERESTS ARE SUBJECT TO GREATER CREDIT RISKS THAN MORE SENIOR
CLASSES. The Company expects the Invested Portfolio to include a significant
amount of various classes of MBS, including "first loss" classes of subordinated
MBS (hereinafter referred to as "Subordinated Interests"). A "first loss" class
is the most subordinated class of a multi-class issuance of pass-through or debt
securities and is the first to bear the loss upon a default on the underlying
Mortgage Collateral. Subordinated Interests are subject to special risks,
including a substantially greater risk of loss of principal and non-payment of
interest than more senior classes. While the market values of most Subordinated
Interest classes tend to react less to fluctuations in interest rate levels than
more senior classes, the market values of Subordinated Interest classes tend to
be more sensitive to changes in economic conditions than more senior classes. As
a result of these and other factors, Subordinated Interests generally are not
actively traded, are more difficult to pledge as collateral for borrowings and
may not provide holders thereof with liquidity of investment.
 
     The yield to maturity on Subordinated Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage pass-through securities or pools of whole
loans securing or backing a series of MBS and the timing of any such defaults or
losses. Because the Subordinated Interests of the type the Company intends to
acquire generally have no credit support, to the extent there are realized
losses on the Mortgage Collateral for such classes, the Company may recover less
than the full amount, if any, of its initial investment in such Subordinated
Interests.
 
     When the Company acquires a Subordinated Interest, it may be unable to
obtain the right to service the underlying performing Mortgage Collateral. To
minimize its losses, if the underlying Mortgage Collateral is in default, the
Company will seek to obtain the rights to service such underlying Mortgage
Collateral, although in some cases it will not be able to obtain Special
Servicing Rights on acceptable terms. To the extent the Company does not obtain
Special Servicing Rights with respect to the Mortgage Collateral underlying its
MBS, the servicer of the Mortgage Collateral generally would be responsible to
holders of the senior classes of MBS, whose interests may not be the same as
those of the holders of the subordinated classes. Accordingly, the Mortgage
Collateral may not be serviced in a manner that is most advantageous to the
Company as the holder of a subordinated class.
 
     The subordination of Subordinated Interests to more senior classes may
affect adversely the yield on the Subordinated Interests even if realized losses
are not ultimately allocated to such classes. On any payment date, interest and
principal are paid on the more senior classes before interest and principal are
paid with respect to the unrated or non-investment grade credit support classes.
Typically, interest deferred on these credit support classes is payable on
subsequent payment dates to the extent funds are available, but such deferral
may not itself bear interest. Such deferral of interest will affect adversely
the yield on the Subordinated Interests.
 
     YIELDS ON SUBORDINATED INTERESTS MAY BE AFFECTED ADVERSELY BY PREPAYMENTS
AND INTEREST RATE CHANGES. The yield on the Subordinated Interests also will be
affected by the rate and timing of payments of principal (including prepayments,
repurchase, defaults and liquidations) on the Mortgage Loans underlying a series
of MBS. The rate of principal payments may vary significantly over time
depending on a variety of factors such as the level of prevailing Mortgage Loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the Mortgage Loans underlying a series of MBS are generally
allocated to the more senior classes of MBS until those classes are paid in full
or until the end of a lock-out period, typically of five years or more.
Generally, prepayments of principal from the Mortgage Loans are not received by
the Subordinated Interest holders for a period of at least four years. As a
result, the weighted average lives of the Subordinated Interests may be longer
than would be the case if, for example, prepayments were allocated pro rata to
all classes of MBS. To the extent that the holder of a Subordinated Interest is
not paid compensating interest on interest shortfalls due to prepayments,
liquidations or otherwise, the yield on the Subordinated Interests may be
affected adversely.
 
     CERTAIN INVESTMENTS MAY GENERATE TAXABLE INCOME EXCEEDING CASH FLOW. The
Company also may invest in certain classes of MBS that are designated as the
residual interest in the related REMIC (a "REMIC Residual Interest") or that
represents the residual interest in a non-REMIC securitization ("Non-
 
                                       23
<PAGE>   30
 
REMIC Residual Interest"), which receive principal and interest payments in
excess of amounts needed to make payments on other classes of securities or to
fund a reserve account. Like interest otherwise allocable to Sub IOs, principal
and interest amounts otherwise allocable to such residual interests are used to
protect the senior classes of securities from credit losses on the underlying
Mortgage Loans. Moreover, in any given year, the taxable income produced by a
residual interest may exceed its cash flow. The Company may also invest in
Distressed Mortgage Loans and such loans may produce taxable interest income for
the Company prior to the Company's receipt of loan payments.
 
     RISKS RELATED TO INVESTMENTS IN REAL ESTATE
 
     TENANT DEFAULTS AND BANKRUPTCY MAY CAUSE LOSSES. A portion of the Company's
income is expected to be derived from rental income on real estate owned and,
consequently, the Company's distributable cash flow and ability to make expected
distributions to shareholders would be adversely affected if a significant
number of tenants of the Company's owned real estate failed to meet their lease
obligations. At any time, a tenant of the Company could seek the protection of
the bankruptcy laws, which could result in delays in rental payments or in the
rejection and termination of such tenant's lease. No assurance can be given that
tenants will not file for bankruptcy protection in the future or, if any tenants
file, that they will affirm their leases and continue to make rental payments in
a timely manner. In addition, a commercial tenant from time to time may
experience a downturn in its business which may weaken its financial condition
and result in the failure to make rental payments when due.
 
     RELIANCE ON THIRD PARTY OPERATORS MAY ADVERSELY AFFECT RESULTS. Neither the
Company nor the Manager has experience in the operation of real estate.
Therefore, neither the Company nor the Manager intends to operate any of the
Company's real estate investments. The Company will engage experienced real
estate operators to operate its properties and will be dependent upon the
abilities of such third parties to operate such real estate. The failure of any
such operator to operate the Company's real estate competently or efficiently,
or to operate any such real estate in accordance with the Company's policies and
objectives, including the Company's policy with respect to maintaining its
status as a REIT, could have a material adverse effect on the results of
operations of the Company.
 
     CONDITIONS BEYOND THE COMPANY'S CONTROL MAY AFFECT ADVERSELY THE VALUE OF
REAL ESTATE. The underlying value of the Company's real estate investments and
the Company's income and ability to make distributions to its shareholders are
dependent upon the ability of the third party operators engaged by the Company
to operate such real estate in a manner sufficient to maintain or increase
revenues in excess of operating expenses and debt service or, in the case of
real estate leased to a single lessee, the ability of the lessee to make rent
payments. Revenues may be adversely affected by adverse changes in national or
local economic conditions, competition from other properties offering the same
or similar services, changes in interest rates and in the availability, cost and
terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements (particularly in older structures), changes in real estate tax
rates and other operating expenses, adverse changes in governmental rules and
fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes
and other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other factors which are beyond the control
of the Company.
 
     REAL ESTATE IS ILLIQUID AND ITS VALUE MAY DECREASE. Real estate investments
are relatively illiquid. To the extent the Company holds a significant amount of
real estate, the ability of the Company to vary its Invested Portfolio in
response to changes in economic and other conditions will be limited. No
assurances can be given that the fair market value of any of the Company's real
estate assets will not decrease in the future.
 
     THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES. The Company intends to
maintain comprehensive insurance on all of its real estate, including liability
and fire and extended coverage, in amounts sufficient to permit the replacement
of the improvements thereon in the event of a total loss, subject to applicable
deductibles. The Company will endeavor to obtain coverage of the type and in the
amount customarily obtained by owners of real estate similar in nature in the
areas where such real estate is located. There are certain types of losses,
however, generally of a catastrophic nature, such as earthquakes, floods and
hurricanes,
 
                                       24
<PAGE>   31
 
that may be uninsurable or not economically insurable. Inflation, changes in
building codes and ordinances, environmental considerations, and other factors
also might make it infeasible to use insurance proceeds to replace a property if
it is damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company, if any, might not be adequate to restore the Company's
investment with respect to the affected property.
 
     PROPERTY TAXES DECREASE RETURNS ON REAL ESTATE. All real estate owned by
the Company will be subject to real property taxes and, in some instances,
personal property taxes. Such real and personal property taxes may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. An increase in property taxes on the Company's
real estate could affect adversely the Company's income and ability to make
distributions to its shareholders and could decrease the value of that real
estate.
 
     COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public properties are required to meet
certain federal requirements related to access and use by disabled Persons.
Certain real estate acquired by the Company may not be in compliance with the
ADA. If a property is not in compliance, the owner of the property will be
required to make modifications to such property to bring it into compliance, or
face the possibility of an imposition of fines or an award of damages to private
litigants. In addition, changes in governmental rules and regulations or
enforcement policies affecting the use and operation of the real estate,
including changes to building codes and fire and life-safety codes, may occur.
If the Company is required to make substantial modifications to any of its
properties to comply with the ADA or other changes in governmental rules and
regulations, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
 
     REAL ESTATE WITH HIDDEN ENVIRONMENTAL PROBLEMS WILL INCREASE COSTS AND MAY
CREATE LIABILITY FOR THE COMPANY. Operating costs and the value of the real
estate acquired by the Company may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations,
as well as the cost of future legislation. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such real estate.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances.
Therefore, an environmental liability could have a material adverse effect on
the value of the real estate acquired by the Company, the Company's income and
cash available for distribution to its shareholders. The Company intends to
obtain Phase I environmental assessments on all real estate acquired by the
Company prior to the acquisition by the Company of such real estate. The purpose
of Phase I environmental assessments is to identify potential environmental
contamination that is made apparent from historical reviews of the real estate,
reviews of certain public records, preliminary (non-invasive) investigations of
the sites and surrounding real estate, and screening of relevant records for the
presence of hazardous substances, toxic substances and underground storage
tanks. Even if a Phase I environmental assessment is obtained, however, there is
no assurance it will reveal all existing and potential environmental risks and
liabilities, and there is no assurance that there will be no unknown or material
environmental obligations or liabilities.
 
     REAL ESTATE WITH KNOWN ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR THE
COMPANY. The Company may invest in real estate with known environmental problems
that materially impair the value of the real estate. In such cases, the Company
will generally take certain steps to seek to limit its environmental liability,
including the creation of a special purpose entity which will own such real
estate. Despite these precautionary measures, there are risks associated with
such an investment.
 
     FOREIGN REAL ESTATE IS SUBJECT TO CURRENCY CONVERSION RISKS AND UNCERTAINTY
OF FOREIGN LAWS. The Company may invest in real estate located outside the
United States. Investing in real estate located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets including,
without limitation, laws respecting foreign ownership, the enforceability of
loan documents and foreclosure laws. Moreover, investments in foreign real
estate are subject to currency conversion risks. In addition, income from
investment in foreign real estate may be subject to tax by foreign
jurisdictions, which would reduce the
 
                                       25
<PAGE>   32
 
economic benefit of such investments. Neither the Company nor the Manager has
experience in investing in foreign real estate. The Company intends to limit its
investments in foreign real estate to those jurisdictions in which the AMRESCO
Group has historically conducted business (currently, Canada, the United Kingdom
and Mexico).
 
     INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENTS
AND OPERATING RESULTS
 
     INTEREST RATE MISMATCH COULD OCCUR BETWEEN INVESTED PORTFOLIO YIELD AND
BORROWING RATES RESULTING IN DECREASED YIELD. The Company's operating results
will depend in large part on differences between the income earned on its
Invested Portfolio (net of credit losses) and its borrowing costs. The Company
may fund a substantial portion of its Invested Portfolio with borrowings having
interest rates that reset relatively rapidly, such as monthly or quarterly. The
Company anticipates that, in some cases, the income from its Invested Portfolio
may respond more slowly to interest rate fluctuations than the cost of its
borrowings, creating a potential mismatch between the yield on its Invested
Portfolio and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may significantly influence the
Company's net income. If there is a mismatch, increases in these rates will tend
to decrease the Company's net income and market value of the Company's net
Invested Portfolio. Interest rate fluctuations resulting in the Company's
interest expense exceeding interest income would result in the Company incurring
operating losses.
 
     INVERTED YIELD CURVE ADVERSELY AFFECTS INCOME. The relationship between
short-term and long-term interest rates is often referred to as the "yield
curve." Ordinarily, short-term interest rates are lower than long-term interest
rates. If short-term interest rates rise disproportionately relative to
long-term interest rates (a flattening of the yield curve), the borrowing costs
of the Company may increase more rapidly than the interest income earned on its
Invested Portfolio. Because the Company's borrowings will primarily bear
interest at short-term rates and its Invested Portfolio will primarily earn
interest at medium-term to long-term rates, a flattening of the yield curve will
tend to decrease the Company's net income and market value of its net Invested
Portfolio. Additionally, to the extent cash flows from long-term assets that
return scheduled and unscheduled principal and other payments are reinvested,
the spread between the yields of the new assets and available borrowing rates
may decline and also may tend to decrease the net income and market value of the
Company's net Invested Portfolio. It is also possible that short-term interest
rates may adjust relative to long-term interest rates such that the level of
short-term rates exceeds the level of long-term rates (a yield curve inversion).
In such event, the Company's borrowing costs may exceed its interest income and
operating losses would be incurred.
 
     INCREASED INTEREST RATES COULD DECREASE DEMAND FOR MORTGAGE LOANS. A
significant increase in interest rates would likely reduce the demand for
Mortgage Loans, which could impair the Company's ability to acquire Targeted
Investments, which could in turn reduce the Company's income and ability to make
distributions to its shareholders.
 
     INCREASED PREPAYMENT RATES COULD ADVERSELY AFFECT YIELDS. The value of
certain of the Company's assets may be adversely affected by prepayment rates on
Mortgage Loans. Prepayment rates on Mortgage Loans are influenced by changes in
current interest rates and a variety of economic, geographic and other factors
beyond the control of the Company, and consequently, such prepayment rates
cannot be predicted with certainty. In periods of declining Mortgage Loan
interest rates, prepayments on Mortgage Loans generally increase. If general
interest rates decline as well, the proceeds of such prepayments received during
such periods are likely to be reinvested by the Company in assets yielding less
than the yields on the Mortgage Loans that were prepaid. In addition, the market
value of the Mortgage Loans may, because of the risk of prepayment, benefit less
than other fixed-income securities from declining interest rates. Conversely, in
periods of rising interest rates, prepayments on Mortgage Loans generally
decrease, in which case the Company would not have the prepayment proceeds
available to invest in assets with higher yields. Although the Company
anticipates that the majority of the Mortgage Loans in which it invests and
which underlie the MBS in which it invests will prohibit or substantially limit
prepayments, to the extent prepayments are not prohibited, the Company's income
may be reduced or the Company may incur losses.
 
     LEVERAGE INCREASES EXPOSURE TO LOSS. The Company's operations are expected
to be highly leveraged. The Company intends to finance its acquisitions of
Targeted Investments through the net proceeds of the
 
                                       26
<PAGE>   33
 
   
Offering and the Private Placement and by borrowing against or "leveraging" its
Invested Portfolio. The Company will leverage primarily with reverse repurchase
agreements, securitizations of its Mortgage Loans and secured and unsecured
loans. The Company has obtained a commitment from PSCC pursuant to which the
Company expects to have the ability to obtain up to $500 million of financing
upon the closing of the Offering for the acquisition of Targeted Investments.
See "Management's Discussion and Analysis of Liquidity and Capital Resources,"
"Business and Strategy -- Operating Policies and Guidelines -- Capital and
Leverage Policies" and "Risk Factors -- Conflicts of Interest of Certain
Underwriters May Affect Offering." The Company presently intends to achieve a
Leverage Ratio of 2:1 within 24 months after the closing of the Offering and
thereafter to operate at a Leverage Ratio of less than 3:1, although the actual
ratio may be higher or lower from time to time depending upon market conditions
and other factors deemed relevant by the Manager, subject to the review of the
Board of Trust Managers. The Declaration of Trust and Bylaws do not limit the
amount of indebtedness the Company can incur, and the Board of Trust Managers
has the discretion to deviate from or change its indebtedness policy at any
time, without consent from or notice to the Company's shareholders. See "-- The
Company's Broad Discretion Creates Uncertainty."
    
 
     Leverage creates an opportunity for increased net income, but at the same
time increases volatility in the Company's income and the value of its net
Invested Portfolio. The Company will leverage its Invested Portfolio only when
there is an expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial or
advantageous to the Company, relative to the Company's risks. Moreover, there
can be no assurance that the Company will be able to meet its debt service
obligations. The Company's ability to meet its debt service obligations will be
dependent upon the Company's receipt of sufficient income from its Invested
Portfolio. In the event of a mismatch in interest rates between the Company's
borrowings and the yield on its Invested Portfolio or other reductions in cash
flow, including without limitation reductions resulting from payment defaults on
the Company's Mortgage Loans, MBS or other assets, the Company may not have
sufficient cash flow to meet its debt service obligations. See "-- Interest Rate
Fluctuations May Adversely Affect the Company's Investments and Operating
Results."
 
     A substantial portion of the Company's borrowings are expected to be in the
form of securitizations and reverse repurchase agreements. If the value of the
assets pledged to secure such borrowings were to decline, the Company would be
required to post additional collateral, to reduce the amount borrowed or suffer
forced sales of the collateral. If sales were made at prices lower than the
carrying value of the collateral, the Company would experience additional
losses. If the Company is forced to liquidate Qualified REIT Real Estate Assets
to repay borrowings, there can be no assurance that it will be able to maintain
compliance with the REIT Provisions of the Code regarding asset and source of
income requirements. See "-- Failure to Maintain REIT Status Would Have Adverse
Tax Consequences."
 
     INABILITY TO IMPLEMENT LEVERAGING STRATEGY MAY REDUCE PROFITS. The ability
of the Company to achieve its desired level of leverage, and therefore its
investment objective, depends to a significant extent on its ability to borrow
money in sufficient amounts and on sufficiently favorable terms to earn
incremental returns. The Company may not be able to achieve the degree of
leverage it believes to be optimal due to decreases in the proportion of the
value of its Invested Portfolio that it can borrow, decreases in the market
value of the Invested Portfolio, increases in interest rates, changes in the
availability of financing in the market, conditions then applicable in the
lending market and other factors. If the Company is unable to enter into
borrowing arrangements on terms and conditions satisfactory to the Company, or
if such arrangements are subsequently terminated, the Company may be unable to
effectively implement its leveraging strategy. Such an occurrence may cause the
Company to experience losses or lower profits than would otherwise be the case.
 
   
     HEDGING TRANSACTIONS CAN LIMIT GAINS AND MAY INCREASE EXPOSURE TO
LOSSES. The Company may, from time to time, enter into hedging transactions,
including interest rate swaps, interest rate collars, caps or floors, forward
contracts and U.S. Treasury and Eurodollar futures and options, in an effort to
protect itself from the effect of interest rate fluctuations on any floating
rate debt it may incur and also to protect its Invested Portfolio from interest
rate and prepayment rate fluctuations. There can be no assurance that the
Company will enter into hedging activities or that if entered into, such
activities will have the desired beneficial impact on the Company's results of
operations or financial condition. Moreover, no hedging activity
    
 
                                       27
<PAGE>   34
 
can completely insulate the Company from the risks associated with changes in
interest rates and prepayment rates.
 
   
     Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs, during
such periods when interest rates are volatile or rising and hedging costs have
increased. The Company intends generally to hedge as much of the interest rate
risk as the Manager determines is in the best interest of the shareholders of
the Company given the cost of such hedging transactions and the Company's desire
to maintain its status as a REIT. The Guidelines do not contain specific
requirements as to the percentages or amount of interest rate risk which the
Manager is required to hedge. The Board of Trust Managers will from time to time
review the extent and effectiveness of hedging transactions conducted by the
Company.
    
 
     Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record-keeping, financial responsibility or segregation of customer funds and
positions. The business failure of a counterparty with which the Company has
entered into a hedging transaction will most likely result in a default. Default
by a party with which the Company has entered into a hedging transaction may
result in the loss of unrealized profits and force the Company to cover its
resale commitments, if any, at the then current market price. Although generally
the Company will seek to reserve for itself the right to terminate its hedging
positions, it may not always be possible to dispose of or close out a hedging
position without the consent of the counterparty, and the Company may not be
able to enter into an offsetting contract in order to cover its risk. There can
be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to maintain a
position until exercise or expiration which could result in losses.
 
     To the extent the Company utilizes a derivatives transaction to hedge
another position, such transaction will also subject the Company to basis or
correlation risk. Basis or correlation risk refers to the exposure of a
transaction or portfolio to differences in the price performance of the
derivatives it contains and their hedges. If the Company enters into a
transaction in which an instrument and its hedge are not perfectly correlated,
changes in applicable indices or other price movements will result in a change
(which could include a loss) in the market value of the combined hedge position.
Hedging transactions may also subject the Company to risks of loss resulting
from the unenforceability of a contract with a counterparty. Such risks could
result from insufficient documentation, insufficient capacity or authority of a
counterparty and unenforceability in the event of bankruptcy or insolvency. If a
hedging transaction entered into by the Company was determined to be
unenforceable, the Company could incur unrecoverable losses from such
transaction.
 
   
     TERMINATION OF THE MANAGEMENT AGREEMENT COULD ADVERSELY AFFECT THE
COMPANY'S INVESTMENTS AND OPERATING RESULTS. The Company expects that a
significant portion of its Invested Portfolio will be identified, originated or
otherwise made available to it through the AMRESCO Group. If the Management
Agreement is terminated (and no member of the AMRESCO Group is serving as
manager of the Company), the Right of First Refusal and the Correspondent
Agreement may be terminated by the AMRESCO Group. If the AMRESCO Group chooses
not to continue to offer Targeted Investments to the Company, the Company's
operations could be materially adversely affected. Further, the Manager may be
entitled to a significant termination fee if the Company does not renew, or
elects to terminate, the Management Agreement, which, if paid, would materially
adversely affect the cash available for distribution to the Company's
shareholders and may result in material net operating losses for the period. In
addition, the Management Agreement provides that, upon termination of the
Management Agreement, the AMRESCO Group will have the right to require the
Company to cease all use of the "AMRESCO" name, which could have a material
adverse effect on the Company. See "The Manager -- Termination."
    
 
     THE COMPANY'S BROAD DISCRETION CREATES UNCERTAINTY. Management of the
Company will have broad discretion (i) in the types of real estate related
assets which constitute Targeted Investments from time to time, (ii) in the
types and percentages of any type of Targeted Investments included in the
Invested Portfolio from time to time, and (iii) to modify or waive the Company's
investment and operating policies and strategies at any time without shareholder
consent, subject, in certain cases, to approval by a majority of the
 
                                       28
<PAGE>   35
 
Independent Trust Managers. The ultimate effect of these changes may have a
positive or negative effect on the results of operations of the Company and
could result in losses to the Company. See "Business and Strategy -- Operating
Policies and Guidelines -- Future Revisions in Policies and Strategies."
 
   
     CONFLICTS OF INTEREST OF CERTAIN UNDERWRITERS MAY AFFECT OFFERING. Certain
of the Underwriters or their affiliates have in the past, and may in the future,
provide investment banking services and financing to members of the AMRESCO
Group. Prudential Securities Credit Corporation ("PSCC"), an affiliate of
Prudential Securities Incorporated ("PSI"), the lead Underwriter, has committed
to provide a $400 million Warehouse Line and a $100 million Repurchase Agreement
to the Company upon the closing of the Offering for which PSCC will receive
certain fees. In addition, in connection with the Warehouse Line, the Company
will agree (as is customary in many similar warehouse lending arrangements with
affiliates of investment banking firms), to engage PSI to act as underwriter
and/or placement agent for any sale or securitization of Mortgage Loans financed
with proceeds from the Warehouse Line. Accordingly, PSI may have certain
conflicts of interest in connection with the Offering. For example, PSI's
decisions or recommendations with respect to the Offering (including, without
limitation, its recommendations to the Company with respect to determining the
initial public offering price of the Common Shares) may be influenced by the
fact that PSI or its affiliate, PSCC, will receive compensation in addition to
that payable to it as an Underwriter in connection with the Offering. See
"Underwriting."
    
 
     FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES. In
order to maintain its qualification as a REIT for federal income tax purposes,
the Company must continually satisfy certain tests with respect to the sources
of its income, the nature of its assets, the amount of its distributions to
shareholders and the ownership of its shares. If the Company fails to qualify as
a REIT in any tax year, it would be taxed as a regular domestic corporation. In
such a case, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to the Company's shareholders would not be deductible
by the Company in computing its Taxable Income. Any such corporate tax liability
could be substantial and would reduce the amount of cash available for
distribution to the Company's shareholders, which in turn could have an adverse
impact on the value of, and trading prices for, the Common Shares. In addition,
the unremedied failure of the Company to be treated as a REIT for any one year
would disqualify the Company from being treated as a REIT for four subsequent
years. See "Federal Income Tax Consequences -- Requirements For Qualification"
and "Federal Income Tax Consequences -- Failure to Qualify."
 
     Investment by the Company in certain real estate and in Participating Loans
and Mezzanine Loans may involve special considerations in applying the various
REIT qualification tests. For instance, since certain of the Company's
Participating Loans and Mezzanine Loans will entitle the Company to an interest
in either a percentage of the revenues of a mortgaged property or the borrower,
such Mortgage Loans must be structured to avoid violation by the Company of the
REIT Provisions of the Code. Generally, to the extent interest is based upon or
attributable to net cash flow from the real estate, the real estate underlying
such Mortgage Loans must be operated in accordance with the REIT Provisions of
the Code in order for the interest income on such Mortgage Loans to qualify
under the REIT Provisions of the Code, regardless of whether the owner of any
such real estate has elected to be taxed as a REIT. If any such real estate is
not operated in accordance with the REIT Provisions of the Code, the interest
income from such Mortgage Loans will not qualify under the REIT Provisions of
the Code. Further, the Company may be required to transfer the related
Participating Loan or Mezzanine Loan to a taxable corporation owned in whole or
in part by the Company, in which case there would be a corporate level income
tax on any income derived from such Mortgage Loan. Moreover, the requirement
that the real estate underlying a Mezzanine Loan or Participating Loan must be
operated in accordance with the REIT Provisions of the Code may diminish the
Company's ability to compete with other lenders for such Mortgage Loans. See
"Business and Strategy -- Description of Targeted Investments" and "Federal
Income Tax Consequences -- Requirements For Qualification -- Income Tests."
 
     The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash items, government
securities and Qualifying REIT Real Estate Assets, and of the investments in
securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the
 
                                       29
<PAGE>   36
 
Company to dispose of a portion of its assets within 30 days after the end of
the calendar quarter or face loss of REIT status and adverse tax consequences.
See "Federal Income Tax Consequences -- Requirements For Qualification -- Asset
Tests" and "Federal Income Tax Consequences -- Failure to Qualify."
 
     The Company must generally distribute at least 95% of its REIT Taxable
Income each year after taking various timing considerations into account. The
Company's operations may from time to time generate Taxable Income in excess of
cash flows. To the extent that the Company does not otherwise have funds
available, the Company may need to borrow money, receive additional capital or
sell assets to obtain the cash needed for distribution to the Company's
shareholders. The Company generally intends to distribute sufficient amounts to
avoid excise tax liability unless retention of income will create additional
shareholder value. See "Federal Income Tax Consequences -- Requirements For
Qualification -- Annual Distribution Requirements."
 
   
     SALES BY SHAREHOLDERS COULD ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON
SHARES. Upon the closing of the Offering and the Private Placement, the Company
will have a total of 22,222,333 Common Shares outstanding (25,555,667 if the
Underwriters' over-allotment option in the Offering is exercised in full and the
number of Common Shares sold in the Private Placement is fully increased as a
result). Of these shares, the 20,000,000 Common Shares offered hereby
(23,000,000 if the Underwriters' over-allotment option is exercised in full)
will be freely tradeable without restriction or registration under the
Securities Act by Persons other than Affiliates of the Company. The remaining
2,222,333 Common Shares (2,555,667 if the Private Placement is increased to its
maximum as a result of the separate exercise in full of the Underwriters'
over-allotment option) will be "restricted securities" as that term is defined
by Rule 144 as promulgated under the Securities Act. Upon the closing of the
Offering, the Company will issue options to purchase 3,092,233 Common Shares at
or above the initial public offering price (assuming the Underwriters'
over-allotment option is not exercised). Options to purchase an additional
241,117 Common Shares (assuming the Underwriters' over-allotment option is not
exercised) will remain available for issuance under the Share Option Plan. See
"Management of the Company -- Share Options Outstanding" and "Shares Eligible
for Future Sale." In addition, the Company intends to grant 1,500 restricted
Common Shares annually to each Independent Trust Managers in lieu of annual
fees. See "Management of the Company -- Executive Officers and Trust Managers of
the Company."
    
 
     The "restricted securities" and Common Shares issued upon the exercise of
Share Options will become eligible for sale upon expiration of the lock-up
restrictions described below, and the expiration of any applicable vesting
periods or other restrictions. See "Management of the Company -- Executive
Officers and Trust Managers of the Company." Holdings has agreed not to offer,
sell, offer to sell, or contract to sell, pledge, grant any option to purchase
or otherwise dispose of or sell (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant any option to purchase or other sale or
disposition of) the Common Shares acquired by it pursuant to the Private
Placement for a period of two years after the closing of the Offering without
the prior written consent of Prudential Securities Incorporated on behalf of the
Underwriters so long as the Manager or another member of the AMRESCO Group
continues to serve as manager of the Company during such period. In addition,
the Company and the Trust Managers and executive officers of the Company have
agreed not to offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise dispose of or sell (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant any option to purchase or other
sale or disposition of) any Common Shares, or any securities convertible into,
or exchangeable or exercisable therefor, for a period of 180 days after the
closing of the Offering, without the prior written consent of Prudential
Securities Incorporated on behalf of the Underwriters, except that during such
period, Common Shares may be issued upon the exercise of outstanding Share
Options and the Company may issue Share Options which are exercisable after the
180th day after the closing of the Offering. Prudential Securities Incorporated
may, in its sole discretion, at any time and without notice, release all or any
portion of the Common Shares subject to such lock-up agreements. See
"Underwriting."
 
     The Company has agreed that, upon Holdings' demand, it will file and seek
to have declared effective a resale registration statement covering the sale in
the public market of the shares sold to Holdings in the Private Placement. See
"Description of Shares of Beneficial Interest -- Registration Rights" and
"Private Placement." Following expiration of the lock-up period described above,
assuming such resale registration statement is filed and declared effective,
those shares will be available for sale in the public market. If such
 
                                       30
<PAGE>   37
 
resale registration statement is not filed and declared effective, those shares
will be available for sale, following expiration of the lock-up restrictions
discussed above, pursuant to Rule 144 including the manner of sale and volume
limitations thereof. See "Private Placement."
 
     In addition, the Company anticipates that during 1998 it will file a
registration statement with respect to the 3,333,350 Common Shares issuable
under the Share Option Plan and any Common Shares which may be issued in
connection with other incentive compensation arrangements thereby allowing such
Common Shares to be transferred or resold without restriction under the
Securities Act subject to the lock-up and other restrictions discussed above.
See "Management of the Company."
 
     Prior to the Offering, there has been no public market for the Common
Shares and no prediction can be made of the effect, if any, that the sale or
availability for sale of additional Common Shares will have on the market price
of the Common Shares. Nevertheless, sales of substantial amounts of such shares
in the public market, or the perception that such sales could occur, could
materially and adversely affect the market price of the Common Shares and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See "Shares Eligible for Future Sale."
 
     FUTURE OFFERINGS BY THE COMPANY OF DEBT AND EQUITY COULD DILUTE THE
INTERESTS OF HOLDERS OF COMMON SHARES. The Company may in the future increase
its capital resources by making additional offerings of equity and debt
securities, including classes of Preferred Shares, Common Shares, commercial
paper, medium-term notes, MBS and senior or subordinated notes. All debt
securities and other borrowings, as well as all classes of Preferred Shares,
will be senior to the Common Shares in a liquidation of the Company. The effect
of additional equity offerings may be the dilution of the equity of shareholders
of the Company or the reduction of the price of Common Shares, or both. The
Company is unable to estimate the amount, timing or nature of additional
offerings as they will depend upon market conditions and other factors.
 
     RESTRICTIONS ON OWNERSHIP OF THE COMMON SHARES COULD DISCOURAGE A CHANGE OF
CONTROL. The Declaration of Trust prohibits any Person from acquiring or
holding, directly or indirectly, shares of beneficial interest in excess of 9.8%
(in value or in number of shares, whichever is more restrictive) of the
aggregate of the outstanding shares of beneficial interest of the Company
("Excess Shares") without approval of the Board of Trust Managers, even in
instances where such restriction is not necessary for the Company to meet the
requirements for qualification as a REIT. The Declaration of Trust further
prohibits (i) any Person from beneficially or constructively owning shares of
beneficial interest that would result in the Company being "closely held" under
Section 856(h) of the Code or otherwise cause the Company to fail to qualify as
a REIT and (ii) any Person from transferring shares of beneficial interest if
such transfer would result in shares of beneficial interest being owned by fewer
than 100 Persons. Subject to certain limitations, the Board of Trust Managers
may increase or decrease the ownership limitations or waive the limitations for
individual investors. The Board of Trust Managers has waived the foregoing
limitations for the Manager and other members of the AMRESCO Group who will own
approximately 20% of the outstanding Common Shares, in the aggregate (assuming
no exercise of the Underwriters' over-allotment option, and exercise of all
options granted to the Manager). See "Description of Shares of Beneficial
Interest -- Restrictions on Transfer" and "Management of the Company -- Share
Options Outstanding."
 
     RESTRICTIONS ON OR IMPEDIMENTS TO CHANGE OF CONTROL COULD ADVERSELY AFFECT
THE VALUE OF THE COMMON SHARES. The authorized capital shares of the Company
include Preferred Shares issuable in one or more series. The issuance of
Preferred Shares could have the effect of making an attempt to gain control of
the Company more difficult by means of a merger, tender offer, proxy contest or
otherwise. The Preferred Shares, if issued, would have a preference on dividend
payments that could affect the ability of the Company to make dividend
distributions to the holders of Common Shares.
 
     Material provisions of the Declaration of Trust relating to "business
combinations" may also have the effect of delaying, deterring or preventing a
takeover attempt or other change in control of the Company that would be
beneficial to shareholders and might otherwise result in a premium over then
prevailing market prices. In addition, the staggered Board provisions of the
Declaration of Trust and the advance notice provisions of the Bylaws could
delay, defer or prevent a change of control of the Company or other transaction
that might involve a premium price for holders of Common Shares or otherwise be
in their best interest.
 
                                       31
<PAGE>   38
 
     CHANGES IN TAX LAWS APPLICABLE TO REITS MAY ADVERSELY AFFECT THE
COMPANY. The rules regarding federal income taxation are constantly under review
by the IRS, the Treasury Department and Congress. New federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings or
Treasury Regulations could be adopted, all of which could adversely affect the
taxation of the Company or its stockholders, possibly with retroactive effect.
No prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions either directly or indirectly affecting the
Company or its shareholders. See "Federal Income Tax Consequences -- Proposed
Tax Legislation and Possible Other Legislative Actions Affecting Tax
Consequences."
 
     FAILURE TO DEVELOP A STABLE MARKET MAY RESULT IN DEPRESSED MARKET
PRICE. Prior to the Offering, there has been no public market for the Common
Shares, and there can be no assurance that an active trading market for the
Common Shares offered hereby will develop or, if developed, be sustained. The
initial public offering price will be determined through negotiations between
the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Shares will trade after the
closing of the Offering. See "Underwriting." The market price of the Common
Shares may be volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
developments with respect to conditions and trends in the Company's lines of
business or in the financial services industry or real estate market as a whole,
governmental regulation, changes in estimates by securities analysts of the
Company's or its competitors' future financial performance, general market
conditions and other factors, many of which are beyond the Company's control. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have adversely affected the market prices of
securities of companies irrespective of such companies' operating performances.
 
     SOFTWARE DEFICIENCIES COULD ADVERSELY AFFECT THE COMPANY. The Company will
rely upon a significant number of computer software programs and operating
systems of the Manager and other members of the AMRESCO Group as well as parties
unaffiliated with the AMRESCO Group in conducting its operations. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year 2000, some level of
modification or even possibly replacement of such source code or applications
will be necessary. Pursuant to the Management Agreement, the Manager will bear
the costs associated with determining whether its systems are Year 2000
compliant and the costs of any necessary modifying or replacing its source code
or application, unless such systems are used solely for the Company's
operations. Given the information known at this time about the systems of the
AMRESCO Group and those of other parties upon which the Company intends to rely,
it is currently not anticipated that these "Year 2000" costs will have any
material adverse impact on the Company's business, financial condition or
results of operations. However, the Company will be dependent upon the AMRESCO
Group to determine that its systems and applications and those of other parties
utilized by it are "Year 2000" compliant.
 
     FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT WOULD
RESTRICT THE COMPANY'S OPERATING FLEXIBILITY. The Company at all times intends
to conduct its business so as not to become regulated as an investment company
under the Investment Company Act. Accordingly, the Company does not expect to be
subject to the restrictive provisions of the Investment Company Act. The
Investment Company Act excludes from regulation entities that are primarily
engaged in the business of purchasing or otherwise acquiring "mortgages and
other liens on and interests in real estate." Under the current interpretations
of the staff of the Commission, in order to qualify for this exception, the
Company must, among other things, maintain at least 55% of its assets directly
in Mortgage Loans and certain other qualifying liens on or interests in real
estate. In addition, unless certain MBS represent all the certificates issued
with respect to an underlying pool of Mortgage Loans, such securities may be
treated as securities separate from the underlying Mortgage Loans and, thus, may
not qualify as qualifying interests in real estate for purposes of the 55%
requirement. The Company's ownership of certain types of mortgage assets,
therefore, will be limited by the provisions of the Investment Company Act. If
the Company fails to qualify for exemption from registration as an investment
company, its ability to use leverage would be substantially reduced, and it
would be unable to conduct its business as described herein. Any such failure to
qualify for such exemption would have a material adverse effect on the Company.
 
     ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME COULD ADVERSELY AFFECT
SHAREHOLDERS. In general, dividend income that a Tax-Exempt Entity receives from
the Company should not constitute unrelated trade
 
                                       32
<PAGE>   39
 
or business income as defined in Section 512 of the Code ("UBTI"). If, however,
Excess Inclusion income were realized by the Company and allocated to
shareholders, such income cannot be offset by net operating losses and, if the
shareholder is a Tax-Exempt Entity, is fully taxable as UBTI under Section 512
of the Code and, as to foreign shareholders, would be subject to federal income
tax withholding without reduction pursuant to any otherwise applicable income
tax treaty. Excess Inclusion income would be generated if the Company were to
issue debt obligations with two or more maturities and the terms of the payments
on such obligations bore a relationship to the payments that the Company
received on its assets securing those debt obligations. The Company intends to
arrange its borrowings in a manner to avoid generating significant amounts of
Excess Inclusion income. Furthermore, certain types of Tax-Exempt Entities, such
as voluntary employee benefit associations and entities that have borrowed to
acquire their Common Shares, may be required to treat all or a portion of the
dividends they may receive from the Company as UBTI. See "Federal Income Tax
Consequences -- Taxation of Shareholders -- Taxation of Tax-Exempt
Shareholders."
 
                                       33
<PAGE>   40
 
                                USE OF PROCEEDS
 
   
     The net proceeds from the Offering are estimated to be approximately $277.7
million ($319.6 million if the Underwriters' over-allotment option is exercised
in full), assuming an initial public offering price of $15 per Common Share (the
mid-point of the range set forth on the cover page of this Prospectus). The
Company will receive an additional $33.3 million in net proceeds from the
Private Placement ($38.3 million if the Private Placement is fully increased as
a result of the exercise in full of the Underwriters' over-allotment option).
See "Private Placement."
    
 
   
     A portion of the net proceeds from the Offering (up to $101.0 million
(based on the committed amount) or 36.4% of the estimated net proceeds of the
Offering) is expected to be used by the Company to acquire the Initial Assets.
Up to an additional $10 million of the estimated net proceeds from the Offering
may be used for general corporate purposes, and the remaining balance of the
estimated net proceeds from the Offering (approximately $166.7 million), and the
net proceeds from the Private Placement, will be used by the Company to acquire
additional Targeted Investments.
    
 
   
     The Company intends temporarily to invest the net proceeds of the Offering
in interest-bearing investment-grade securities, guaranteed obligations of the
United States government or money-market funds until appropriate Targeted
Investments are identified and acquired. The Company presently intends to have
the net proceeds of the Offering fully invested in Targeted Investments within
12 months after the closing of the Offering. Pending full investment in the
desired mix of assets, funds will be committed to short-term investments that
are expected to provide a lower net return than the Company expects to achieve
from its Targeted Investments. See "Risk Factors -- Interest Rate Fluctuations
May Adversely Affect the Company's Investments and Operating Results" and "Risk
Factors -- Inability to Acquire or Delays in Acquiring Targeted Investments Will
Reduce Income to the Company."
    
 
                       DIVIDEND POLICY AND DISTRIBUTIONS
 
     The Company intends to make quarterly distributions to its shareholders
equal, on an annual basis, to at least 95% of the Company's REIT Taxable Income
(which does not ordinarily equal net income as calculated in accordance with
GAAP). The Company's dividend policy is subject to revision at the discretion of
the Board of Trust Managers. All distributions in excess of those required for
the Company to maintain REIT status will be made by the Company at the
discretion of the Board of Trust Managers and will depend on the earnings and
financial condition of the Company and such other factors as the Board of Trust
Managers deems relevant. See "Risk Factors -- The Company's Broad Discretion
Creates Uncertainty."
 
     In order to qualify as a REIT under the Code, the Company must make
distributions to its shareholders each year in an amount at least equal to (i)
95% of its REIT Taxable Income, plus (ii) 95% of the excess of the net income
from Foreclosure Property over the tax imposed on such income by the Code, minus
(iii) any excess noncash income. The "Taxable Income" of the Company for any
year means the taxable income of the Company for such year (excluding any net
income derived either from property held primarily for sale to customers or from
Foreclosure Property) subject to certain adjustments provided in the REIT
Provisions of the Code. "REIT Taxable Income" means Taxable Income, computed
without regard to the dividends paid deduction or any net capital gain. See
"Federal Income Tax Consequences -- Requirements For Qualification -- Annual
Distribution Requirements."
 
     It is anticipated that distributions generally will be taxable as ordinary
income to shareholders of the Company, although a portion of such distributions
may be designated by the Company as capital gain or may constitute a return of
capital. The Company will furnish annually to each of its shareholders a
statement setting forth distributions paid during the preceding year and their
characterization as ordinary income, return of capital or capital gains. For a
discussion of the federal income tax treatment of distributions by the Company,
see "Federal Income Tax Consequences -- Taxation of Shareholders."
 
                                       34
<PAGE>   41
 
                                 CAPITALIZATION
 
   
     The capitalization of the Company, as of February 2, 1998 and as adjusted
to reflect the sale of the Common Shares offered hereby and in the Private
Placement at an assumed initial public offering price of $15 per Common Share
(the mid-point of the range set forth on the cover page of this Prospectus), is
as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                              AS
                                                              ACTUAL    ADJUSTED(1)(2)
                                                              ------    --------------
<S>                                                           <C>       <C>
Shareholders' Equity:
Preferred Shares Authorized -- 50,000,000 shares
  Outstanding -- none.......................................
Common Shares, par value $.01 Authorized -- 200,000,000
  shares Outstanding -- 100 shares (as adjusted, 22,222,333
  shares)(1)................................................  $    1     $    222,223
     Additional Paid-in Capital.............................     999      333,112,272
                                                              ------     ------------
          Total.............................................  $1,000     $333,334,495
                                                              ======     ============
</TABLE>
    
 
---------------
 
   
(1) Before deducting underwriting discounts and commissions and Offering
    expenses payable by the Company (estimated to be approximately $1,300,000)
    and assuming no exercise of the Underwriters' over-allotment option and no
    corresponding increase in the number of Common Shares sold pursuant to the
    Private Placement. See "Private Placement."
    
 
(2) Includes 2,222,233 Common Shares subscribed for in the Private Placement.
    See "Private Placement." Does not include 3,333,350 Common Shares reserved
    for issuance under the Share Option Plan. See "Management of the Company."
 
                                       35
<PAGE>   42
 
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has no operating history. The Company's opening audited balance
sheet as of February 2, 1998, and related footnotes are presented elsewhere in
this Prospectus. The Management's Discussion and Analysis of Liquidity and
Capital Resources should be read in conjunction with such opening balance sheet
and related notes. The Company has been organized and will elect to qualify as a
REIT under the Code and, as such, anticipates distributing annually at least 95%
of its REIT Taxable Income. Cash for such distributions is expected to be
generated from the Company's operations, although the Company also may borrow
funds to make distributions. The Company's revenues will be derived from
ownership of real estate related assets. See "Business and Strategy."
 
   
     The principal sources of the Company's funds in the near term will be the
net proceeds of the Offering and the Private Placement and funds available under
the Warehouse Line and the Repurchase Agreement. Up to $101.0 million (based on
the committed amount), or 36.4% of the estimated net proceeds of the Offering,
is expected to be utilized to originate or acquire (and fully fund) the Initial
Assets. Up to an additional $10 million of the estimated net proceeds from the
Offering may be used for general corporate purposes. The remaining net proceeds
of the Offering ($166.7 million), together with the net proceeds of the Private
Placement and the funds expected to be available under the Warehouse Line and
the Repurchase Agreement ($700.0 million in the aggregate) will be used to
acquire additional Targeted Investments.
    
 
     The Company has obtained a commitment, subject to legal documentation, from
Prudential Securities Credit Corporation (an affiliate of Prudential Securities
Incorporated, the lead Underwriter) ("PSCC") pursuant to which PSCC will provide
to the Company a $400 million warehouse financing facility (the "Warehouse
Line") and a $100 million repurchase agreement (the "Repurchase Agreement"). The
Warehouse Line and the Repurchase Agreement are expected to close upon closing
of the Offering. See "Risk Factors -- Conflicts of Interest of Certain
Underwriters May Affect Offering" and "Underwriting."
 
     The Warehouse Line and the Repurchase Agreement are expected to have
initial terms of two years and to be renewable annually thereafter, subject to
certain conditions. The Company expects that it will renew the Warehouse Line
and the Repurchase Agreement or enter into similar or additional secured and
unsecured lending arrangements with institutional lenders in the future,
although there can be no assurances that the Company will be able to obtain
renewed or additional financing on acceptable terms. See "Risk Factors --
Leverage Increases Exposure to Losses."
 
     WAREHOUSE LINE. The Company expects to utilize the Warehouse Line to
provide financing for the origination or acquisition of Mortgage Loans. The
Warehouse Line is expected to bear interest at a floating rate of 1.0% to 1.5%
over LIBOR (depending upon the Loan-to-Value Ratios and the advance rate chosen
by the Company) and be secured by a first lien security interest in the Mortgage
Loans funded with the proceeds of the Warehouse Line.
 
     The Company intends to utilize the Warehouse Line and other similar
warehouse lending arrangements to finance Mortgage Loans until a sufficient
quantity is accumulated at which time they may be refinanced through
securitization or other financing. Mortgage Loans financed with proceeds from
the Warehouse Line will generally be required to be refinanced through a
securitization or otherwise within approximately nine months from the date that
the Mortgage Loan is placed in the facility. In order to comply with the REIT
Provisions of the Code, securitizations may be conducted through taxable
subsidiaries of the Company. See "Business and Strategy -- Operating Policies
and Guidelines -- Capital and Leverage Policies -- Securitizations," "Federal
Income Tax Consequences -- Requirements for Qualification -- Income Tests" and
"Federal Income Tax Consequences -- Proposed Tax Legislation and Possible Other
Legislative Actions Affecting Tax Consequences."
 
   
     Pursuant to the Warehouse Line, the Company will agree to engage PSI as
underwriter and/or placement agent for the sale or securitization, if any, of
Mortgage Loans financed with proceeds from the Warehouse Line, upon such terms
and conditions as are customary in comparable commercial Mortgage Loan
securitization transactions. See "Underwriting" and "Risk Factors -- Conflicts
of Interest of Certain Underwriters May Affect Offering."
    
 
                                       36
<PAGE>   43
 
   
     REPURCHASE AGREEMENT. The Company expects to utilize the $100 million
Repurchase Agreement to finance the purchase of MBS. The Repurchase Agreement is
expected to provide that the lenders will loan to the Company a varying
percentage of the market value of the purchased MBS, depending upon the credit
quality of the MBS. The Repurchase Agreement is expected to require payment of
interest at varying percentages of 0.20% to 1.75% over LIBOR, depending upon the
advance rate and the credit quality of the MBS.
    
 
   
     In the event the Company were to utilize all financing expected to be
available to it under the Warehouse Line and the Repurchase Agreement prior to
the issuance of any additional Common Shares or any Preferred Shares or other
equity investment in the Company, the Company would have total outstanding
indebtedness of $500 million and the Company's Leverage Ratio would be
approximately 1.5 to 1. See "Business and Strategy -- Operating Policies and
Guidelines -- Capital and Leverage Policies."
    
 
     The Company plans to raise additional funds for operations by leveraging
its Invested Portfolio, primarily through additional secured financings,
including reverse repurchase agreements, secured term loans, warehouse lines of
credit, securitizations, credit and liquidity facilities and other borrowing
arrangements, which management believes will be sufficient to enable the Company
to meet its anticipated liquidity and capital requirements in the long term. See
"Business and Strategy" and "Use of Proceeds."
 
                             BUSINESS AND STRATEGY
 
GENERAL
 
     The Company was recently organized to take advantage of certain mid- to
high-yield lending and investment opportunities in real estate related assets,
including various types of Mortgage Loans, MBS, commercial real estate and
certain other real estate related assets. The Company will elect to be taxed as
a REIT under the Code. The Company generally will not be subject to federal
income taxation to the extent that it distributes at least 95% of its REIT
Taxable Income to its shareholders and maintains its qualification as a REIT.
See "Federal Income Tax Consequences." The day-to-day operations of the Company
will be managed by the Manager subject to the direction and oversight of the
Board of Trust Managers, a majority of whom will be unaffiliated with the
AMRESCO Group. See "The Manager -- The Management Agreement."
 
   
     The Company intends to pursue and capitalize upon certain investment
opportunities arising within the AMRESCO Group which are currently referred to
entities unaffiliated with AMRESCO. Such investment opportunities (which may
include co-investment opportunities with members of the AMRESCO Group) arise
from the existing business and operations of the AMRESCO Group, including
primarily its commercial mortgage brokerage operations conducted through
Holliday Fenoglio Fowler and its commercial mortgage lending operations
conducted through AMRESCO Funding.
    
 
INDUSTRY TRENDS
 
     Management of the Company believes that fundamental structural changes are
occurring in the real estate capital markets, which have resulted in the shift
of investment capital and mortgage assets out of traditional lending and savings
institutions and into developing and growing new forms of mortgage banking and
mortgage investment firms, including those that qualify as REITs under the Code.
These opportunities are the result of the following developments, among other
factors:
 
     - SCALE AND ROLLOVER. The Mortgage Loan market in the United States has
       increased from $965 billion in 1980 to approximately $3.9 trillion in
       1996. Commercial real estate debt outstanding in the United States has
       increased from $955 billion in 1995 to approximately $1.1 trillion in
       1996. The Company believes that a significant amount of these commercial
       Mortgage Loans are scheduled to mature in the near future. The Company
       believes that significant rollover or maturity of commercial Mortgage
       Loans over the next several years will create demand for Bridge Loans and
       Mezzanine Loans which will be utilized to transition underlying assets
       for sale or long-term financing through either securitization or the
       private debt market.
 
                                       37
<PAGE>   44
 
   
     - RAPID GROWTH OF SECURITIZATION. The total amount of MBS currently
       outstanding has grown to approximately $1.9 trillion in 1996 from $1.0
       billion in 1980. The total amount of CMBS currently outstanding has grown
       to over $100 billion in 1996 from approximately $6 billion in 1990. The
       Company believes that as securitized lending continues to grow, demand
       for Mezzanine Loans will increase. Lenders originating commercial
       Mortgage Loans for securitization, as well as traditional lenders such as
       banks and insurance companies which are subject to regulatory constraints
       on their lending activities, have relatively inflexible underwriting
       standards, particularly with regard to Loan-to-Value Ratios. Mezzanine
       Loans are used to finance the portion of a real estate project's value
       (typically, the tranche equal to between 75% to 95% of total capitalized
       cost) which are typically not financed by lenders originating commercial
       Mortgage Loans for securitization or other traditional lenders. The
       Company believes that it is well-positioned to review a significant
       number of investment opportunities of this type through the AMRESCO
       Group, including primarily Holliday Fenoglio Fowler. See "Risk
       Factors -- Risks of Loss on Mortgage Loans."
    
 
   
     - GROWTH IN ECONOMY. The Company believes, given the current favorable
       ratio of supply to demand for commercial real estate in many real estate
       markets in the United States, that continued economic growth and job
       creation will result in the construction and rehabilitation of commercial
       real estate projects. Therefore, the Company intends to offer
       Construction Loans and Rehabilitation Loans to accommodate new
       development. The Company may also offer Construction Loans and
       Rehabilitation Loans together with Mezzanine Loans in order to deliver a
       convenient, single financing source to commercial real estate owners and
       developers. However, there can be no assurance that economic growth and
       job creation will continue and, accordingly, that sufficient demand will
       exist for Construction Loans, Rehabilitation Loans or other Mortgage
       Loans. See "Risk Factors -- Inability to Acquire or Delays in Acquiring
       Targeted Investments Will Reduce Income to the Company."
    
 
     The Company believes that it is well-positioned to capitalize on the
opportunities resulting from these changes in the real estate market because of
its relationship to the Manager and the other members of the AMRESCO Group and
the resulting access to necessary expertise and resources, and the experience
and unique business relationships of the key executives of the Manager. Further,
the Company believes that, as the foregoing trends continue and demand for
mortgage capital continues to increase, the REIT investment structure will be
the most efficient vehicle to finance such growth and afford the Company the
greatest access to capital, due to the tax advantages provided by the REIT
Provisions of the Code. See "Federal Income Tax Consequences." Finally, the
Company believes, based upon the experience of management of the Manager and the
AMRESCO Group in the real estate finance industry, that traditional providers of
debt and equity financing to the real estate industry have not (i) fully
recognized the changing environment, (ii) prepared for the changing environment,
(iii) recognized the need for more specialized Mortgage Loan products, or (iv)
developed the corporate infrastructure and management expertise to effectively
implement a business strategy designed to meet the demands and capitalize on the
opportunities developing in real estate lending and investment.
 
OBJECTIVE AND STRATEGY
 
     The Company's principal business objective is to maximize shareholder value
by producing cash flow for distribution to its shareholders through investment
in mid- to high-yield real estate related assets which earn an attractive spread
over the Company's cost of funds. To achieve its principal business objective,
the Company's strategy is to:
 
   
     - invest in certain types of assets, such as Participating Loans, Mezzanine
       Loans, Construction Loans, Rehabilitation Loans, Bridge Loans,
       Subordinated Interests in MBS, Net Leased Real Estate and Distressed Real
       Estate, which the Company expects to generate the highest risk-adjusted
       returns on capital invested, after considering all material relevant
       factors;
    
 
     - take advantage of expertise existing within, and investment and
       co-investment opportunities arising from the business and operations of,
       the AMRESCO Group by engaging the Manager, a member of
 
                                       38
<PAGE>   45
 
       the AMRESCO Group, to manage the day-to-day operations of the Company,
       and pursuant to the Right of First Refusal and the Correspondent
       Agreement;
 
     - utilize the expertise and resources of Holliday Fenoglio Fowler to
       monitor trends and demands in the Mortgage Loan and real estate markets
       and to adjust its Mortgage Loan products in response thereto in order to
       increase its ability to successfully compete for Targeted Investments;
 
     - through the Manager, capitalize upon the market research capabilities of
       the AMRESCO Group to analyze the Company's investment opportunities and
       the economic conditions in the Company's proposed geographic markets to
       assist the Company in selecting investments which satisfy the Company's
       investment criteria and targeted returns;
 
     - through the Manager, utilize the expertise of the AMRESCO Group in the
       underwriting, origination and closing of Mortgage Loans and in the
       acquisition, management and servicing of Mortgage Loans, Mortgage Loan
       portfolios and MBS;
 
     - borrow against or leverage its Invested Portfolio (initially through the
       Warehouse Line and the Repurchase Agreement), to the extent consistent
       with the Company's leverage policies, in order to increase the size of
       the Invested Portfolio and increase potential returns to the Company's
       shareholders;
 
     - attempt to offset the potential interest rate mismatch resulting from the
       differences between fixed rates or other limitations on coupon rate
       adjustments associated with its Invested Portfolio and the shorter-term
       variable nature of the Company's borrowings by structuring the key terms
       of its borrowings to generally correspond (in the aggregate for the
       entire Invested Portfolio, and not on an asset-by-asset basis) to the
       interest rate and maturity parameters of its Invested Portfolio;
 
   
     - implement various hedging strategies, including interest rate swaps,
       interest rate collars, caps or floors, forward contracts and U.S.
       Treasury and Eurodollar futures and options (to the extent permitted by
       the REIT Provisions of the Code), to minimize the effects of interest
       rate fluctuations on its Invested Portfolio and its borrowings if, given
       the cost of such hedges and the Company's desire not to jeopardize its
       status as a REIT, the Manager determines such strategies are in the best
       interest of the Company's shareholders; and
    
 
     - manage the credit risk of its Invested Portfolio by (i) extensively
       underwriting its investments utilizing the processes developed and
       utilized by the AMRESCO Group, (ii) selectively choosing its investments
       for origination or acquisition in compliance with the Company's
       investment policies, (iii) actively monitoring (through the servicing and
       asset management capabilities of the AMRESCO Group) the credit quality of
       the Invested Portfolio, and (iv) maintaining appropriate capital levels
       and allowances for credit losses.
 
OPERATING POLICIES AND GUIDELINES
 
     The Board of Trust Managers has established certain operating policies for
the Company. The Board of Trust Managers may, in its discretion, revise such
policies from time to time without shareholder approval. See "Risk
Factors -- The Company's Broad Discretion Creates Uncertainty." Such policies
include the Company's policies with respect to (i) investments, (ii) leveraging
of the Invested Portfolio, (iii) management of the credit risk of the Invested
Portfolio, (iv) management of the interest rate risks of the Invested Portfolio,
including its policies with respect to hedging of the Invested Portfolio, (v)
its relationship with the AMRESCO Group and (vi) compliance with certain legal
requirements, including the REIT Provisions of the Code.
 
     INVESTMENT POLICIES. The Manager is authorized in accordance with the terms
of the Management Agreement to make the day-to-day investment decisions of the
Company based on the Guidelines in effect from time to time. The investment
decisions of the Manager will include decisions to issue commitments on behalf
of the Company to originate or purchase Mortgage Loans, MBS, commercial real
estate and other
 
                                       39
<PAGE>   46
 
Targeted Investments. The Trust Managers will review all transactions of the
Company on a quarterly basis to determine compliance with the Guidelines.
 
   
     Pursuant to the Guidelines, the Company may invest in Mortgage Loans
(including, among others, Participating Loans, Mezzanine Loans, Construction
Loans, Rehabilitation Loans, Permanent Mortgage Loans and Bridge Loans), MBS,
commercial real estate (including Net Leased Real Estate, real estate acquired
at foreclosure or by deed-in-lieu of foreclosure or other underperforming or
Distressed Real Estate) and certain other real estate related assets. The
Company has no specific policy as to the percentages of its Invested Assets
which will be allocated to various categories of Targeted Investments. The
Company expects that its Invested Portfolio will include primarily those asset
types with respect to which the Manager and other members of the AMRESCO Group
have significant knowledge and/or experience. However, the Company intends to be
opportunistic in its approach to its investments and, therefore, the types of
real estate related assets that constitute Targeted Investments and the types
and percentages of any type of Targeted Investments contained in the Invested
Portfolio from time to time will change depending on market conditions. See
"Risk Factors -- The Company's Broad Discretion Creates Uncertainty." Similarly,
the Company expects that, with respect to Invested Assets which consist of
Mortgage Loans or commercial real estate, such Invested Assets (or the
underlying collateral) will generally be located in those geographic markets
with respect to which the Manager and the other members of the AMRESCO Group
have significant knowledge and/or experience. However, the Manager will have
broad discretion with respect to the geographic markets in which the Company
invests and such locations are expected to change from time to time depending
upon market conditions.
    
 
     The Manager's loan underwriters will be afforded flexibility and latitude
with respect to the size of any single asset in the Invested Portfolio or series
of assets in the Invested Portfolio. However, with respect to Mortgage Loans,
the Guidelines provide that the Manager will typically target Mortgage Loans
ranging in size from $10 million to $40 million and that, without the prior
approval of the Board of Trust Managers, the Company's investment in any one
Mortgage Loan may not exceed the greater of (i) $75 million in principal amount
or (ii) 10% of the Company's total consolidated assets. With respect to MBS,
without the prior approval of the Board of Trust Managers, the percentage of the
Company's total consolidated assets which may be invested in MBS at any time may
not exceed 40%. The Company may, in the future, in consultation with the Manager
and the Investment Committee, establish specified limitations or parameters on
the percentage of the Company's total consolidated assets invested in MBS that
relate to any one issuer. Assets in the Invested Portfolio may be originated by
the Company or acquired from third parties, including members of the AMRESCO
Group. To the extent the Company acquires assets from, or co-invests with,
members of the AMRESCO Group, such acquisition or co-investment will be made in
accordance with the Company's policies regarding transactions with the AMRESCO
Group. See "-- Relationship With AMRESCO."
 
   
     The Company intends, through the services of the Manager, to selectively
and extensively underwrite its Targeted Investments. The Company believes, due
to the nature of its Targeted Investments (typically higher risk, with higher
Loan-to-Value Ratios and more contingent returns than Permanent Mortgage Loans),
that the underwriting analysis and procedures will be more extensive and will
require a greater level of expertise than those required in connection with
other types of real estate related assets. The Company intends to utilize and
benefit from the expertise, processes and procedures developed by the AMRESCO
Group with respect to the underwriting of assets such as the Targeted
Investments. See "Risk Factors -- Dependence on the Manager and the AMRESCO
Group for Operations and the Lack of Experience of the Manager May Adversely
Affect Operating Results" and "-- Description of Targeted Investments."
    
 
     After the closing of the Offering, the Company will, in consultation with
the Manager, establish certain underwriting criteria for the Company's
investments. Such underwriting criteria, which will vary for each type of
Targeted Investment, will include, among others, required credit quality of the
prospective borrower, tenant or Mortgage Collateral, as applicable,
Loan-to-Value Ratios, loan structuring requirements and satisfaction of certain
due diligence requirements. See "-- Description of Targeted Investments" for a
general description of such underwriting criteria expected to be established
with respect to each type of Targeted Investment. Compliance with the Company's
underwriting criteria will be monitored by the Company's Chief Investment
Officer and will be reviewed annually by the Board of Trust Managers. The
Company's underwriting criteria
 
                                       40
<PAGE>   47
 
may be changed from time to time upon the recommendation of the Manager, with
the approval of the Investment Committee, based upon changes in market
conditions or Targeted Investments, the performance of the Invested Portfolio or
such other factors that the Manager and the Investment Committee or the Company
determines are appropriate.
 
     Although the Company intends to invest primarily in Mortgage Loans, MBS and
commercial real estate, the Company will take an opportunistic approach to its
investments and its business decisions will depend on changing market factors.
Thus, the Company cannot anticipate with any certainty the percentage of its
Invested Portfolio that will be invested in each category of Targeted
Investments. The Company has substantial discretion as to the manner in which it
may invest, leverage and hedge its assets. The Company may change any of its
policies without further shareholder approval. See "Risk Factors -- The
Company's Broad Discretion Creates Uncertainty."
 
   
     The Company presently intends to have the net proceeds of the Offering
fully invested in Targeted Investments within 12 months after the closing of the
Offering. Pending investment of the net proceeds of the Offering in the Targeted
Investments, the Company intends to invest the net proceeds of the Offering in
short-term interest bearing investment grade securities or guaranteed
obligations of the United States government until appropriate Targeted
Investments are identified and acquired. Such short-term investments are
expected to provide a lower net return than the Company expects to achieve from
its Targeted Investments. See "Risk Factors -- Inability to Acquire or Delays in
Acquiring Targeted Investments Will Reduce Income to the Company" and "Use of
Proceeds."
    
 
   
     CAPITAL AND LEVERAGE POLICIES. The Company intends to increase its Invested
Portfolio through the use of leverage. Initially, the Company intends to finance
its acquisition of Targeted Investments with the net proceeds of the Offering,
the net proceeds of the Private Placement, and with funds available under the
Warehouse Line and the Repurchase Agreement. In the future, the Company intends
to continue to borrow against or "leverage" its Invested Portfolio and use the
proceeds to acquire additional Targeted Investments. Such financings are
expected to include, among other things, reverse repurchase agreements,
securitizations of its Mortgage Loans and secured and unsecured loans. The
Company may also borrow on a long-term basis and issue additional shares as a
source of longer-term capital, including Preferred Shares or additional Common
Shares. See "Risk Factors -- Leverage Increases Exposure to Loss." The Company
intends to achieve a ratio of (i) total indebtedness with respect to which the
Company is the obligor, to (ii) the Company's total shareholders' equity
("Leverage Ratio") of 2:1 within 24 months after the closing of the Offering,
and currently intends thereafter to operate at a Leverage Ratio of less than
3:1, although the actual Leverage Ratio may be higher or lower from time to time
depending upon market conditions and other factors deemed relevant by the
Manager, subject to the review of the Board of Trust Managers. However, neither
the Declaration of Trust nor the Bylaws limit the amount of indebtedness the
Company can incur, and the Board of Trust Managers has discretion to deviate
from or change the Company's indebtedness policy at any time, without the
consent of the Company's shareholders. The Company intends to maintain an
adequate capital base to protect against various business environments in which
the Company's financing and hedging costs might exceed interest income (net of
credit losses) from its Invested Portfolio. These conditions could occur, for
example, due to credit losses or when, due to interest rate fluctuations,
interest income on the Invested Portfolio lags behind interest rate increases in
the Company's borrowings, which are expected to be predominantly variable rate.
See "Risk Factors -- Interest Rate Fluctuations May Adversely Affect the
Company's Investments and Operating Results." The Company may enter into hedging
transactions in an effort to protect its Invested Portfolio and related debt
from interest rate fluctuations. See "-- Financial Risk Management Policy."
    
 
     The Company expects to utilize a variety of debt vehicles (both secured and
unsecured) to execute its business strategy. Initially, the Company will utilize
proceeds from the Warehouse Line and the Repurchase Agreement and other
collateralized borrowings to finance the acquisition of Targeted Investments.
See "Management's Discussion and Analysis of Liquidity and Capital Resources."
 
     Warehouse Line. The Company intends to enter into the Warehouse Line upon
the closing of the Offering pursuant to which it expects to obtain up to $400
million of financing for the origination or acquisition
 
                                       41
<PAGE>   48
 
of Mortgage Loans. See "Management's Discussion and Analysis of Liquidity and
Capital Resources." The Warehouse Line is expected to bear interest at a
floating rate of 1.0% to 1.5% over LIBOR and to be secured by a first lien
security interest in the Mortgage Loans funded with the proceeds of the
Warehouse Line.
 
     The Warehouse Line and other warehouse lending arrangements will typically
be used to finance Mortgage Loans which will be accumulated until a sufficient
quantity is accumulated at which time they will be refinanced through
securitization or other financing.
 
     The Warehouse Line is expected to be renewable annually after the
expiration of its initial two year term (subject to certain conditions). The
Company intends to renew the Warehouse Line or enter into similar or additional
secured warehouse lending arrangements with institutional lenders in the future,
although there can be no assurances that the Company will be able to obtain
renewed or additional warehouse financing on acceptable terms. See "Risk
Factors -- Leverage Increases Exposure to Loss" and "Management's Discussion and
Analysis of Liquidity and Capital Resources."
 
     Repurchase Agreement. Upon the closing of the Offering, the Company intends
to enter into the Repurchase Agreement pursuant to which the Company may obtain
up to $100 million of financing for the purchase of MBS. See "Management's
Discussion and Analysis of Liquidity and Capital Resources." Reverse repurchase
agreements (including the Repurchase Agreement) are structured as sale and
repurchase obligations and have the economic effect of allowing a borrower to
pledge purchased CMBS as collateral securing short-term loans to finance the
purchase of such CMBS. Typically, the lender in a reverse repurchase arrangement
makes a loan in an amount equal to a percentage of the market value of the
pledged collateral. At maturity, the borrower is required to repay the loan and
the pledged collateral is released. The pledged assets continue to pay principal
and interest to the borrower.
 
   
     The Repurchase Agreement is expected to provide that the lender(s) will
loan to the Company varying percentages (typically ranging from 70% to 95%) of
the market value of the purchased MBS, depending upon the credit quality of the
MBS and the applicable advance rate. The Repurchase Agreement is expected to
require payment of interest at varying percentages (ranging from 0.20% to 1.75%)
over LIBOR, depending upon the credit quality of the MBS. The Repurchase
Agreement is expected to mature after two years at which time the Company
intends to extend or renew such Repurchase Agreement or enter into similar or
additional reverse repurchase agreements, although there can be no assurance
that the Company will be successful in obtaining any such extension or
replacement. See "Risk Factors -- Leverage Increases Exposure to Loss" and
"Management's Discussion and Analysis of Liquidity and Capital Resources."
    
 
     Warehouse lines and reverse repurchase agreements (including the Warehouse
Line and the Repurchase Agreement) typically require the Company to deposit
additional collateral or reduce its borrowings thereunder, if the market value
of the pledged collateral declines. This may require the Company to sell a
portion of its Invested Portfolio to provide such additional collateral or to
reduce its borrowings. The Company intends to maintain an equity cushion
sufficient to provide liquidity in the event of interest rate movements and
other market conditions affecting the market value of the pledged MBS. However,
there can be no assurance that the Company will be able to safeguard against
being required to sell a portion of its Invested Portfolio in the event of a
change in market conditions.
 
     Securitizations. The Company may obtain additional secured financing
through the securitization of all or any portion of its Mortgage Loans.
Securitization is the process of pooling Mortgage Loans and other fixed income
assets in a trust or other special purpose vehicle and issuing securities, such
as MBS or other debt securities, from the special purpose vehicle. The Company
expects that its securitizations will be accomplished primarily through the
issuance of structured debt with the Company retaining an equity interest in the
collateral. Under this approach, for accounting purposes, the securitized
Mortgage Loans will remain on the Company's balance sheet as assets and the debt
obligations (such as CMOs) will appear as liabilities. The proceeds of
securitizations by the Company will be used to reduce pre-existing borrowings
relating to such Mortgage Loans and to originate or acquire additional Mortgage
Loans. Issuing structured debt in this manner locks in potentially less
expensive, long-term, non-recourse financing that generally better matches the
terms of the Mortgage Loans and fixed income instruments serving as collateral
for such debt.
 
                                       42
<PAGE>   49
 
     The Company also may employ, from time to time, to the extent permitted by
the REIT Provisions of the Code, other forms of securitization under which a
"sale" of an interest in the Mortgage Loans occurs, and a resulting gain or loss
is recorded for accounting purposes at the time of sale. In a "sale"
securitization, only the net retained interest in the securitized Mortgage Loans
would remain on the Company's balance sheet. The Company may elect to conduct
certain of its securitization activities, including such sales, through one or
more taxable subsidiaries, as defined under the REIT Provisions of the Code,
formed for such purpose. In most cases, the special purpose vehicle would elect
to be taxed as a REMIC or a Financial Asset Securitization Investment Trust
("FASIT"). If a taxable subsidiary were formed, the Company would comply with
the current REIT ownership requirements under Section 856(c)(4) of the Code
whereby the Company's ownership would not exceed 10% of the voting securities of
such subsidiary and would not exceed 5% of the value of the Company's gross
assets. However, the ability to use a taxable subsidiary in this manner may be
limited or prohibited. See "Federal Income Tax Consequences--Requirements For
Qualification -- Income Tests" and "Federal Income Tax Consequences -- Proposed
Tax Legislation and Possible Other Legislative Actions Affecting Tax
Consequences."
 
     The Company may retain interests in the underlying Mortgage Loans which
will be subordinated with respect to payments of principal and interest on the
underlying Mortgage Loans to the classes of securities issued to investors in
such securitizations. Accordingly, any losses incurred on the underlying
Mortgage Loans will be applied first to reduce the remaining amount of the
Company's retained interest, until reduced to zero. Thereafter, the Company
would have no further exposure to losses.
 
     Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a master
servicing agreement with respect to such series of securities with an entity
acceptable to the Rating Agencies, that regularly engages in the business of
servicing Mortgage Loans (a "Master Servicer"). Currently the AMRESCO Group
engages in this business through AMRESCO Services. AMRESCO Services provided
Master Servicing for approximately $20.2 billion of loans as of December 31,
1997. See "The Manager -- Description of the AMRESCO Group." In order to
maintain its exclusion from regulation under the Investment Company Act, the
Company expects that it will retain the right to initiate, direct or forbear
from instituting foreclosure proceedings in connection with defaults on any of
the underlying Mortgage Loans and may retain AMRESCO Services, other affiliates
of the AMRESCO Group or other Special Servicers to maintain borrower performance
and to exercise available remedies, including foreclosure, at the direction of
the Company. See "Risk Factors -- Failure to Maintain Exclusion From the
Investment Company Act Would Restrict the Company's Operating Flexibility."
Pursuant to and in accordance with the Management Agreement, the expenses of all
Master Servicing will be borne by the Manager, and the expenses of all Special
Servicing will be borne by the Company. See "The Manager -- Expenses."
 
     The Company intends to structure any securitizations of its Mortgage Loans
so as to minimize the attribution of any Excess Inclusion income to the
Company's shareholders. See "Federal Income Tax Consequences -- Taxation of
Shareholders."
 
     Unsecured Financings. The Company may, at any time and from time to time in
the future, obtain financing on an unsecured basis. Such unsecured financings
(which will likely be in addition to the Company's secured financings) may
include unsecured lines of credit, medium or long-term notes or Preferred
Shares.
 
     CREDIT RISK MANAGEMENT POLICY. With respect to its Invested Portfolio, the
Company will be exposed to various levels of credit and special hazard risk,
depending on the nature of the investments. The Company's policy is to originate
or purchase Targeted Investments which satisfy the Company's underwriting
criteria, including standards as to credit quality, Loan-to-Value Ratios, loan
structuring requirements and other standards established by the Company to
manage its credit risk. It is the Company's policy generally not to loan in
excess of 90% of the stabilized value of a property (i.e., the value upon
completion of construction or renovation, or achievement of full occupancy (less
a small vacancy factor) and attainment of market rents) and generally for the
loan not to exceed 100% of the cost of the property (which may include budgeted
interest costs in the case of Construction Loans). In underwriting a Mortgage
Loan, the Manager will typically not require minimum debt service coverage.
Instead, the Manager will analyze and project economic returns to
 
                                       43
<PAGE>   50
 
the Company and the borrower. Pursuant to the Management Agreement, the Manager
will review and monitor credit risk and other risks of loss associated with each
investment.
 
     Pursuant to the Guidelines, the Manager will seek to diversify the
Company's Invested Portfolio to avoid undue geographic, borrower, issuer,
product type, industry and certain other types of concentrations. The Company
may, in the future (in consultation with the Investment Committee and the
Manager), establish specified limitations or parameters as to the foregoing
concentrations. In addition, with respect to the Company's MBS portfolio, the
Guidelines include the following risk control parameters: (i) investments (other
than the Company's initial MBS investments) should be made in a manner intended
to minimize overweighting of economic concentration as measured by the quotient
of the weighted average loan distribution (compared to the U.S. as a whole) of
the largest states divided by the size of the state's economy relative to the
entire U.S. economy; (ii) no single property type should represent more than 50%
of the Company's entire MBS portfolio without the prior approval of the Board of
Trust Managers (except for the Company's initial MBS investments); and (iii)
distribution of loan sizes should be expected to result in favorable loss
distributions (with large loans individually analyzed with respect to their
impact on the Company's position). Pursuant to the Guidelines, the Manager will
maintain one or more investment committee(s) (the "Investment Committee") which
will meet regularly to consider whether the Company should invest in specific
Targeted Investments. At least two-thirds of the members of such committee
present and voting at such meeting must vote in favor of a particular Targeted
Investment before the Targeted Investment may be purchased, acquired or
originated by the Company. The Board of Trust Managers will monitor the Invested
Portfolio and the credit risk associated therewith.
 
     The Manager will closely monitor the credit quality and performance of the
Invested Portfolio. Pursuant to the Guidelines, the Manager will implement a
portfolio review program to provide for periodic review of the Invested Assets
so that potential credit problems can be recognized and addressed at the
earliest opportunity. Pursuant to the portfolio review program, the Manager will
assign credit quality ratings to each Invested Asset (other than MBS), will
monitor the progress and effectiveness of corrective action that has been
implemented to improve the quality of any deteriorating credits and will monitor
the adequacy of loan loss reserves in effect from time to time. The Manager will
report to the Board of Trust Managers on a quarterly basis, as to the
performance of the Invested Portfolio as compared to budgets or projected
operating results and the credit quality status of the Invested Portfolio. To
the extent any investments become nonperforming, the Manager will analyze the
performance of such investments and develop a proposed course of action for
resolution or disposition of such investments. Such action may include engaging
a member of the AMRESCO Group to act as Special Servicer for such investments.
 
   
     FINANCIAL RISK MANAGEMENT POLICY. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. Pursuant to such policy, the Company intends, where appropriate,
to minimize its interest rate risk from borrowings by attempting to structure
the key terms of its borrowings to correspond generally (in the aggregate for
its entire Invested Portfolio, and not on an investment-by-investment basis) to
the interest rate and maturity parameters of its Invested Portfolio. The Company
intends to protect its Invested Portfolio against the effects of significant
interest rate fluctuations and to preserve the net income flows and capital
value of the Company. Specifically, the Company's acquisition and borrowing
strategies are intended to offset the potential adverse effects resulting from
the differences between fixed rates or other limitations on coupon rate
adjustment, such as interest rate caps, associated with its Invested Portfolio
and the shorter term predominantly variable nature of the Company's related
borrowings.
    
 
     In addition, the Company may, from time to time, enter into hedging
transactions to protect its Invested Portfolio from interest rate fluctuations
and other changes in market conditions. These transactions may include the
purchase or sale of interest rate swaps, interest rate collars, caps or floors,
forward contracts and U.S. Treasury and Eurodollar futures and options. It is
the Company's policy that these instruments be used to hedge as much of the
interest rate risk as the Manager determines is in the best interest of the
Company, given the cost of and risks involved with such hedges and the need to
maintain the Company's status as a REIT. See "Federal Income Tax
Consequences -- Requirements For Qualification -- Income Tests." The Company has
not established specific policies as to the extent of the hedging transactions
in which it will engage. However,
 
                                       44
<PAGE>   51
 
the Board of Trust Managers will from time to time review the extent and
effectiveness of hedging transactions conducted by the Company. The Manager may
elect to have the Company bear a level of interest rate risk that could
otherwise be hedged when the Manager believes, based on all relevant facts, that
bearing such risk is advisable.
 
     The Company's policy is to enter into hedging transactions only with
counterparties that have a current senior debt rating by either Standard &
Poor's or Moody's of "A" or better or an equivalent rating by one of the other
Rating Agencies. The Company will not enter into a hedging transaction with a
counterparty if the transaction will result in credit exposure exceeding certain
specified limits. If a counterparty's credit rating is downgraded below "BBB" by
Standard & Poor's or Moody's (or the equivalent) by one or more of the Rating
Agencies, the Company's policy is to require that the Manager take appropriate
actions to minimize risk, including obtaining collateral or some other form of
credit enhancement or terminating the transaction, if possible. The business
failure of a counterparty with which the Company has entered into a hedging
transaction will most likely result in a default, which may result in the loss
of unrealized profits and force the Company to cover its resale commitments, if
any, at the then current market price. Although generally the Company will seek
to reserve for itself the right to terminate its hedging positions, it may not
always be possible to dispose of or close out a hedging position without the
consent of the counterparty, and the Company may not be able to enter into an
offsetting contract in order to cover its risk. There can be no assurance that a
liquid secondary market will exist for hedging instruments purchased or sold,
and the Company may be required to maintain a position until exercise or
expiration, which could result in losses. See "Risk Factors -- Hedging
Transactions Can Limit Gains and May Increase Exposure to Losses."
 
     The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between the yield on the Invested Portfolio and the Company's borrowing costs
across a reasonable range of adverse interest rate environments. Capital
preservation refers to maintaining a relatively steady level in the market value
of the Company's capital across a reasonable range of adverse interest rate
scenarios. Pursuant to the Guidelines, to monitor and manage capital
preservation risk, the Manager will model and measure the sensitivity of the
market value of the Company's capital (i.e., the combination of its Invested
Portfolio, liabilities and hedging positions) to various changes in interest
rates in various economic scenarios. It is the Company's policy not to enter
into hedging transactions for speculative purposes or for purposes other than
managing identified business risks.
 
     The Company believes its hedging activities, when utilized, will provide a
level of income and capital protection against reasonable interest rate risks.
However, no strategy can insulate the Company completely from changes in
interest rates. See "Risk Factors -- Interest Rate Fluctuations May Adversely
Affect the Company's Investments and Operating Results."
 
  RELATIONSHIP WITH AMRESCO
 
     Right of First Refusal. Upon the closing of the Offering, AMRESCO will
grant the Right of First Refusal to the Company pursuant to which AMRESCO will
agree not to permit any member of the AMRESCO Group to invest in (i) the first
$100 million of Targeted Mortgage Loans which are identified by or to any member
of the AMRESCO Group during any calendar quarter, or (ii) any MBS, other than
MBS issued in securitizations sponsored in whole or in part by any member of the
AMRESCO Group. If the Company's Investment Committee determines that the Company
should not invest in any such asset, or should invest in only a portion of such
asset, any member of the AMRESCO Group would be permitted to invest in such
asset, or portion thereof. The Company believes that the Right of First Refusal
will minimize conflicts of interest and potential competition for Targeted
Investments between the Company and the AMRESCO Group.
 
     Correspondent Agreement. Upon the closing of the Offering, the Company will
enter into the Correspondent Agreement with Holliday Fenoglio Fowler pursuant to
which Holliday Fenoglio Fowler will agree, so long as the Manager or any other
member of the AMRESCO Group is acting as manager of the Company, to present to
the Company (on a nonexclusive basis) Mortgage Loan origination and other real
estate related investment opportunities identified by Holliday Fenoglio Fowler
which meet the investment criteria and
 
                                       45
<PAGE>   52
 
objectives of the Company. The Company expects that a substantial portion of its
Invested Portfolio will be identified through the mortgage brokerage operations
of Holliday Fenoglio Fowler and pursuant to the Correspondent Agreement.
 
   
     Acquisition or Co-Investment Opportunities. The Company expects to acquire
the Initial Assets from, and may acquire other Targeted Investments from, or
co-invest with members of the AMRESCO Group from time to time. Such transactions
will be upon such terms and conditions as may be agreed from time to time by the
Company and the AMRESCO Group. Pursuant to the Guidelines, the Company may
acquire Targeted Investments (other than MBS originated by members of the
AMRESCO Group) from members of the AMRESCO Group without prior approval from the
Independent Trust Managers, provided that the requirements as to terms and price
described below are satisfied, and provided further, that the purchase price of
any individual Targeted Investment or pool of Targeted Investments proposed to
be purchased at any one time (other than the Initial Assets) does not exceed the
greater of $75 million or 10% of the Company's total consolidated assets,
determined before the proposed acquisition. Any Targeted Investment proposed for
acquisition from a member of the AMRESCO Group which does not meet the criteria
set forth above may be purchased only with the prior approval of a majority of
the Independent Trust Managers (or a majority of the Independent Trust Managers
on any committee of the Board of Trust Managers). It is the Company's policy
that any MBS (including any Subordinated Interests) originated by members of the
AMRESCO Group may be purchased by the Company from a member of the AMRESCO Group
only pursuant to a competitive bidding process (which may include a public or
private offering) and only with the prior approval of a majority of the
Independent Trust Managers. See "Risk Factors -- Conflicts of Interest May
Result in Decisions That Do Not Fully Reflect the Shareholders' Best Interest."
    
 
     The Company expects to be able to purchase Targeted Investments from time
to time from members of the AMRESCO Group on the same or better terms as would
be available from third parties for similar investments in bona fide arms'
length transactions. If a Targeted Investment is being offered to the Company by
the AMRESCO Group at a price that is greater, or on terms that are less
favorable, than would be available from third parties for similar investments in
bona fide arms' length transactions, the Manager would be expected to recommend
that the Company decline to acquire that Targeted Investment at the quoted price
and terms, notwithstanding the relationship among the Company and the AMRESCO
Group.
 
     In deciding whether to approve an acquisition of, or an investment in, any
Targeted Investment, including Targeted Investments identified or offered by the
AMRESCO Group, the Manager may consider such information as it deems appropriate
to determine whether the acquisition is consistent with the Guidelines, such as
whether the price is fair, reflective of appropriate diversification and risk
levels and whether the Targeted Investment otherwise is suitable and in the best
interest of the Company. In addition, the Manager may consider, among other
factors, whether the acquisition of that Targeted Investment will enhance the
Company's ability to achieve or exceed the Company's risk adjusted target rate
of return, if any, whether the Targeted Investment otherwise is well-suited for
the Company and whether the Company financially is able to take advantage of the
investment opportunity presented thereby. There is no geographic limitation or
requirement of geographic diversification (either as to size, jurisdictional
boundary, zip code or other geographic measure) as to the real estate that
secures repayment of the Mortgage Loans, the real estate underlying the MBS, or
the commercial real estate in which the Company may invest. The only limitations
as to the Targeted Investments that the Company may acquire and the
characteristics thereof being limitations either (i) imposed by law, (ii) set
forth in the Guidelines or other policies of the Company, or (iii) with which
the Company must comply as a condition of maintaining both its status as a REIT
and its exemption from regulation under the Investment Company Act.
 
     The Manager will determine fair transfer prices for the Company's
acquisitions of Targeted Investments from members of the AMRESCO Group based on
Guidelines approved by the Independent Trust Managers. The Guidelines provide
that, when possible, the price that the Company will pay for any Targeted
Investments acquired from the AMRESCO Group will be determined with reference to
the prices most recently paid to the AMRESCO Group for similar investments,
adjusted for differences in the terms of such transactions and for changes in
market conditions between the dates of the relevant transactions. If no previous
sales of similar investments have occurred, the Company will attempt to
determine a market price for the Targeted
 
                                       46
<PAGE>   53
 
Investments by an alternative method, such as obtaining a broker's price opinion
or an appraisal, if it can do so at a reasonable cost. Investors should
understand, however, that such determinations are estimates and are not bona
fide third party offers to buy or sell.
 
   
     Pursuant to the Guidelines, the Company may co-invest with any member of
the AMRESCO Group, without prior approval from the Independent Trust Managers,
provided that the terms of the Company's investment are substantially similar to
the terms of the investment of the AMRESCO Group, except for such differences as
may be attributable solely to the size of the investment. Any potential
co-investments by the Company with any member of the AMRESCO Group which exceed
$15 million in the aggregate during any calendar year and which contemplate
investment terms which are different than those proposed for any member of the
AMRESCO Group will require the prior approval of a majority of the Independent
Trust Managers (or a majority of the Independent Trust Managers on any
authorized committee of the Board).
    
 
     It is the Company's policy that the agreements and transactions, including
the sale of or co-investment in any Targeted Investment between the Company on
the one hand and the AMRESCO Group on the other hand are fair to both parties.
However, there can be no assurance that any of such agreements and transactions
will be on terms at least as favorable to the Company as it could have obtained
from unaffiliated third parties.
 
     The Company anticipates that the price it pays for Targeted Investments
acquired from members of the AMRESCO Group, in certain cases, may be lower than
the price that a third party would pay for those investments if economic
benefits would inure to the AMRESCO Group by selling to the Company, rather than
a third party. For example, the AMRESCO Group generally would not incur any
broker's fees in connection with a sale of Mortgage Loans and MBS to the
Company. In addition, if AMRESCO and its affiliates engage in repetitive sales
of Targeted Investments to the Company, the form of purchase and sale agreement
used in the successive transactions is likely to contain standard terms and
conditions that previously will have been negotiated by the parties, which may
result in reduced legal and other transaction costs.
 
     COMPLIANCE POLICIES. As a requirement for maintaining REIT status, the
Company generally intends to distribute to the shareholders of the Company
aggregate dividends equaling at least 95% of its REIT Taxable Income each year.
See "Federal Income Tax Consequences -- Requirements For Qualification -- Annual
Distribution Requirements."
 
     The Company has adopted certain compliance policies, including restrictions
on acquiring, holding and selling Targeted Investments, to ensure that the
Company continues to qualify as a REIT. Pursuant to such policies, before
acquiring any Targeted Investment, the Manager will determine whether such
Targeted Investment would constitute a Qualified REIT Real Estate Asset under
the REIT Provisions of the Code. Substantially all of the Targeted Investments
that the Company intends to acquire are expected to be Qualified REIT Real
Estate Assets. The Guidelines require the Manager to regularly monitor the
Company's Invested Portfolio and the income generated from its Invested
Portfolio, including income from its hedging activities, in an effort to ensure
that at all times the Company maintains its qualification as a REIT. Pursuant to
the Guidelines, the Company has engaged a nationally recognized independent
public accounting firm to assist it in developing internal accounting and
testing procedures and to assist in monitoring and conducting quarterly
compliance reviews to determine compliance with the REIT Provisions of the Code.
See "Risk Factors -- Failure to Maintain REIT Status Would Have Adverse Tax
Consequences."
 
   
     The Company's policy is to operate in a manner that will not subject it to
regulation under the Investment Company Act. Accordingly, the Company may (i)
invest in the securities of other issuers for the purpose of exercising control
over such issuers, (ii) underwrite securities of other issuers, particularly in
the course of disposing of portions of the Invested Portfolio, (iii) originate
Mortgage Loans and (iv) issue securities in exchange for real estate or other
assets. See "Risk Factors -- Failure to Maintain Exclusion From the Investment
Company Act Would Restrict the Company's Operating Flexibility."
    
 
     FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Board of Trust Managers
has approved the operating policies and the strategies set forth in this
Prospectus. The Board of Trust Managers has the power to modify or waive such
policies and strategies without the consent of the shareholders of the Company
to the extent that the Board of Trust Managers determines that such modification
or waiver is in the best interest of the
 
                                       47
<PAGE>   54
 
Company or the shareholders of the Company. Among other factors, developments in
the market that affect the policies and strategies mentioned herein or which
change the Company's assessment of the market may cause the Board of Trust
Managers to revise its policies and strategies. See "Risk Factors -- The
Company's Broad Discretion Creates Uncertainty."
 
DESCRIPTION OF TARGETED INVESTMENTS
 
     The following types of real estate related assets currently constitute
Targeted Investments; however, the Company has broad discretion to vary the
types of real estate related assets which constitute Targeted Investments from
time to time (and to determine and vary from time to time the portion of the
Invested Portfolio invested or to be invested in any particular type of Targeted
Investment). See "Risk Factors -- The Company's Broad Discretion Creates
Uncertainty." Also, see "Risk Factors" for a discussion of certain of the risks
involved in connection with the Company's investments in the Targeted
Investments.
 
     MORTGAGE LOANS
 
   
          PARTICIPATING LOANS. The Company intends to originate or acquire
     Mortgage Loans secured by mortgages or deeds of trust on commercial real
     estate which will typically entitle the Company to receive a stated
     interest rate (which may be fixed or variable) plus a portion of the
     pledged real estate's revenues or cash flow, or a specified percentage or
     fixed amount of the net proceeds from any sale or refinancing of the
     pledged real estate. Such Participating Loans may be Construction Loans,
     Rehabilitation Loans, Bridge Loans, Mezzanine Loans or other types of
     Mortgage Loans.
    
 
   
          CONSTRUCTION LOANS AND REHABILITATION LOANS. The Company believes,
     given the current favorable ratio of supply and demand for commercial real
     estate in many real estate markets in the United States, that continued
     economic growth and job creation will result in the construction and
     rehabilitation of commercial real estate projects. Accordingly, the Company
     believes there are significant opportunities to invest in or provide
     Construction Loans and Rehabilitation Loans. The Company intends to make
     Construction Loans and Rehabilitation Loans of up to 100% of total project
     costs if the Construction Loan or Rehabilitation Loan is secured by a first
     lien mortgage, deed of trust or deed to secure debt, as collateral security
     for the borrower's obligations with respect to the Construction Loan or
     Rehabilitation Loan. The Company may receive a stated fixed or variable
     interest rate on the Construction Loan or Rehabilitation Loan, and a
     percentage of the increase in the fair market value of the property
     securing repayment of that Construction Loan or Rehabilitation Loan,
     payable upon maturity or refinancing of the applicable Construction Loan or
     Rehabilitation Loan or upon the sale of the property. The Company may also
     offer Construction Loans and Rehabilitation Loans together with Mezzanine
     Loans to deliver a convenient, single financing source to commercial real
     estate owners and developers.
    
 
   
          MEZZANINE LOANS. The Company intends to take advantage of
     opportunities to provide Mezzanine Loans on commercial real estate that is
     subject to first lien mortgage debt. The Company believes that there is a
     growing need for mezzanine capital (i.e., capital representing the level
     typically between 75% and 100% of property value or cost, dependent upon
     the type and structure of the proposed transaction) as a result of current
     commercial mortgage lending practices setting Loan-to-Value Ratio targets
     as low as 65%. For example, in the case of a commercial real estate project
     subject to a first lien Mortgage Loan with a principal balance equal to 70%
     of the cost of the property, the Company could lend the owner of the
     property (typically a partnership) an additional 15% to 30% of the cost of
     the property. The Company's Mezzanine Loans may take the form of
     subordinated Mortgage Loans, commonly known as second mortgages, or, in the
     case of Mezzanine Loans originated for securitization, partnership loans
     (also known as pledge loans), joint venture interests or equity
     investments. The Company believes that as a result of (i) the significant
     changes in the lending practices of traditional commercial real estate
     lenders, primarily relating to more conservative Loan-to-Value Ratios, and
     (ii) the significant increase in securitized lending with strict
     Loan-to-Value Ratios imposed by the Rating Agencies, there will be
     increasing demand for mezzanine capital by property owners.
    
 
          Typically, as security for a Mezzanine Loan, the borrower would pledge
     to the Company either the real estate subject to the first lien (giving the
     Company a second lien position) or the limited partnership
 
                                       48
<PAGE>   55
 
     and/or general partnership interest in the borrower. If the borrower's
     general partnership interest is pledged, then the Company would be in a
     position to assume the operation of the real estate pursuant to a
     foreclosure proceeding in the event of a default by the borrower. By
     borrowing against the additional value in the real estate, the borrower
     obtains an additional level of liquidity to apply to real estate
     improvements or alternative uses. Mezzanine Loans generally will provide
     the Company with the right to receive a stated interest rate on the
     Mezzanine Loan balance plus various commitment and/or exit fees. In certain
     instances, the Company will negotiate to receive a percentage of gross
     revenues or cash flows from the real estate, payable to the Company on an
     ongoing basis, and a percentage of any increase in value of the real
     estate, payable upon maturity or refinancing of the Mezzanine Loan, or the
     Company will otherwise seek terms to allow the Company to charge an
     interest rate that would provide an attractive risk adjusted return.
     Alternatively, the Mezzanine Loans can take the form of a non-voting
     preferred equity investment in a single-purpose entity borrower.
 
          The Company may originate or acquire Mezzanine Loans in connection
     with Permanent Mortgage Loans on the same real estate.
 
          BRIDGE LOANS. The Company intends to actively pursue opportunities to
     originate and fund Mortgage Loans to owners and developers of commercial
     and multifamily real estate who need interim or "bridge" financing until
     permanent financing can be obtained. Such Mortgage Loans generally are not
     intended to be "permanent" in nature, but rather are intended to be of a
     relatively short-term duration, with extension options as deemed
     appropriate, and generally require a balloon payment of principal and
     interest at maturity. Bridge Loans are intended to be higher-yield loans
     with higher interest rates and commitment fees than Permanent Mortgage
     Loans. Property owners or developers in the market for Bridge Loans
     include, but are not limited to, traditional property owners and operators
     who desire to acquire a property before it has received a commitment for a
     Permanent Mortgage Loan from a traditional commercial mortgage lender, or a
     property owner or investor who has an opportunity to purchase its existing
     mortgage debt or third party mortgage debt at a discount. In addition, the
     Company believes that, as a result of the recent increase in commercial
     real estate securitization, there are attractive opportunities to originate
     Bridge Loans to owners of mortgaged properties that are temporarily
     prevented, as a result of timing and structural reasons, from securing
     Permanent Mortgage Loans through securitization. Bridge Loans are generally
     exposed to a higher default risk as well as the risk of extension of
     principal repayment terms due to the need for refinancing and minimal
     principal amortization. As they are associated with transfers of equity
     ownership, property repositioning and tenant lease-up, Bridge Loans bear
     the risk that operating strategies may not be successful, economic
     conditions may deteriorate and competitors may undertake competing
     strategies.
 
          DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming
     Mortgage Loans or Subperforming Mortgage Loans secured by multifamily and
     commercial real estate. The Company may foreclose on such Mortgage Loans in
     an attempt to acquire title to the underlying Distressed Real Estate. If
     the Company acquires pools of Distressed Mortgage Loans (or pools of
     Mortgage Loans that are primarily Distressed Mortgage Loans), the Company's
     policy is that the due diligence to be performed before acquiring such
     Distressed Mortgage Loans or pools is to be substantially similar to the
     due diligence process described below in connection with the acquisition of
     performing pools of Mortgage Loans and in connection with the acquisition
     of Distressed Real Estate.
 
          REAL ESTATE POOLS. The Company may also acquire Mortgage Loans
     originated by or purchased from various suppliers of Mortgage Loans
     throughout the United States and abroad, such as savings and loan
     associations, banks, mortgage bankers, home builders, insurance companies
     and other mortgage lenders. The Company may acquire Mortgage Loans directly
     from originators and from entities holding Mortgage Loans originated by
     others.
 
          In considering whether to acquire a pool of Mortgage Loans, the
     Company's policy is to require that the Manager perform certain due
     diligence tasks on behalf of the Company that reasonably may be expected to
     provide relevant and material information as to the value of the Mortgage
     Loans within that pool and whether the Company should acquire that pool.
 
                                       49
<PAGE>   56
 
     The Company's policy is to acquire or originate Mortgage Loans only at
prices that are fair to the Company and that meet the Company's investment
criteria. In determining the price of a Mortgage Loan, the Company will require
that the Manager review and analyze a number of factors. These factors may
include market conditions, market interest rates, the availability of mortgage
credit and economic, demographic, geographic, tax, legal and other factors. They
also may include yield to maturity of the Mortgage Loan, the liquidity of the
Mortgage Loan, the limitations on the obligations of the seller with respect to
the Mortgage Loan, the rate and timing of payments to be made with respect to
the Mortgage Loan, the mortgaged property underlying the Mortgage Loan, the risk
of adverse fluctuations in the market values of that mortgaged property as a
result of economic events or governmental regulations, the historical
performance and other attributes of the property manager responsible for
managing the mortgaged property, relevant laws limiting actions that may be
taken with respect to Mortgage Loans and limitations on recourse against the
borrowers following realization on the collateral through various means, risks
of timing with respect to Mortgage Loan prepayments, risks associated with
geographic concentration of mortgaged property, environmental risks, pending and
threatened litigation, junior liens and other issues relating to title, a prior
history of real estate mortgage and other contractual defaults by affiliated
parties on similar and dissimilar obligations, and other factors.
 
     It is generally expected that when the Company acquires Mortgage Loans, the
seller will represent and warrant to the Company that there has been no fraud or
misrepresentation during the origination of the Mortgage Loans and it will agree
to repurchase any Mortgage Loan with respect to which there is fraud or
misrepresentation. The Company expects that it will provide similar
representations and warranties when the Company sells or pledges Mortgage Loans
as collateral for MBS. Although the Company will generally have recourse to the
seller for any loss resulting from the breach of the seller's representations
and warranties to the Company, the Company will generally be at risk for loss
due to credit quality and to the extent the seller does not perform its
repurchase obligations.
 
   
     The Company may retain a Subordinate Interest in the pools of Mortgage
Loans it securitizes and may acquire Subordinate Interests in pools of Mortgage
Loans securitized by others. The credit quality of Mortgage Loans and the MBS
utilizing Mortgage Loans as the underlying collateral depends on a number of
factors, including their Loan-to-Value Ratio, their terms and the geographic
diversification of the location of the real estate securing the Mortgage Loans
and, in the case of multifamily and commercial real estate, the creditworthiness
of tenants and debt service coverage ratios.
    
 
     MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS, primarily
non-investment grade classes of CMBS, from various sources. MBS typically are
divided into two or more interests, sometimes called "tranches" or "classes."
The senior classes are often securities which, if rated, would have ratings
ranging from low investment grade "BBB" to higher investment grades "A," "AA" or
"AAA." The junior, subordinated classes typically would include one or more
non-investment grade classes which, if rated, would have ratings below
investment grade "BBB." Such subordinated classes also typically include an
unrated higher-yield, credit support class (which generally is required to
absorb the first losses on the underlying Mortgage Loans).
 
     CMBS. CMBS generally are issued either as CMOs or Pass-Through
Certificates. CMOs are debt obligations of special purpose corporations, owner
trusts or other special purpose entities secured by commercial Mortgage Loans or
CMBS. Pass-Through Certificates evidence interests in trusts, the primary assets
of which are Mortgage Loans. CMO bonds and Pass-Through Certificates may be
issued or sponsored by private originators of, or investors in, Mortgage Loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and other entities. CMBS are not guaranteed by an entity having
the credit status of a governmental agency or instrumentality and are generally
structured with one or more of the types of credit enhancement described below.
In addition, CMBS may be illiquid. See "Risk Factors -- Risks Related to
Investments in MBS."
 
     In most commercial Mortgage Loan securitizations, a series of CMBS is
issued in multiple classes in order to obtain investment-grade credit ratings
for the senior classes and thus increase their marketability. Each class of CMBS
may be issued with a specific fixed or variable coupon rate and has a stated
maturity or
 
                                       50
<PAGE>   57
 
final scheduled distribution date. Principal prepayments on the Mortgage Loans
comprising the collateral (i.e., mortgage pass-through securities or pools of
whole Mortgage Loans securing or backing a series of CMBS) ("Mortgage
Collateral") may cause the CMBS to be retired substantially earlier than their
stated maturities or final scheduled distribution dates. Although, with respect
to commercial Mortgage Loans, there generally are penalties for or limitations
on the ability of the borrower to prepay the Mortgage Loan. Interest is paid or
accrued on CMBS on a periodic basis, typically monthly.
 
     The credit quality of CMBS depends on the credit quality of the underlying
Mortgage Collateral. CMBS are collateralized generally by a more limited number
of commercial or multifamily Mortgage Loans with larger principal balances than
those of single-family Mortgage Loans. As a result, a loss on a single Mortgage
Loan underlying a CMBS will have a greater negative effect on the yield of such
CMBS, especially the Subordinated Investments in such CMBS.
 
     Among the factors determining the credit quality of the Mortgage Collateral
will be the ratio of the Mortgage Loan balances to the value of the properties
securing the Mortgage Loans, the purpose of the Mortgage Loans (e.g.,
refinancing or new purchase), the amount of the Mortgage Loans, their terms, the
geographic diversification of the location of the real estate securing the
Mortgage Loans, and the creditworthiness of tenants.
 
     The principal of and interest on the underlying Mortgage Loans may be
allocated among the several classes of CMBS in many ways, and the credit quality
of a particular class results primarily from the order and timing of the receipt
of cash flow generated from the underlying Mortgage Loans. Subordinated
Interests in CMBS carry significant credit risks. See "Risk Factors -- Risks
Related to Investments in MBS." Typically, in a "senior-subordinated" structure,
the Subordinated Interests provide credit protection to the senior classes by
absorbing losses from Mortgage Loan defaults or foreclosures before such losses
are allocated to more senior classes. Moreover, typically as long as the more
senior classes of securities are outstanding, all prepayments on the Mortgage
Loans generally are paid to those senior classes, at least until the end of a
lock-out period, which typically is four years or more. In some instances,
particularly with respect to Subordinated Interests in commercial Mortgage Loan
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior classes are paid
in full or until the end of a lock-out period. Because of this structuring of
the cash flows from the underlying Mortgage Loans, Subordinated Interests in a
typical securitization are subject to a substantially greater risk of
non-payment than are those more senior classes. Accordingly, the Subordinated
Interests are assigned lower credit ratings, or no ratings at all. Neither the
Subordinated Interests nor the underlying Mortgage Loans are guaranteed by
agencies or instrumentalities of the United States government or by other
governmental entities and accordingly are subject, among other things, to credit
risks. See "Risk Factors -- Risks Related to Investments in MBS."
 
     As a result of the typical "senior-subordinated" structure, the
Subordinated Interests will be extremely sensitive to losses on the underlying
Mortgage Loans. Accordingly, the holder of the Subordinated Interest is
particularly interested in minimizing the loss frequency (the percentage of the
Mortgage Loan balances that default over the life of the Mortgage Collateral)
and the loss severity (the amount of loss on defaulted Mortgage Loans, i.e., the
principal amount of the Mortgage Loan unrecovered after applying any recovery to
the expenses of foreclosure and accrued interest) on the underlying Mortgage
Loans.
 
   
     Losses on the Mortgage Collateral underlying the Company's MBS will depend
upon a number of factors, many of which will be beyond the control of the
Company or the applicable servicer. Among other things, the default frequency on
the Mortgage Collateral will reflect broad conditions in the economy generally
and real property particularly, economic conditions in the local area in which
the underlying mortgaged real estate is located, the Loan-to-Value Ratio of the
Mortgage Loan, the purpose of the Mortgage Loan, and the debt service coverage
ratio (with respect to commercial and multifamily Mortgage Loans). The loss
severity on the Mortgage Collateral will depend upon many of the same factors
described above, and will also be influenced by certain legal aspects of
Mortgage Loans that underlie the MBS acquired by the Company, including the
servicer's ability to foreclose on the defaulted Mortgage Loan and sell the
underlying Mortgaged Collateral. Various legal issues affect the ability to
foreclose on a Mortgage Loan or sell the Mortgaged
    
 
                                       51
<PAGE>   58
 
Collateral. These legal issues may extend the time of foreclosure proceedings or
may require the expenditure of additional sums to sell the underlying Mortgage
Collateral, in either case increasing the amount of loss with respect to the
Mortgage Loans.
 
     In considering whether to acquire MBS, the Company's policy is to
determine, in consultation with the Manager, the scope of review to be performed
before the Company acquires that MBS, which will be designed to provide to the
Company such information regarding the MBS as the Company and Manager determine
to be relevant and material to the Company's decision regarding the acquisition
of the MBS. The Company's policy generally is to require that the Manager
perform due diligence substantially similar to that described above in
connection with the acquisition of performing Mortgage Loans. The due diligence
may include an analysis of (i) the underlying collateral pool, (ii) the
prepayment and default history of the Mortgage Loans previously originated by
the originator, (iii) cash flow analyses under various prepayment and interest
rate scenarios (including sensitivity analyses) and (iv) an analysis of various
default scenarios. The Company also may request that the Manager determine and
advise the Company as to the price at which the Manager would recommend
acquisition of the MBS by the Company, and the Manager's reasons for such
advice. However, which of these characteristics (if any) are important and how
important each characteristic may be to the evaluation of a particular MBS
depends on the individual circumstances. Because there are so many
characteristics to consider, each MBS must be analyzed individually, taking into
consideration both objective data as well as subjective analysis.
 
   
     With respect to CMBS, the Manager will use sampling and other appropriate
analytical techniques to determine on a loan-by-loan basis which Mortgage Loans
will undergo a full-scope review and which Mortgage Loans will undergo a more
streamlined review process. Although the choice is a subjective one,
considerations that influence the choice for scope of review often include
Mortgage Loan size, debt service coverage ratio, Loan-to-Value Ratio, Mortgage
Loan maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a site inspection,
tenant-by-tenant rent roll analysis, review of historical income and expenses
for each property securing the Mortgage Loan, a review of major leases for each
property (if available); recent appraisals (if available), engineering and
environmental reports (if available), and the price paid for similar CMBS by
unrelated third parties in arm's length purchases and sales (if available) or a
review of broker price opinions (if the price paid by a bona fide third party
for similar CMBS is not available and such price opinions are available). For
those Mortgage Loans that are selected for the more streamlined review process,
the Manager's evaluation may include a review of the property operating
statements, summary loan level data, third party reports, and a review of prices
paid for similar CMBS by bona fide third parties or broker price opinions, each
as available. If the Manager's review of such information does not reveal any
unusual or unexpected characteristics or factors, no further due diligence will
be performed.
    
 
     Many of the MBS to be acquired by the Company will not have been registered
under the Securities Act, but instead initially will have been sold in private
placements. These MBS will be subject to restrictions on resale and,
accordingly, will have substantially more limited marketability and liquidity.
 
     Many special purpose trusts or corporations that issue multi-class MBS
elect to be treated, for federal income tax purposes, as REMICs. The Company may
acquire not only MBS that are treated as regular interests in REMICs, but also
those that are designated as REMIC Residual Interests or as Non-REMIC Residual
Interests. The cash flow generated by the Mortgage Loans underlying a series of
CMOs is first applied to the required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
Residual Interests generally receive excess cash flows, if any, after making the
foregoing payments. Unlike regular interests, CMO Residuals typically generate
Excess Inclusion income or other forms of Taxable Income (including the
accretion of market discount) that bear no relationship to the actual economic
income that is generated by a REMIC. CMO Residuals that are required to report
taxable income or loss, but receive no cash flow from the Mortgage Loans are
called "Non-Economic". To the extent permitted by the REIT Provisions of the
Code, the Company may conduct any purchases and sales of CMO Residuals in a
fully taxable corporate subsidiary to prevent the liability for Excess Inclusion
income from being passed to the Company's shareholders. See "Federal Income Tax
Consequences -- Taxation of Shareholders -- Taxation of Taxable U.S.
Shareholders" and "Federal Income
 
                                       52
<PAGE>   59
 
Tax Consequences -- Proposed Tax Legislation and Possible Other Legislative
Actions Affecting Tax Consequences."
 
     Any securitizations effected by the Company will generally create a
Residual Interest. If the residual is a Non-Economic Residual Interest, the
Company may incur a negative purchase price to dispose of it, or the Company may
retain it in a fully taxable corporate subsidiary. See "-- Operating Policies
and Guidelines -- Capital and Leverage Policies -- Securitizations."
 
     Subordinated Interests generally are issued at a significant discount to
their outstanding principal balance, which gives rise to OID for federal income
tax purposes. The Company will be required to accrue the OID as taxable income
over the life of the related MBS on a level-yield method whether or not the
Company receives the related cash flow. See "Federal Income Tax
Consequences -- Requirements For Qualification -- Annual Distribution
Requirements."
 
     The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act generally exempts entities
that are "primarily engaged in purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). The
Company intends to rely on current interpretations by the staff of the
Commission in an effort to qualify for this exemption. To comply with the
foregoing guidance, the Company, among other things, must maintain at least 55%
of its assets in Qualifying Interests and also may be required to maintain an
additional 25% in Qualifying Interests or other real estate-related assets.
Generally, the Mortgage Loans in which the Company may invest constitute
Qualifying Interests. While certain MBS may not constitute Qualifying Interests,
the Company may seek to structure such investments in a manner in which the
Company believes such interests may constitute Qualifying Interests. The Company
may seek, where appropriate, to obtain foreclosure rights or other similar
arrangements (including rights to control the oversight and management of the
resolution of such Mortgage Loans by workout or modification of loan provisions,
foreclosure, deed in lieu of foreclosure or otherwise, and to control decisions
with respect to the preservation of the collateral generally, including property
management and maintenance decisions with respect to the underlying Mortgage
Loans, however, there can be no assurance that it will be able to do so on
acceptable terms. As a result of obtaining such rights, the Company believes
that the related MBS will constitute Qualifying Interests for purposes of the
Investment Company Act. The Company does not intend, however, to seek an
exemptive order, no-action letter or other form of interpretive guidance from
the Commission or its staff on this position. Any decision by the Commission or
its staff advancing a position with respect to whether such MBS constitute
Qualifying Interests that differs from the position taken by the Company could
have a material adverse effect on the Company. See "Risk Factors -- Failure to
Maintain Exclusion From the Investment Company Act Would Restrict the Company's
Operating Flexibility."
 
     RMBS. The Company may also acquire interests, including Subordinated
Interests, in RMBS. Such RMBS will consist primarily of securities backed by
"non-conforming" Mortgage Loans, that is, single-family Mortgage Loans secured
by liens on residential property that do not qualify for sale to GNMA, FNMA or
FHLMC. Typically, non-conforming Mortgage Loans do not meet agency guarantee
criteria because their principal balances exceed agency limits. Sometimes the
Mortgage Loans or the borrower do not meet other agency credit underwriting
standards. In addition, such RMBS may include Agency Certificates primarily
issued by GNMA, FNMA or FHLMC, which represent interests in fixed rate or
adjustable rate Mortgage Loans secured primarily by liens on single-family
(one-to-four units) residential property.
 
     The process of a single-family Mortgage Loan securitization is similar to
the process of a commercial Mortgage Loan securitization. As in CMBS, a typical
RMBS series allocates the cash flow on the underlying Mortgage Loans so that the
Subordinated Interests shield the more senior classes from losses due to
defaults on the underlying residential Mortgage Loans, resulting in
substantially greater credit risk to the Subordinated Interests.
 
     In addition to creating credit support for the more senior classes, another
general goal in allocating cash flows from the Mortgage Loans to the various
classes of a securitization, particularly an RMBS issuance, is to create certain
tranches on which the expected cash flows have a higher degree of predictability
than the cash
 
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<PAGE>   60
 
flows on the underlying Mortgage Loans. As a general matter, the more
predictable the cash flow is on a particular RMBS tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on certain other RMBS. As part of the process of
seeking to create more predictable cash flows on certain tranches of a
non-conforming Mortgage Loan securitization, one or more tranches generally must
be created that absorb most of the changes in the cash flows from the Mortgage
Collateral. The yields on these tranches generally are higher than prevailing
market yields on MBS with similar expected average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of, and
yields on, these tranches are more volatile.
 
     Although Subordinated Interests in RMBS bear substantial credit risk,
because of the structuring of cash flows typically provided in RMBS
transactions, such Subordinated Interests generally tend to be less subject to a
substantial prepayment risk. Typically, all prepayments of principal are
allocated to the more senior, generally investment-grade, RMBS classes (for at
least five years for fixed-rate Mortgage Loans and ten years for adjustable-rate
Mortgage Loans) in order to increase the outstanding percentage of
subordination. After this initial period during which prepayments are shifted to
the more senior RMBS classes, prepayments then are made pro rata or more likely
phased in over a five-year period until all classes are receiving their pro rata
share. The net effect on the subordinated classes is a degree of call protection
because the principal amounts of the subordinated classes are not reduced by
prepayments of the Mortgage Loans, generally for at least five years. The
structuring of cash flows generally creates a Subordinated Interest in RMBS with
a longer but more predictable average life.
 
     The Company may also acquire interests, including Subordinated Interests,
in RMBS secured by lower credit quality Mortgage Loans known as "B," "C" and "D"
Mortgage Loans. B, C and D Mortgage Loans are made to borrowers who have credit
histories of a lower overall quality than "A" borrowers. These credit histories
generally result from previous repayment difficulties, brief job histories,
previous bankruptcies or other causes. The loan-to-value ratio for a B, C and D
Mortgage Loan is typically significantly lower than the loan-to-value ratio of
an "A" Mortgage Loan, and the pass-through coupon of a B, C and D Mortgage Loan
is typically higher than the coupon on an A Mortgage Loan. Although the Company
does not currently anticipate investing in such RMBS, the Company may, in the
future, consider investing in these types of RMBS in the event and to the extent
the Company determines that market conditions or yields on such investments
justify accepting the higher credit risk.
 
     COMMERCIAL REAL ESTATE. The Company intends to invest in commercial real
estate, including properties which are newly developed, to be built, Net Leased
Real Estate, REO Properties or other Distressed Real Estate. Such investment may
be made directly by the Company or through partnerships or other entities formed
with other parties, including members of the AMRESCO Group. The Company may also
form one or more partnerships, the limited partnership interests in which would
be convertible into Common Shares, for the purpose of enabling the Company to
acquire real estate or interests therein from real estate owners on a tax
deferred basis in exchange for such real estate or interests therein.
 
     Net Leased Real Estate. The Company intends to invest in Net Leased Real
Estate on a leveraged basis. Net Leased Real Estate is generally defined as real
estate that is net leased on a long-term basis (i.e., ten years or more) to
tenants who are customarily responsible for paying all costs of owning,
operating, and maintaining the leased property during the term of the lease, in
addition to the payment of a monthly rent to the landlord for the use and
occupancy of the premises. The Company expects to acquire Net Leased Real Estate
on a leveraged basis that will provide sufficient cash flow to provide an
attractive return on its investment therein after debt service. Although the
time during which the Company will hold Net Leased Real Estate will vary, the
Company anticipates holding most Net Leased Real Estate for more than ten years,
although there are no assurances that it will do so. The Company will focus on
Net Leased Real Estate that is either leased to creditworthy tenants or is real
estate that can be leased to other tenants in the event of a default of the
initial tenant. See "Risk Factors -- Risks Related to Investments in Real
Estate -- Tenant Defaults and Bankruptcy May Cause Losses."
 
     The Company expects to have the tax depreciation associated with such
investments to offset the non-cash accrual of interest on certain MBS and
Mortgage Loans, including the OID generally associated with
 
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<PAGE>   61
 
either MBS that are issued at a discount from par or Participating Loans and the
"phantom" taxable income associated with other MBS derivatives.
 
     REO Properties and Other Distressed Real Estate. The Company believes that
under appropriate circumstances the acquisition of multifamily and commercial
real estate, including REO Properties and other Distressed Real Estate, may
offer significant opportunities to the Company. The Company's policy will be to
cause the Manager to conduct an investigation and evaluation of the real estate
proposed to be purchased before purchasing such real estate. Prior to purchasing
real estate, the Manager generally will obtain and analyze rent and sale
comparables for the real estate contemplated to be acquired. The Manager will
either obtain a Phase I environmental assessment or review a previously obtained
Phase I environmental assessment (if available) for each property prior to its
acquisition by the Company. This information will be used to supplement other
due diligence that will be performed by the Manager's employees.
 
     The Company's policy generally is to request that the Manager include
within its due diligence review and analysis of the real estate contemplated to
be acquired by the Company a review of market studies for each geographic market
designated by the Company in which the real estate proposed to be purchased is
concentrated. The Company may request that such studies include area economic
data, employment trends, absorption rates and market rental rates. The Company's
policy is that such due diligence analyses generally also include (i) site
inspections of significant properties (and, if the Company determines that such
a review will be cost-effective, a random sampling of less significant
properties) and (ii) a review of all property files and documentation that are
made available to the Company or the Manager. The Company generally will require
that the Manager's review include, to the extent possible, examinations of
available legal documents, litigation files, correspondence, title reports,
operating statements, appraisals, engineering reports and environmental reports,
among other due diligence items.
 
     The Company's policy is that the process of determining the fair market
value of real estate is to utilize those procedures that the Company and the
Manager deem relevant for the specific real estate being evaluated, which
procedures need not be the same for each property being evaluated. Sources of
information that may be examined in determining the fair market value of a
property may include one or more of the following: (a) current and historical
operating statements; (b) existing or new appraisals; (c) sales comparables; (d)
industry statistics and reports regarding operating expenses; (e) existing
leases and market rates for comparable leases; (f) deferred maintenance observed
during site inspections or described in structural and engineering reports; and
(g) correspondence and other documents and memoranda found in the files of the
seller of that real estate or other relevant parties.
 
     The Manager is expected to develop projections of net operating income and
cash flows taking into account lease rollovers, tenant improvement costs and
leasing commissions. The Manager will compare its estimates of revenue and
expenses to historical operating statements and estimates provided in appraisals
and general industry and regional statistics. Market capitalization rates and
discount rates are then applied to the cash flow projections to estimate values.
These values are then compared to available appraisals and market sale
comparables to determine recommended bid prices for each property. The amount
offered by the Company generally will take into account projected holding
periods, capital costs and projected profit expectations, and will be the price
that the Manager estimates is sufficient to generate an acceptable risk-
adjusted return on the Company's investment.
 
     After the Company acquires Distressed Real Estate, the Company's goal will
be to improve management of that property so as to increase its cash flow. See
"Risk Factors -- Risks Related to Investments in Real Estate -- Reliance on
Third Party Operators May Adversely Affect Results." If cash flows can be
increased and the net operating income stabilized, the Company may seek an
opportunity to sell the real estate. The length of time the Company will hold
Distressed Real Estate may vary considerably from property to property, and will
be based in part on the Manager's analysis and conclusions as to the best time
to sell some or all of them and will be subject to certain limitations imposed
by the REIT Provisions of the Code.
 
     OTHER INVESTMENTS. The Company may also pursue a variety of complementary
commercial real estate and finance-related businesses and investments in
furtherance of its investment policies and strategies. Such activities may
include, but are not limited to, foreign real estate-related asset investments
and investing in (or
 
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<PAGE>   62
 
lending to) other REITs and similar companies. Any lending with regard to the
foregoing may be on a secured or an unsecured basis and will be subject to risks
similar to those attendant to investing in Mortgage Loans, MBS and commercial
real estate. The Company seeks to maximize yield by managing credit risk through
credit underwriting, although there can be no assurance that the Company will be
successful in this regard.
 
     Investment in Other Entities. The Company may acquire equity interests or
make other investments in other REITs, registered investment companies,
partnerships and other investment funds and real estate operating companies to
the extent permitted by the REIT Provisions of the Code when the Manager
believes that such purchase will yield attractive returns on capital employed.
When the stock market valuations of such companies are low in relation to the
market value of their assets, such stock purchases can be a way for the Company
to acquire an interest in a pool of Targeted Investments at an attractive price.
The Company may also decide in the future to pursue business acquisition
opportunities that it believes will complement the Company's operations.
 
     Foreign Investments. The Company may acquire or originate Mortgage Loans to
foreign borrowers secured by real estate located outside the United States or
may acquire such real estate. The Company intends that any such investments in
real estate or Mortgage Loans secured by real estate located in foreign
countries will be primarily in countries in which the AMRESCO Group conducts
business or has invested or made Mortgage Loans in the past (currently Canada,
the United Kingdom and Mexico). Investing in real estate related assets located
in foreign countries creates risks associated with the uncertainty of foreign
laws and markets and risks related to currency conversion. The Company may
attempt to mitigate such currency risks, to the extent practicable, depending on
the nature of the investment. For example, the Company may originate Mortgage
Loans or acquire Net Leased Real Estate which require payments or are otherwise
denominated in U.S. dollars. The Company may be subject to foreign income tax
with respect to its investments in foreign real estate related assets. However,
any foreign tax credit that otherwise would be available to the Company for U.S.
federal income tax purposes will not flow through to the Company's shareholders.
 
THE INITIAL ASSETS
 
   
     To date, the Company has identified five Mortgage Loans to purchase or
originate with the proceeds of the Offering, subject to, among other things, the
review and approval of the Company's Investment Committee. See "Risk
Factors -- Risks of Loss on the Initial Assets." There can be no assurance that
any of such Mortgage Loans will be purchased or originated by the Company. Each
of the Initial Assets is currently owned (if the Mortgage Loan is currently
existing) or being negotiated (if the Mortgage Loan has not yet been originated)
by AMRESCO Funding. With respect to each Initial Asset which is originated by
AMRESCO Funding prior to the closing of the Offering, the Company has issued a
non-binding commitment to purchase such Initial Asset from AMRESCO Funding, and
AMRESCO Funding has agreed to sell such Initial Asset to the Company, for an
amount equal to the aggregate outstanding principal balance thereof as of the
date of purchase, plus accrued and unpaid interest to the date of purchase. With
respect to Initial Assets which are not originated prior to the closing of the
Offering, AMRESCO Funding has agreed to transfer its rights to originate such
Mortgage Loans to the Company after the closing of the Offering, without charge,
if the Company's Investment Committee determines that the Company should
originate the proposed loans. If the Company purchases any Initial Asset from
AMRESCO Funding, AMRESCO Funding will pay to the Company the unamortized portion
of any loan origination fee paid to AMRESCO Funding by the applicable borrower
(typically equal to 1% to 2% of the committed amount of the loan), less AMRESCO
Funding's actual cost in underwriting and closing such loan. Each of the
Mortgage Loans included in the Initial Assets is or is expected to be
non-recourse to the applicable borrower, and each borrower is or is expected to
be a newly formed or to-be-formed special purpose entity with no operating
history and no significant assets other than the property pledged to secure the
applicable Mortgage Loan.
    
 
   
     Loan One. The first Mortgage Loan identified for purchase by the Company
with the net proceeds of the Offering ("Loan One") is a $6 million non-recourse
Rehabilitation Mezzanine Loan secured by a second lien on a 956,114
(approximate) square foot mixed-use development located in north-central
Columbus, Ohio. The improvements securing Loan One were built in 1973, are
located on 59 acres and include 117,181 square
    
 
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<PAGE>   63
 
feet of office space, 160,376 square feet of retail space, a 125,000 square foot
athletic club, a 28,723 square foot food court/French market and 596
multi-family apartment units.
 
   
     Loan One was originated by AMRESCO Funding on February 20, 1998. Of the $7
million committed amount, $6 million was funded at the closing of the loan.
Funded proceeds of Loan One were used by the borrower to fund a portion of the
purchase price for the mortgaged property. The remaining $17 million of the
purchase price for the mortgaged property was furnished to the borrower by
Credit Suisse First Boston Mortgage Capital LLC (an affiliate of one of the
Underwriters), which has a first lien on the mortgaged property.
    
 
     Loan One bears interest at 15% per annum. Payments of interest only are due
monthly commencing April 1, 1998, until the loan is paid in full. All principal,
and all remaining accrued and unpaid interest on the loan, are due on March 31,
2001. Certain of the borrower's excess cash flow is required to be applied
toward payments of principal and interest on the loan. In addition to a second
lien on the mortgaged real property, Loan One is also secured by a pledge of the
partnership interests of each partner in the borrower and limited guaranties of
the three owners of the general partner of the borrower.
 
   
     The borrower is in the process of formulating a business plan to redevelop
the mortgaged real property. The borrower's tentative 3-year redevelopment
budget is approximately $23 million. In the event that AMRESCO Funding (or its
assignee) does not commit to provide the redevelopment financing by May 1, 1998,
it must advance an additional $1 million to the borrower on May 1, 1998 to fund
deferred maintenance costs. If AMRESCO Funding (or its assignee) provides the
redevelopment financing for the mortgaged real property, prepayments on Loan One
are generally prohibited until February 20, 1999 (except for certain payments
required to be made out of excess cash flow). The loan documents governing Loan
One contain standard representations and warranties by the borrower, including
customary representations regarding environmental matters, compliance with laws,
the payment of taxes and the maintenance of insurance.
    
 
     Pursuant to the intercreditor agreement between Credit Suisse First Boston
Mortgage Capital LLC and AMRESCO Funding regarding Loan One, AMRESCO Funding (or
its assignee) is prohibited from foreclosing on the mortgaged real property
without the consent of Credit Suisse First Boston Mortgage Capital LLC, or from
accepting payments on Loan One while the first lien loan is in default, but has
rights to cure defaults or purchase the first lien loan in the event of a
default thereunder.
 
   
     Loan Two. The second Mortgage Loan which the Company has identified for
purchase or origination with the net proceeds of the Offering ("Loan Two") is a
proposed $12.8 million non-recourse Participating Construction Loan for the
acquisition of approximately 10.2 acres of land located in a master planned
residential community near Houston, Texas and the construction thereon of a 236
unit multi-family apartment property. AMRESCO Funding has issued a terms letter
dated March 30, 1998 (the "Loan Two Terms Letter") to originate Loan Two. The
proposed borrower has paid a good faith deposit for the loan in the amount of
$20,000, and AMRESCO Funding and the proposed borrower are currently negotiating
loan documents. However, there can be no assurance that Loan Two will be closed
and funded.
    
 
   
     The Loan Two Terms Letter provides that the proposed Loan Two would bear
interest at an accrual rate of 11.5% per annum and be due and payable monthly at
a pay rate of 10% per annum. Certain excess cash flow would be required to be
applied to the payment of accrued and unpaid interest. All principal, and all
accrued and unpaid interest, would be due 24 months after the closing of the
loan. Prepayments would not be permitted during the first year, other than out
of proceeds from an approved sale, or from certain excess cash flow. In
addition, the Loan Two Terms Letter provides that the lender would be entitled
to 60% of the net profits, if any, from the sale or refinancing of the mortgaged
property (calculated after the loan has been paid in full) until the lender has
received a return of 18% per annum. The Loan Two Terms Letter also provides that
the lender would have a first right of refusal on long-term take-out financing
for the mortgaged property.
    
 
   
     The Loan Two Terms Letter contemplates that AMRESCO Funding (or its
assignee) would provide up to $1.85 million of the total loan amount to finance
the acquisition of the land, commence construction and finance closing costs.
The balance of the loan proceeds would be disbursed according to the
construction budget, subject to customary retainage, upon AMRESCO Funding's (or
its assignee's) satisfaction with the
    
 
                                       57
<PAGE>   64
 
   
completion of the subject construction and the performance by the borrower of
certain customary conditions. The Loan Two Terms Letter requires the borrower to
maintain a minimum of $150,000 cash equity in the property, to cover all cost
overruns and to defer management fees of $389,000 until the loan is paid. In
addition to a first lien on the apartment property, Loan Two would also be
secured by all ownership interests in the borrower and the limited guaranties of
the principals. The borrower would be required to make customary representations
and warranties, including customary representations concerning environmental
matters, compliance with laws, the payment of taxes and the maintenance of
insurance.
    
 
   
     Loan Three. The third Mortgage Loan which the Company has identified for
purchase or origination with the net proceeds of the Offering ("Loan Three") is
a proposed $40 million non-recourse Rehabilitation Loan for the acquisition and
renovation of a 403,000 (approximate) square foot office/research and
development building located in Massachusetts. AMRESCO Funding has issued a
commitment for Loan Three dated March 31, 1998 (the "Loan Three Commitment").
The borrower has paid a good faith deposit in the amount of $150,000 for Loan
Three. AMRESCO Funding and the borrower are currently negotiating loan terms and
AMRESCO Funding is performing its underwriting. However, there can be no
assurance that Loan Three will be closed and funded. The Loan Three Commitment
provides that the proposed Loan Three would bear interest at a rate of 10.5% per
annum and have an initial term of 24 months. Prepayments would not be permitted
during the first year, other than out of proceeds from an approved sale, or from
certain excess cash flows. The Loan Three Commitment contemplates that AMRESCO
Funding (or its assignees) would make an initial advance under the loan in the
amount of approximately $10 million, and subsequent advances for project costs
as they are incurred. The Loan Three Commitment requires the borrower to
maintain approximately 19% equity.
    
 
     The property proposed to secure Loan Three is part of an 83 acre facility
formerly owned by Continental Assurance Company and operated by Raytheon
Electronic Systems, a division of Raytheon Company ("Raytheon") from 1955 to
1995. An environmental site assessment which included extensive subsurface soil
and groundwater testing, was conducted by Raytheon in 1996. The environmental
site assessment disclosed the presence of asbestos-containing materials ("ACM")
in certain of the buildings located on the subject property, hydrocarbon
concentrations above reportable limits impacting what appeared to be a limited
area of soil, a release of No. 6 fuel oil from a 20,000-gallon underground
storage tank that had been removed in 1992, and the presence of oil and
hazardous material ("OHM") containing metals and volatile organic compounds,
including polychlorinated biphenyls and polynuclear aromatic hydrocarbons in
drywells on the property. Significantly lower levels of OHM were also detected
in catch basins and within wetland sediments adjacent to the property. Impact at
the drywells has been abated by Raytheon through soil removal actions conducted
as Limited Response Actions performed under the requirements imposed by
Massachusetts Contingency Plan regulations.
 
   
     The environmental site assessment concluded that the release of No. 6 fuel
oil did not pose an eminent hazard and that the groundwater contamination
associated with the release had a low potential to impact current public water
supplies. The assessment also indicated that Raytheon was to conduct a Limited
Response Action to remove the hydrocarbons detected in the property. As part of
the rehabilitation costs associated with the property, the proposed borrower on
Loan Three has budgeted approximately $550,000 to remediate the contamination
associated with the release of the No. 6 fuel oil and approximately $300,000 to
abate the ACM. Further due diligence regarding the environmental condition of
the property and compliance with the requirements of the Massachusetts
Contingency Plan requirements will be conducted during the underwriting of Loan
Three. However, should the due diligence not detect any other significant
environmental problems and Loan Three closes as currently anticipated, no
assurance can be given that such due diligence will have identified all areas of
potential impact to soil, groundwater or other media or that the actual costs to
remediate any contamination that is or has been detected will not exceed the
costs estimated at the time the loan is closed. The discovery of unknown
environmental conditions or increased costs could limit the ability of the
Company to recover all of its interest and/or principal on Loan Three and may
expose the Company to additional liability. As a condition to the origination of
Loan Three, the Company would require that the borrower indemnify the Company
for any environmental liability or other losses incurred by the Company as a
result of any environmental problem associated with the real property securing
Loan Three; however there can
    
 
                                       58
<PAGE>   65
 
   
be no assurance that the borrower will have the ability to satisfy any such
indemnification obligation. See "Risks Related to Investments in Real
Estate -- Real Estate With Hidden Environmental Problems Will Increase Costs and
May Create Liability for the Company," "Risk Factors -- Real Estate With Known
Environmental Problems May Create Liability for the Company" and "Risk
Factors -- Risks of Loss on Initial Assets."
    
 
   
     Loan Four. The fourth Mortgage Loan which the Company has identified for
purchase or origination with the net proceeds of the Offering ("Loan Four") is a
$14.7 million non-recourse Participating Mezzanine Construction Loan for the
construction of an 11 story multi-tenant office building containing 300,887
(approximate) net rentable square feet and an adjoining five level parking
structure located in a suburb of Dallas, Texas. Loan Four includes a $2.45
million interest reserve.
    
 
   
     Loan Four was originated by AMRESCO Funding on March 30, 1998. Loan Four
bears interest at an accrual rate of 12% per annum. Payments of interest only
are due and payable monthly at a pay rate of 10% per annum. A portion of excess
cash flow will be applied to payment of accrued and unpaid interest until the
lender has received a 12% return. Any remaining operating cash flow will be
applied to the principal balance of Loan Four and any excess may be retained by
the borrower. In addition, Loan Four provides that the lender will receive 100%
of any appreciation in the value of the mortgaged real property until the lender
has achieved a 15% per annum return. After the borrower has received a 15%
return on its equity,then the lender is entitled to a 30% interest in the
appreciation in value of the project until the lender achieves a 20% per annum
return on its investment and, finally, the lender will then be entitled to a 20%
interest in any appreciation in the value of the project, with a maximum 25% per
annum return to the lender. All principal and accrued and unpaid interest,
including any shared appreciation contingent interest, will be due and payable
on March 30, 2001. The borrower has two extension options of one year each,
subject to satisfaction of certain conditions, including reaching certain
leasing parameters and the payment of a 1% extension fee.
    
 
   
     Construction of the improvements will be financed with a $26 million first
lien senior Construction Loan to be made by Guaranty Federal Bank, FSB, the
Company's Mezzanine Loan of $14.7 million and a borrower equity contribution of
approximately $5.2 million. The developer has provided a completion guaranty and
a limited guaranty of certain recourse carve-outs. Pursuant to the intercreditor
agreement between Guaranty Federal Bank, FSB and AMRESCO Funding, AMRESCO
Funding is prohibited from accepting payments on Loan Four while the first lien
loan is in default, but has rights to cure defaults or purchase the first lien
loan in the event of a default thereunder. Loan proceeds will be disbursed
according to the construction budget, subject to customary retainage, upon
AMRESCO Funding's (or its assignee's) satisfaction with the completion of the
subject construction and the performance by the borrower of certain customary
conditions. The documents governing Loan Four contain certain customary
representations and warranties, including customary representations concerning
environmental matters, compliance with laws, the payment of taxes and the
maintenance of insurance.
    
 
   
     Loan Five. The fifth Mortgage Loan which the Company has identified for
origination or purchase with the net proceeds of the Offering ("Loan Five") is a
proposed $26.5 million non-recourse senior Participating Mortgage Loan for the
acquisition of a four-building industrial office complex located on 173 acres in
Portsmouth, Rhode Island, and containing 769,551 (approximate) net rentable
square feet, and the completion of certain tenant improvements, renovations and
lease-up of the project. AMRESCO Funding has issued a commitment dated April 13,
1998 (the "Loan Five Commitment") to originate Loan Five and AMRESCO Funding and
the borrower are currently negotiating loan documents while AMRESCO Funding
completes its underwriting process. There can be no assurance that Loan Five
will close or be funded.
    
 
   
     Loan Five is proposed to bear interest at an accrual rate of 13.5% per
annum and be due and payable monthly at a pay rate of 10% per annum. All
principal, and all accrued and unpaid interest, would be due 36 months from the
closing of Loan Five. All of cash flow from operations from the property after
the payment of certain approved operating expenses would be required to be
applied to pay accrued and unpaid interest and to fund certain required
reserves. In addition, the lender would be entitled to a 20% interest in any
proceeds from the sale or refinancing of the project (which are in excess of all
principal and pay rate interest payments
    
 
                                       59
<PAGE>   66
 
   
on Loan Five, payment to the borrower of a 10% return on borrower's equity and
the payment of any unreturned borrower's equity), until the lender has achieved
a 20% per annum return.
    
 
   
     A portion of the loan proceeds equal to $24.7 million would be used by the
borrower to purchase the real property. The remainder of the loan proceeds would
be used to finance tenant improvements ("TI"), renovations and lease-up. The
portion of the loan amount allocated to TI, renovations and leasing would be
required to be disbursed according to budget, subject to customary retainage and
other customary procedures.
    
 
   
     As conditions to the origination of Loan Five, the borrower would be
required to maintain a minimum of $1.4 million in equity, and at least 440,000
square feet would be required to be preleased to an approved tenant pursuant to
an approved triple net lease. In addition to a first lien on the property, the
Company would have a security interest in all ownership interests of the
borrower, and the limited guaranties of certain principals of the borrower of
certain recourse carve-outs. Prepayments would be prohibited for the first 12
months after the closing of Loan Five, and the borrower would be required to
grant to AMRESCO Funding (or its assignee) the first right to negotiate to
provide a Permanent Mortgage Loan to refinance Loan Five. Finally, the borrower
would be required to make customary representations concerning environmental
matters, compliance with laws, the payment of taxes and the maintenance of
insurance.
    
   
    
 
                                       60
<PAGE>   67
 
   
     Set forth below is a summary of certain of the material terms of the
Initial Assets, as currently proposed.
    
   
    
   
<TABLE>
<CAPTION>
                                                                   LOCATION OF                              ACCRUAL
                                       MAXIMUM      LOAN AMOUNT    REAL ESTATE   GENERAL DESCRIPTION OF  INTEREST RATE
                       LOAN TYPE(1)  LOAN AMOUNT   FUNDED TO DATE   COLLATERAL   REAL ESTATE COLLATERAL   (PER ANNUM)
                       ------------  -----------   --------------  -----------   ----------------------  -------------
<S>                    <C>           <C>           <C>             <C>           <C>                     <C>
Loan One               Rehabilitation $7.0 million $6.0 million    Ohio          956,114 sq ft (approx)  15%
                       Mezzanine                                                 mixed use facility
                       Loan                                                      built in 1973
                                                                                 (including office
                                                                                 space, retail space,
                                                                                 an athletic club,
                                                                                 a food court and 598
                                                                                 apartments)
Loan Two(2)            Participating $12.8         (2)             Texas         (To be built) 236-unit  11.5% (plus
                       Construction  million                                     apartment complex       shared
                       Loan                                                      located on 10.2 acres   appreciation
                                                                                                         capped at 18%
                                                                                                         return)
Loan Three(3)          Rehabilitation $40.0        (3)             Massachusetts 403,000 (approx) sq ft  10.5%
                       Loan          million                                     office/R&D building
                                                                                 built in 1955
Loan Four              Participating $14.7         $1,000          Texas         (To be built) 11        12% (plus
                       Mezzanine     million                                     story, 300,887          shared
                       Construction                                              (approx) sq ft          apprecia-
                       Loan                                                      multi-tenant office     tion capped
                                                                                 building                at 25%
                                                                                                         return)
Loan Five(4)           Participating $26.5         (4)             Rhode Island  A four building         13.5% (plus
                       Loan          million                                     industrial/R&D/ office  shared
                                                                                 complex on 173 acres    appreciation
                                                                                 built circa 1958 and    capped at 20%
                                                                                 containing 769,551      return)
                                                                                 (approx) net rentable
                                                                                 sq ft
 
<CAPTION>
                                           PAYMENT SCHEDULE
                                      --------------------------
                       MATURITY DATE    INTEREST     PRINCIPAL        PREPAYMENTS      ADDITIONAL COLLATERAL
                       -------------  ------------  ------------      -----------      ---------------------
<S>                    <C>            <C>           <C>           <C>                  <C>
Loan One               03/31/2001     Monthly(5)    All due at    Prohibited until     Ownership interests
                                                    maturity(5)   February 20,         in borrower; limited
                                                                  1999(6) (unless      guarantees of
                                                                  lender does not      recourse carve-outs
                                                                  provide permanent
                                                                  financing)
 
Loan Two(2)            24 months      Monthly at a  All due at    Prohibited for the   Ownership interests
                       from close(2)  pay rate of   maturity(5)   first 12 months(6)   in borrower; limited
                                      10% per                                          guarantees of
                                      annum;                                           recourse carve-outs
                                      deferred                                         and of completion and
                                      interest due                                     cost overruns
                                      at
                                      maturity(5)
Loan Three(3)          24 months      Monthly(5)    All due at    Prohibited for the   Ownership interests
                       from close(3)                maturity(5)   first 12 months(6)   in borrower; limited
                                                                                       guarantees of
                                                                                       recourse carve-outs
                                                                                       and of completion and
                                                                                       cost overruns
Loan Four              3/30/2001      Monthly at a  All due at    Prohibited for the   Ownership interests
                                      pay rate of   maturity(5)   first 18 months(6)   in borrower; limited
                                      10% per                                          guarantees of
                                      annum;                                           recourse carve-outs
                                      deferred                                         and of completion and
                                      interest due                                     cost overruns
                                      at
                                      maturity(5)
Loan Five(4)           36 months      Monthly at a  All due at    Prohibited for the   Ownership interests
                       from close(4)  pay rate of   maturity(5)   first 12 months(6)   in borrower; limited
                                      10% per                                          guarantees of
                                      annum;                                           recourse carve-outs
                                      deferred                                         and of completion and
                                      interest due                                     cost overruns
                                      at
                                      maturity(5)
</TABLE>
    
 
---------------
 
   
(1) Each of the Initial Assets is (or will be) non-recourse to the applicable
    borrower, and each borrower is (or is expected to be) a newly formed or
    to-be-formed special purpose entity with no operating history and no
    significant assets other than the property pledged to secure the applicable
    Mortgage Loan.
    
 
   
(2) Loan Two is currently being negotiated. It is expected to close in
    approximately May 1998; however, there can be no assurance that Loan Two
    will close.
    
 
   
(3) Loan Three is currently being negotiated. It is expected to close in
    approximately April 1998; however, there can be no assurance that Loan Three
    will close.
    
 
   
(4) Loan Five is currently being negotiated. It is expected to close in
    approximately May 1998; however, there can be no assurance that Loan Five
    will close.
    
 
   
(5) Or earlier upon a prior approved sale of the property. Earlier payments are
    also required out of excess cash flow.
    
 
   
(6) Except for payments required out of excess cash flow.
    
 
                                       61
<PAGE>   68
 
EMPLOYEES
 
     The Company initially expects not to have any employees other than
officers, each of whom will also be employees of the Manager. See "Management of
the Company" and "The Manager."
 
FACILITIES
 
     The executive offices of the Company, the Manager and AMRESCO are located
at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
 
LEGAL PROCEEDINGS
 
     There are no pending legal proceedings to which the Company is a party or
to which any property of the Company is subject.
 
                           MANAGEMENT OF THE COMPANY
 
EXECUTIVE OFFICERS AND TRUST MANAGERS OF THE COMPANY
 
     The executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
NAME                                 AGE                         POSITION
----                                 ---                         --------
<S>                                  <C>   <C>
Mark D. Gibson.....................  38    President and Chief Executive Officer
Thomas J. Andrus...................  40    Executive Vice President and Chief Financial Officer
Rebecca Kuban......................  42    Executive Vice President and Chief Investment Officer
Jonathan S. Pettee.................  38    Executive Vice President and Chief Operating Officer
Michael L. McCoy...................  42    Senior Vice President, General Counsel and Secretary
John M. Jumonville.................  38    Vice President and Treasurer
Thomas R. Lewis....................  35    Vice President and Controller
</TABLE>
 
     Mark D. Gibson is President and Chief Executive Officer of the Company and
a member of the Board of Trust Managers. Mr. Gibson also serves as President and
Chief Executive Officer of the Manager and as President of Holliday Fenoglio
Fowler. Mr. Gibson joined Holliday Fenoglio Fowler in 1984 and served at
Holliday Fenoglio Fowler in various capacities until becoming President in April
1996. Prior to joining Holliday Fenoglio Fowler, Mr. Gibson was employed by Bank
of the Southwest in various capacities from 1981 to 1984, including Vice
President of Commercial Lending. Mr. Gibson holds a B.B.A. degree in Finance
from The University of Texas.
 
     Thomas J. Andrus is Executive Vice President and Chief Financial Officer of
both the Company and the Manager. Since May 1995, Mr. Andrus has also served as
Vice President and Treasurer of AMRESCO, where his primary responsibilities
include financing, capital raising, investor relations, asset liability
management, cash management, insurance and strategic planning. Mr. Andrus has
been employed by the AMRESCO Group in various capacities since 1987, including
Managing Director of Asset Marketing (with responsibility for directing the
marketing activities for loan and real estate assets) and Director and Senior
Vice President of Asset Management (with responsibility for directing the
management and liquidation of distressed commercial and real estate loans).
Prior to 1987, Mr. Andrus was employed by KPMG Peat Marwick, as Manager in the
Management Consulting Department, and NationsBank of Texas in various capacities
including Senior Vice President of Special Assets and Vice President of
Commercial Lending. Mr. Andrus holds a B.S. degree in Finance from Trinity
University and an M.B.A. degree from Texas A&M University.
 
                                       62
<PAGE>   69
 
     Rebecca Kuban is Executive Vice President and Chief Investment Officer of
both the Company and the Manager. Until March 1998, Ms. Kuban served as the
Senior Credit Officer of the commercial finance group of the AMRESCO Group (see
"The Manager -- Description of the AMRESCO Group"), with responsibilities for
various business lines, including the high-yield real estate lending group of
AMRESCO Funding. As one of the core group of senior officers of AMRESCO Funding
from its inception in 1995, her primary responsibilities were business
development, production, underwriting, training, management and leadership of
the staff responsible for high-yield real estate lending and structured finance.
Ms. Kuban, who has 15 years of real estate lending related experience, has been
with AMRESCO in various capacities since 1989, including being a manager in
AMRESCO's "Commercial Real Estate Owned Properties Group" and being responsible
for a large portfolio of distressed loans, with several years of experience
handling debt restructures, loan workouts and related litigation and
bankruptcies. Ms. Kuban was employed by First City National Bank -- Austin N.A.
from 1983 to 1989 as a Vice President and commercial real estate lender. Ms.
Kuban holds a B.B.A. Degree in Finance from The University of Texas.
 
     Jonathan S. Pettee is Executive Vice President and Chief Operating Officer
of both the Company and the Manager. From 1996 to March 1998, Mr. Pettee was
responsible for mortgage product development, capital raising and CMBS portfolio
management for the AMRESCO Group. Mr. Pettee has over ten years of experience in
corporate finance, fixed income and real estate. From 1995 to 1996, Mr. Pettee
was Managing Director for BBC Investment Advisors, a joint venture between Back
Bay Advisors and Copley Real Estate Advisors. At BBC, Mr. Pettee managed an
investment grade CMBS portfolio. Mr. Pettee has held previous positions as
Managing Director at Copley Real Estate Advisors (1992 to 1994), where he was
responsible for managing the external financing activities for Copley's
institutional funds, and as Senior Associate at Morgan Stanley Realty (1986 to
1992), where he executed sale, financing and investment banking transactions for
the firm's clients. Mr. Pettee has a B.S. degree in Mechanical Engineering from
Cornell University and an M.B.A. degree from the Harvard Business School.
 
     Michael L. McCoy is Senior Vice President, General Counsel and Secretary of
the Company. Since February 1996, Mr. McCoy has also served as Assistant General
Counsel of AMRESCO responsible for overseeing the legal support to the
commercial mortgage banking, commercial finance and commercial loan servicing
areas of the AMRESCO Group. Mr. McCoy has been employed by the AMRESCO Group
since 1989. Prior to joining the AMRESCO Group, Mr. McCoy was a Director with
the law firm of Baker, Mills & Glast, P.C., where he practiced in the areas of
commercial real estate and banking and finance, and an associate with the law
firm of Carrington, Coleman, Sloman & Blumenthal. Mr. McCoy holds a J.D. degree
and a B.B.A. degree from the University of Texas at Austin.
 
     John M. Jumonville is Vice President and Treasurer of both the Company and
the Manager. Since August 1996, Mr. Jumonville has served as Assistant Treasurer
of AMRESCO, where his primary responsibilities include corporate asset and
liability management and cash management. He has also performed acquisition
analysis and other special projects for the AMRESCO Group. Mr. Jumonville has
been employed by the AMRESCO Group in various capacities since 1989, including
Director of Asset Marketing (with responsibility for marketing and valuation
analysis of loans and Asset Portfolios) and Vice President of Asset Management
(with responsibility for management and disposition of underperforming and
distressed Mortgage Loan portfolios). Mr. Jumonville holds a B.S. degree in
Accounting from Louisiana State University.
 
     Thomas R. Lewis is Vice President and Controller of both the Company and
the Manager. From November 1995 to March 1998, Mr. Lewis was an employee of the
AMRESCO Group, with responsibility for accounting, cash management and reporting
for its 40 institutional advisory clients. Mr. Lewis has over twelve years of
experience in real estate accounting and reporting. From 1993 to 1995, Mr. Lewis
served in a similar capacity as Vice President-Finance for Acacia Realty
Advisors, Inc. ("Acacia"), a predecessor organization. From 1989 to 1993, Mr.
Lewis served as Senior controller for Prentiss Properties Limited, Inc., an
affiliate of Acacia, where he was responsible for the identification and
resolution of technical accounting and reporting issues as well as the annual
business planning and reporting for several closed-end commingled real estate
investment partnerships. Mr. Lewis worked in the Dallas office of Price
Waterhouse from 1985 to 1989, where he was responsible for the audit of a large
real estate development company and the related audits of its
 
                                       63
<PAGE>   70
 
second-tier partnerships and joint ventures. Mr. Lewis holds a B.B.A. degree in
Accounting from Texas A&M University and is a Certified Public Accountant.
 
     The current members of the Board of Trust Managers of the Company are as
follows:
 
<TABLE>
<CAPTION>
                NAME                   AGE                   POSITION
                ----                   ---                   --------
<S>                                    <C>   <C>
Robert L. Adair III..................  54    Chairman of the Board of Trust Managers
Robert H. Lutz, Jr. .................  48    Trust Manager
Mark D. Gibson(1)....................  38    Trust Manager
</TABLE>
 
---------------
 
(1) See above for certain biographical information regarding Mr. Gibson.
 
     Robert L. Adair III is Chairman of the Board of Trust Managers. Since 1994,
Mr. Adair has also served as a director, President and Chief Operating Officer
of AMRESCO. Mr. Adair has served AMRESCO and its predecessors in various
capacities since 1987. Mr. Adair holds a B.B.A. degree in Accounting from The
University of Texas and an M.B.A. degree from the Wharton School at the
University of Pennsylvania.
 
     Robert H. Lutz, Jr. serves as a member of the Board of Trust Managers.
Since May 1994, Mr. Lutz has also served as Chairman of the Board and Chief
Executive Officer of AMRESCO. From November 1991 to May 1994, Mr. Lutz served as
President of Allegiance Realty, a real estate management company. Mr. Lutz, who
is also a director of Bristol Hotel Company, holds a B.A. degree from Furman
University, and an M.B.A. degree from Georgia State University.
 
     Immediately prior to the closing of the Offering, the following individuals
will be elected to the Board of Trust Managers as Independent Trust Managers:
 
   
<TABLE>
<CAPTION>
                         NAME                            AGE
                         ----                            ---
<S>                                                      <C>
John C. Deterding......................................  66
Bruce W. Duncan........................................  46
Christopher B. Leinberger..............................  47
James C. Leslie........................................  42
</TABLE>
    
 
   
     John C. Deterding served as Senior Vice President and General Manager of
the Commercial Real Estate Division of General Electric Capital Corporation
("GECC") from 1975 to June 1993. In directing the real estate activities of
GECC, Mr. Deterding was responsible for both domestic and international lending
activities, portfolio purchases, joint ventures, asset management and real
estate securitization. From November 1989 to June 1993, Mr. Deterding served as
Chairman of the General Electric Real Estate Investment Company, a privately
held REIT. He served as Director of GECC Financial Corporation from 1986 to
1993. Since retiring from GECC, Mr. Deterding has worked as a private real
estate consultant. He has also served as a director of Patriot American
Hospitality Inc., a publicly-held REIT (or its predecessors), since September
1995 and is a former member and trustee of the Urban Land Institute. He holds a
B.S. degree from the University of Illinois.
    
 
     Bruce W. Duncan has been the President and Chief Executive Officer of
Cadillac Fairview Corporation Limited ("Cadillac Fairview") since 1994. Cadillac
Fairview owns, manages and develops commercial real estate in North America and
has a total enterprise value (including equity and debt) of nearly $5.0 billion
(CDN). It has ownership interests in or manages 96 properties containing over 49
million square feet. Prior to joining Cadillac Fairview, Mr. Duncan worked for
JMB Realty Corporation from 1978 to 1992, where he served as Executive
Vice-President and a member of the Board of Directors. From 1992 to 1994, he was
President and Co-Chief Executive Officer of JMB Institutional Realty Corporation
providing advice and management for investments in excess of $9 billion (US) in
real estate by tax exempt investors, including public and corporate pension
funds, unions, endowments and foundations. Mr. Duncan serves as a member of the
Board of Trustees of Starwood Lodging Trust, one of the largest hotel REITs in
the United States, and as a member of the Board of Trustees of Kenyon College.
He is also a member of the Board of Directors of the Canadian Institute of
Public Real Estate Companies (CIPREC). Mr. Duncan is a member of the Urban Land
Institute (ULI) and a member and past trustee of the International Council of
Shopping Centers
 
                                       64
<PAGE>   71
 
(ICSC). Mr. Duncan holds an M.B.A. degree from the University of Chicago and an
undergraduate degree from Kenyon College. He is a Certified Public Accountant.
 
   
     Christopher B. Leinberger has been Managing Director and co-owner of Robert
Charles Lesser & Co. since 1982, where he specializes in metropolitan
development trends and strategic planning for cities and real estate companies.
Robert Charles Lesser & Co. is one of the largest independent real estate
advisory firms in the country, working on over 400 projects a year throughout
North America. Mr. Leinberger is also a partner in Arcadia Land Company, an
environmentally oriented development firm. Mr. Leinberger has written many
articles on strategic planning for real estate which have appeared in trade
magazines such as Builder, Urban Land and National Real Estate Investor. He is
also the author of Strategy for Real Estate Companies: Marketing, Finance,
Organization, jointly published by the ULI and NAIOP. Mr. Leinberger is
President of the Santa Fe Railyard Community Corporation, a nonprofit
development corporation and Chair of the Board of Trustees of the College of
Santa Fe. Mr. Leinberger also serves on the Board of Directors of Avalon
Properties, Inc. (an NYSE listed real estate investment trust) and a number of
private firms. Mr. Leinberger is Vice Chairman of the Metropolitan Economic
Development Council of the Urban Land Institute and on the National Advisory
Board of NAIDP. He is a graduate of Swarthmore College and the Harvard Business
School.
    
 
     James C. Leslie has served as President and Chief Operating Officer of The
Staubach Company since 1996, and as a director of The Staubach Company since
1988. Mr. Leslie was Chief Financial Officer of The Staubach Company from 1982
to January 1992 at which time he became President of Staubach Financial
Services, a position he held until February 1996. The Staubach Company operates
tenant representation businesses, including consulting services for commercial,
retail and industrial users of real estate. Mr. Leslie is also President and a
board member of Wolverine Holding Company, and serves on the boards of FM
Properties, Inc., Forum Retirement Partners, L.P., Wyndham International Inc.
and the North Texas Chapter of the Arthritis Foundation. Mr. Leslie holds a B.S.
degree from The University of Nebraska and an M.B.A. degree from The University
of Michigan Graduate School of Business, and is a member of the American
Institute of Certified Public Accountants.
 
   
     Trust Managers of the Company are required to devote only so much of their
time to the Company's affairs as is necessary or required for the effective
conduct and operation of the Company's business. Because the Management
Agreement provides that the Manager will assume principal responsibility for
managing the affairs of the Company, the officers of the Company, in their
capacities as such, are not expected to devote substantial time to the affairs
of the Company. However, in their capacities as officers or employees of the
Manager, or its Affiliates, they will devote significant amounts of their time
to the affairs of the Manager as is required for the performance of the duties
of the Manager under the Management Agreement. See "Risk Factors -- Conflicts of
Interest May Result in Decisions That Do Not Fully Reflect the Shareholders'
Best Interest" and "The Manager." All officers serve at the discretion of the
Board of Trust Managers. Although the Company may have salaried employees, it
currently has no such employees.
    
 
     The Bylaws of the Company provide that the Board of Trust Managers will
have not less than two nor more than nine members, as determined from time to
time by the existing Board of Trust Managers. Upon the closing of the Offering,
the Board of Trust Managers will have seven members consisting of three Trust
Managers affiliated with the Manager and four Independent Trust Managers. The
Bylaws further provide that except in the case of a vacancy, the majority of the
members of the Board of Trust Managers and of any committee of the Board of
Trust Managers must at all times after the issuance of the Common Shares in the
Offering be Independent Trust Managers. Vacancies occurring on the Board of
Trust Managers among the Independent Trust Managers may be filled by the vote of
a majority of the Trust Managers, including the Independent Trust Managers, or a
majority of the outstanding Common Shares at an annual or special meeting of
shareholders.
 
     The Declaration of Trust provides that immediately after the closing of the
Offering, the Board of Trust Managers will be divided into three classes, each
class to consist as nearly as possible of one-third of the Trust Managers. Each
class of Trust Managers will contain one affiliated Trust Manager and at least
one Independent Trust Manager. The term of office of one class of Trust Managers
will expire each year. The
 
                                       65
<PAGE>   72
 
initial term of office of the Class I, Class II and Class III Trust Managers
will expire at the 1999, 2000 and 2001 annual meeting of shareholders,
respectively. Commencing with the 1999 annual meeting of shareholders, the Trust
Managers of the class elected at each annual meeting of shareholders will hold
office for a term of three years.
 
     In lieu of the cash payment of fees to Independent Trust Managers, the
Company intends to grant to each Independent Trust Manager 1,500 restricted
Common Shares annually (subject to adjustment in the event of stock splits,
recapitalization, etc.). The Company will also reimburse costs and expenses of
all Trust Managers for attending meetings of the Board of Trust Managers (or any
committee thereof). Upon the closing of the Offering, the Company will grant to
each Independent Trust Manager an option to purchase 20,000 Common Shares at a
purchase price equal to the initial public offering price of the Common Shares.
Such options will vest ratably over a four-year period commencing on the first
anniversary of the date of grant. Trust Managers who are also employed by the
Company or the Manager will not be separately compensated by the Company other
than through the Share Option Plan.
 
   
     Upon the closing of the Offering, the Company will establish an Audit
Committee of the Board of Trust Managers. The Audit Committee will be composed
of two or more of the Independent Trust Managers, and will be responsible for
reviewing the functions of the Company's management, the Manager and the
Company's independent auditors pertaining to the Company's financial statements,
and performing such other duties and functions as are deemed appropriate by the
Audit Committee or the Board of Trust Managers.
    
 
   
     The Declaration of Trust provides for the indemnification of the Trust
Managers, officers, employees, and controlling Persons of the Company to the
fullest extent permitted by Texas law. The Texas REIT Act generally permits the
indemnification of a trust manager, officer, employee, or agent of a real estate
investment trust, who was, is, or is threatened to be made, a named defendant or
respondent in a proceeding because of the Person's affiliation with the real
estate investment trust only if that Person: (i) conducted himself in good
faith; (ii) reasonably believed: (a) in the case of conduct in his official
capacity, that his conduct was in the real estate investment trust's best
interest; and (b) in all other cases, that his conduct was at least not opposed
to the real estate investment trust's best interest; and (iii) in the case of
any criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful. Furthermore, except to the extent permitted by the Texas REIT Act,
such Person may not be indemnified in respect of a proceeding (i) in which the
Person is found liable on the basis that personal benefit was improperly
received by him, whether or not the benefit resulted from an action taken in the
Person's official capacity; or (ii) in which the Person is found liable to the
real estate investment trust.
    
 
     If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
 
     The Texas REIT Act also provides that the real estate investment trust may
indemnify Persons who are not or were not officers, employees, or agents of the
real estate investment trust but who are or were serving at the request of the
real estate investment trust as a trust manager, director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
real estate investment trust or of a foreign or domestic corporation,
partnership, or other enterprise to the same extent that it may indemnify its
own trust managers, officers, employees, or agents.
 
     Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to the Company, except for such Trust Manager's own willful
misfeasance, willful malfeasance or gross negligence. Under the Texas REIT Act,
a trust manager is not subject to any liabilities imposed by law upon trust
managers of a real estate investment trust nor liable for any claims or damages
that may result from his acts in the discharge of any duty imposed or power
conferred upon him by the real estate investment trust, if, in the exercise of
ordinary care, he acted in good faith and in reliance upon information,
opinions, reports or statements, including financial statements and other
financial data, concerning the real estate investment trust or another Person,
that were prepared or
 
                                       66
<PAGE>   73
 
presented by: (i) one or more officers or employees of the real estate
investment trust, other than the real estate investment trust manager; (ii)
legal counsel, public accountants, investment bankers, or other Persons as to
matters the trust manager reasonably believes are within the Person's
professional or expert competence; or (iii) a committee of the trust managers of
which the trust manager is not a member.
 
EXECUTIVE COMPENSATION
 
     The Company has not paid and does not intend to pay annual compensation to
the Company's executive officers for their services as executive officers. This
policy may be changed, however, by a vote of the Trust Managers without notice
to or approval by the shareholders. The Company intends, upon closing of the
Offering, to grant options to purchase Common Shares to the Manager. The Company
also intends upon closing of the Offering, to grant options to purchase Common
Shares to executive officers and key employees of the Manager and the Company.
See "-- Share Options Outstanding." The Company may from time to time, in the
discretion of the Independent Trust Managers, grant additional options to
purchase Common Shares to the Manager, its officers or employees or to the
executive officers and Trust Managers of the Company pursuant to the Share
Option Plan.
 
SHARE OPTION PLAN
 
   
     Immediately prior to the closing of the Offering, the Company will adopt
the Share Option Plan that will provide for the grant of qualified incentive
share options ("ISOs") that meet the requirements of Section 422 of the Code,
non-qualified share options and restricted share awards having such vesting or
forfeiture provisions and other material terms as the Board of Trust Managers
shall determine. ISOs may be granted to the employees of the Company.
Nonqualified share options may be granted to the Trust Managers, officers,
directors and any key employees of the Company and to the Manager and its
officers and key employees. The exercise price for any ISO granted under the
Share Option Plan may not be less than 100% of the fair market value of the
Common Shares at the time the option is granted. The purpose of the Share Option
Plan will be to provide a means of performance-based compensation to the Manager
and its officers and key employees and to the officers, directors, Trust
Managers and key employees of the Company in order to attract and retain
qualified personnel and to provide an incentive to others whose job performance
affects the Company.
    
 
     Subject to anti-dilution provisions for share splits, share dividends and
similar events, the Share Option Plan will authorize the grant of options to
purchase Common Shares and restricted Common Shares up to an aggregate of 15% of
the outstanding Common Shares. If an option granted under the Share Option Plan
expires or terminates, the Common Shares subject to any unexercised portion of
that option will again become available for the issuance of further options
under the Share Option Plan. Unless previously terminated by the Board of Trust
Managers, the Share Option Plan will terminate ten years from its effective
date, and no options may be granted under the Share Option Plan thereafter.
 
   
     The Share Option Plan will be administered by a committee of the Board of
Trust Managers comprised of two or more of the Independent Trust Managers (the
"Compensation Committee"). Except for the grant of options issuable upon the
closing of the Offering described below, options granted under the Share Option
Plan will become exercisable in accordance with the terms of the grant made by
the Compensation Committee. The Compensation Committee has discretionary
authority to determine at the time an option is granted whether it is intended
to be an ISO or a non-qualified option, and when and in what increments Common
Shares covered by the option may be purchased.
    
 
     Under current law, ISOs may not be granted to any Person who is not a
full-time employee of the Company or to directors, officers and other employees
of entities unrelated to the Company. In addition, no options may be granted
under the Share Option Plan to any Person (other than AMRESCO and its
Affiliates) who, assuming exercise of all options held by such Person, would own
or be deemed to own more than 9.8% of the outstanding Common Shares.
 
     Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be exercisable
in whole or in part at any time or times during their respective terms, or only
in specified percentages at stated time periods or intervals during the term of
the option.
 
                                       67
<PAGE>   74
 
     The exercise price of any option granted under the Share Option Plan will
be payable in full by (i) cash, (ii) surrender of Common Shares having a market
value equal to the aggregate exercise price of all shares to be purchased, (iii)
cancellation of indebtedness owed by the Company to the optionholder, (iv) a
promissory note executed by the optionholder, or (v) any combination of the
foregoing.
 
     The Board of Trust Managers may, without affecting any outstanding options
or restricted share awards, from time to time revise or amend the Share Option
Plan, and may suspend or discontinue it at any time. However, no such revision
or amendment may increase the number of Common Shares subject to the Share
Option Plan (with the exception of adjustments resulting from changes in
capitalization), reduce the minimum option price specified therein, increase the
maximum permissible term of any option specified therein or remove
responsibility for administering the Share Option Plan from the Board of Trust
Managers or the Compensation Committee without shareholder approval.
 
SHARE OPTIONS OUTSTANDING
 
   
     Upon the closing of the Offering, the Company will grant to the Manager
options to purchase 2,222,233 Common Shares (assuming the Underwriters'
over-allotment option is not exercised). If the Underwriters' over-allotment
option is exercised, the Company will grant to the Manager options to purchase
up to 333,334 additional Common Shares (or such lesser number of Common Shares
as would result in the Manager owning options to purchase a number of Common
Shares equal to 10% of the number of Common Shares outstanding after giving
effect to the exercise of the Underwriters' over-allotment option, and any
corresponding increase in the number of Common Shares sold pursuant to the
Private Placement). Seventy percent of the Common Shares issuable upon the
exercise of such options will have an exercise price equal to the initial public
offering price and the remaining thirty percent of such Common Shares will have
an exercise price equal to 125% of the initial public offering price. All of
such options will vest ratably over a four-year period commencing on the first
anniversary of the closing of the Offering, and will expire 10 years after the
date of grant.
    
 
     Upon the closing of the Offering, the Company will grant options to
purchase an additional 790,000 Common Shares to officers and key employees of
the Company, the Manager and other members of the AMRESCO Group. Such options
will be exercisable at the initial public offering price and will vest ratably
over a four-year period beginning one year after the date of grant.
 
     Upon the closing of the Offering, each Independent Trust Manager will
receive an option to purchase up to 20,000 Common Shares at the initial public
offering price. These options will vest ratably over a four-year period
beginning one year from the date of grant and expire 10 years from the date of
grant. Any Independent Trust Manager newly elected to the Board of Trust
Managers thereafter may receive an identical grant at the fair market value on
the date of grant.
 
                                       68
<PAGE>   75
 
     The following table sets forth the share options expected to be awarded to
executive officers and Trust Managers of the Company upon the closing of the
Offering:
 
                       SHARE OPTION GRANTS IN FISCAL 1998
 
   
<TABLE>
<CAPTION>
                                                  INDIVIDUAL GRANTS
                            -------------------------------------------------------------      POTENTIAL REALIZABLE
                                              PERCENT OF                                      VALUE AT ASSUMED ANNUAL
                              NUMBER OF         TOTAL                                          RATES OF STOCK PRICE
                             SECURITIES      OPTIONS/SARS                                     APPRECIATION FOR OPTION
                             UNDERLYING       GRANTED TO      EXERCISE OR                             TERM(4)
                             OPTION/SARS     EMPLOYEES IN         BASE         EXPIRATION    -------------------------
NAME                        GRANTED(#)(1)    FISCAL YEAR     PRICE($/Sh)(2)       DATE         5%($)         10%($)
----                        -------------    ------------    --------------    ----------    ----------    -----------
<S>                         <C>              <C>             <C>               <C>           <C>           <C>
Mark D. Gibson............     100,000           12.66%          $15.00           (3)        $  943,342    $ 2,390,614
Robert L. Adair III.......      75,000            9.50            15.00           (3)           707,506      1,792,960
Robert H. Lutz, Jr........      75,000            9.50            15.00           (3)           707,506      1,792,960
Rebecca Kuban.............      75,000            9.50            15.00           (3)           707,506      1,792,960
John S. Pettee............      50,000            6.33            15.00           (3)           471,671      1,195,307
Thomas J. Andrus..........      30,000            3.80            15.00           (3)           283,003        717,184
Michael L. McCoy..........      25,000            3.16            15.00           (3)           235,835        597,653
John M. Jumonville........      15,000            1.90            15.00           (3)           141,501        358,592
Thomas R. Lewis...........      10,000            1.26            15.00           (3)            94,334        239,061
Others(5).................     335,000           42.21            15.00           (3)         3,160,195      8,008,556
                               -------          ------                                       ----------    -----------
Total.....................     790,000          100.00%                                      $7,452,399    $18,885,847
                               =======          ======                                       ==========    ===========
</TABLE>
    
 
---------------
 
(1) The options granted are exercisable starting 12 months after the date of
    grant.
 
(2) Based on an assumed initial public offering price of $15.00 per share. See
    "Underwriting." The exercise price and tax withholding obligations incurred
    upon exercise of the options may be paid by the option holder by delivering
    already owned Common Shares, including those which are issuable upon
    exercise of the options.
 
(3) Each option will have an expiration date which is ten years from the date of
    grant.
 
(4) The dollar amounts under these columns are the result of calculations at 5%
    and 10% compounded at annual rates set by the Commission, and therefore are
    not intended to forecast future appreciation, if any, in the price of the
    Common Shares.
 
(5) Expected to be awarded to officers and employees of the Manager and other
    members of the AMRESCO Group.
 
                                  THE MANAGER
 
   
     The day-to-day operations of the Company will be managed by AMREIT
Managers, L.P., a newly formed member of the AMRESCO Group, pursuant to the
Management Agreement, which will become effective upon the closing of the
Offering. Mr. Mark D. Gibson, President, Chief Executive Officer and a Trust
Manager of the Company will serve as President and Chief Executive Officer of
the Manager. A majority of the other executive officers of the Company described
under "Management of the Company" will also hold the same positions with the
Manager. See "Management of the Company." Of the senior executive officers of
the Manager, the Chief Investment Officer, the Chief Operating Officer and the
Controller will be full-time employees of the Manager. Otherwise, the Manager
intends to rely heavily upon the employees and other resources of the AMRESCO
Group to fulfill its obligations under the Management Agreement. For a
description of the Manager's obligations under the Management Agreement, see
"-- The Management Agreement."
    
 
DESCRIPTION OF THE AMRESCO GROUP
 
     The AMRESCO Group is a diversified financial services company specializing
in real estate lending, specialized commercial finance, and the acquisition,
resolution and servicing of nonperforming and underperforming commercial real
estate loans. AMRESCO is a publicly-held company and its common stock is traded
on the NASDAQ National Market under the symbol "AMMB." During 1997, the AMRESCO
Group
 
                                       69
<PAGE>   76
 
   
derived its earnings from four principal lines of business: residential mortgage
banking (33%), asset management (32%), commercial mortgage banking (21%) and
commercial finance (14%). At December 31, 1997, the AMRESCO Group employed
approximately 1,600 persons. In order to fulfill its obligations under the
Management Agreement, the Manager expects to rely significantly on the AMRESCO
Group for administrative support and for expertise in the areas described below.
There can be no assurance that the past experience of the members of the AMRESCO
Group upon which the Manager will rely for a significant portion of its
operations will be sufficient to successfully manage the business of the
Company. The past performance of the AMRESCO Group (or any member thereof) is
not indicative of future results of the Company. See "Business and
Strategy -- Objective and Strategy" and "Risk Factors -- Dependence on the
Manager and the AMRESCO Group for Operations and the Lack of Experience of the
Manager May Adversely Affect Operating Results."
    
 
     COMMERCIAL MORTGAGE BANKING
 
     General. The AMRESCO Group performs a wide range of commercial mortgage
banking services, including originating, underwriting, placing, selling,
securitizing and servicing commercial real estate loans through Holliday
Fenoglio Fowler, AMRESCO Capital and AMRESCO Services.
 
   
     Real Estate Capital Markets. Holliday Fenoglio Fowler is engaged in three
primary lines of business: real estate related debt placement (which involves
assisting real estate developers and owners in obtaining non-Participating
Mortgage Loans, including Permanent Mortgage Loans, Bridge Loans and
Construction Loans), real estate investment banking (which involves assisting
real estate developers and owners in obtaining Participating Loans, Mezzanine
Loans and other types of non-traditional real estate financing) and real estate
dispositions (which involves brokering sales of institutional grade assets to
pension funds, REITs and private investors). In January 1998, Holliday Fenoglio
Fowler significantly expanded its operations by acquiring the mortgage banking
business of Fowler, Goedecke, Ellis & O'Connor Incorporated ("Fowler Goedecke").
Pursuant to such acquisition, Holliday Fenoglio Fowler acquired five of its
current 17 offices and 17 of its current 96 mortgage bankers. Subsequent to such
acquisition, Holliday Fenoglio Fowler changed its name to reflect the Fowler
Goedecke acquisition. The Company believes that, as a result of the acquisition
of Fowler Goedecke and based on the most recently available National Real Estate
Investor's Top Lender Survey, Holliday Fenoglio Fowler is the largest commercial
mortgage brokerage company in the United States (based on 1996 originations,
including those of Fowler Goedecke).
    
 
     Mortgage Loans and other real estate financings originated by Holliday
Fenoglio Fowler have historically been funded by institutional lenders,
principally insurance companies, pension funds and other investment funds, and
by AMRESCO Capital and other conduit purchasers. Real estate related investments
originated by Holliday Fenoglio Fowler during 1997 (without giving effect to the
Fowler Goedecke acquisition) were placed with approximately 128 different
lenders. During 1997, Holliday Fenoglio Fowler closed over $6.0 billion in 706
real estate transactions (including only those transactions actually closed by
Holliday Fenoglio Fowler during 1997 and not those closed by Fowler Goedecke
during 1997). The transactions closed by Holliday Fenoglio Fowler during 1997,
1996 and 1995 included the following types of transactions (without giving
effect to the Fowler Goedecke acquisition):
 
   
<TABLE>
<CAPTION>
                                                            HOLLIDAY FENOGLIO FOWLER
                                                           --------------------------
                                                            REAL ESTATE TRANSACTIONS
                                                           --------------------------
                                                            1997      1996      1995
                                                           ------    ------    ------
                                                                 (IN MILLIONS)
<S>                                                        <C>       <C>       <C>
Permanent Mortgage Loans.................................  $3,650    $2,022    $1,408
Mezzanine Loans..........................................     933       304       225
Bridge Loans.............................................     312       221       134
Construction/Rehabilitation Loans........................     267       197       240
Real Estate Dispositions.................................     892       386       185
                                                           ------    ------    ------
          Total..........................................  $6,054    $3,130    $2,193
                                                           ======    ======    ======
</TABLE>
    
 
                                       70
<PAGE>   77
 
     Pursuant to the Correspondent Agreement, Holliday Fenoglio Fowler will be
obligated to present Targeted Investments to the Company (on a non-exclusive
basis). The Company believes that a substantial portion of the Invested
Portfolio will be identified through Holliday Fenoglio Fowler pursuant to the
Correspondent Agreement. However, the commercial mortgage banking business is
highly competitive and highly fragmented, with certain large national
competitors and significant localized competition. There can be no assurance
that Holliday Fenoglio Fowler will continue to have opportunities to originate
Mortgage Loans and other real estate financings or that, if presented to the
Company, the Company will be successful in its efforts to originate or acquire
such Mortgage Loans or other real estate financings.
 
     Commercial Real Estate Lending. AMRESCO Capital originates, underwrites and
securitizes commercial Mortgage Loans. AMRESCO Capital serves its market
directly through branch offices, as well as through a network of independent
mortgage brokers, including Holliday Fenoglio Fowler. AMRESCO Capital is
approved by Fannie Mae to participate in its Delegated Underwriting and
Servicing ("DUS") program, which AMRESCO Capital believes makes it a more
competitive Mortgage Loan originator and underwriter of multifamily Mortgage
Loans. AMRESCO Capital is also an approved lender in the FHLMC multifamily
seller/servicer program in the states of Florida, New York, North Carolina and
South Carolina.
 
   
     AMRESCO Capital warehouses the commercial Mortgage Loans it acquires or
originates for securitization and sale as MBS. The AMRESCO Group accumulates
commercial Mortgage Loans until the pool of Mortgage Loans is of a sufficient
size (generally in excess of $400.0 million) to allow for an efficient
securitization in the public markets. The AMRESCO Group completed a single
securitization in 1997 relating to approximately $480.1 million of commercial
Mortgage Loans.
    
 
     Commercial Loan Servicing. Through AMRESCO Services, the AMRESCO Group
serves as a primary servicer for whole commercial Mortgage Loans and securitized
pools of commercial Mortgage Loans, and as a Master Servicer for securitized
pools of commercial Mortgage Loans. As a primary servicer for whole commercial
Mortgage Loans and securitized pools of commercial Mortgage Loans, AMRESCO
Services is currently rated by Standard & Poor's as "strong," its highest rating
category. As a commercial Master Servicer, AMRESCO Services is rated by Standard
& Poor's as "above average," which is the highest rating ever awarded by
Standard & Poor's in the commercial Master Servicer category. All other Rating
Agencies which have rated AMRESCO Services as either a primary servicer or a
Master Servicer have given AMRESCO Services their highest rating. At December
31, 1997, AMRESCO Services acted as servicer with respect to approximately $20.2
billion of Mortgage Loans.
 
   
     The Manager expects to rely heavily on the expertise of the Commercial
Mortgage Banking division of the AMRESCO Group in the performance of its duties
under the Management Agreement. See "-- Asset Management -- Servicing Risks;
Borrower Delinquencies and Claims."
    
 
     COMMERCIAL FINANCE
 
     General. Through its commercial finance division, the AMRESCO Group focuses
on (i) loans to franchisees of nationally recognized restaurant, hospitality and
service organizations, (ii) special situation lending, with an emphasis on the
real estate and communications industries, and (iii) single-family residential
construction lending. Loans originated by the franchise lending operation are
sold to third parties, principally through securitization, while the real
estate, communications and single-family residential loans are generally
retained for the AMRESCO Group's own portfolio. Other ancillary products,
services and investments provided by the commercial finance group include
equipment leasing, small business lending and loan servicing.
 
     The Company expects to benefit from the expertise of the commercial finance
division of the AMRESCO Group, including, in particular, AMRESCO Funding, and to
have co-investment opportunities with such division. There can be no assurance
that the loan origination volumes of the commercial finance division of the
AMRESCO Group will continue to increase or that such loan origination volumes
will not decrease. The commercial mortgage lending business is highly
competitive and highly fragmented, and many competitors of the commercial
finance division of the AMRESCO Group are substantially larger and better
capitalized than the AMRESCO Group. In addition, periods of economic slowdown or
recession, rising
 
                                       71
<PAGE>   78
 
interest rates or declining demand for real estate may reduce the demand for
Mortgage Loans and the number of loan origination opportunities available to the
commercial finance division of the AMRESCO Group and to the Company.
 
   
     Franchise Lending. AMRESCO Commercial Lending Corporation ("ACLC")
specializes primarily in the origination of loans to operators of nationally
known franchise concepts and has loan producers in Idaho, Colorado, Michigan,
Oklahoma, Kansas and Georgia. ACLC funds these loans through a warehouse
borrowing facility until they are securitized and sold to investors, with ACLC
retaining the right to service the loans. ACLC also underwrites and originates
commercial real estate loans outside this core concept that are funded by third
party conduit purchasers. ACLC completed two loan securitizations in 1997 which
totalled approximately $298.0 million.
    
 
   
     Specialty Lending. Through AMRESCO Funding, the AMRESCO Group provides
mid-to-high yield Mortgage Loans (including Participating Loans, Mezzanine
Loans, Construction Loans, Rehabilitation Loans and Bridge Loans) the structures
of which typically do not meet the underwriting criteria of traditional
institutional lenders. Currently, the AMRESCO Group lends primarily to the real
estate and communications industries from production offices in Texas,
California, Oregon, Rhode Island, Virginia and Canada. The specialty lending
division of the AMRESCO Group began operations in August 1995. Between August
1995 and December 31, 1997, AMRESCO Funding originated 63 loans totalling $358.4
million, and at December 31, 1997, AMRESCO Funding had approximately $145.3
million in outstanding loans, on commitments of approximately $186.0 million.
AMRESCO will grant to the Company, upon the closing of the Offering, the Right
of First Refusal pursuant to which, among other things, AMRESCO will agree not
to permit AMRESCO Funding or any other member of the AMRESCO Group to invest in
the first $100 million of Targeted Mortgage Loans during any calendar quarter,
identified by or to any member of the AMRESCO Group unless the Company's
Investment Committee shall have first determined that the Company should not
invest in such asset or assets, or should invest in only a portion of such asset
or assets.
    
 
     Single-Family Residential Construction Lending. AMRESCO Builders Group
provides construction financing to builders of homes for first time and first
move-up buyers. The AMRESCO Group targets experienced homebuilders starting
between approximately 100 and 1,500 units per year that have proven construction
and sales expertise. AMRESCO Builders Group is headquartered in Houston, Texas,
and has loan production offices in California, Arizona, Nevada, Colorado,
Georgia and Florida. AMRESCO Builders Group also provides a limited amount of
acquisition and development lending for residential lots to facilitate its
construction loan program. As of December 31, 1997, AMRESCO Builders Group had
advanced approximately $65.5 million of residential construction loans on
commitments of approximately $114.6 million.
 
     ASSET MANAGEMENT
 
     General. The AMRESCO Group manages and resolves Asset Portfolios and
provides Special Servicing for nonperforming and underperforming Mortgage Loans
in commercial mortgage-backed bond trusts and similar securitized commercial
asset-backed Mortgage Loan portfolios. The AMRESCO Group also provides real
estate investment advice to various institutional investors (primarily pension
funds) seeking to invest in real estate and related investments. The Manager
expects to utilize the expertise of the asset management division of the AMRESCO
Group for the benefit of the Company, including primarily its servicing
expertise. See "-- The Management Agreement."
 
     Asset Portfolio Management and Investment. The AMRESCO Group manages and
resolves Asset Portfolios acquired at a discount to face value by the AMRESCO
Group alone and by the AMRESCO Group with co-investors. The AMRESCO Group also
manages and resolves Asset Portfolios owned by third parties. Asset Portfolios
generally include secured loans of varying qualities and collateral types
including fee-owned real estate. The majority of the loans in the Asset
Portfolios in which the AMRESCO Group invests are in payment default at the time
of acquisition. While the majority of the Asset Portfolios are located in the
United States, the AMRESCO Group has opened offices in Toronto and London
through which it pursues Asset Portfolio acquisition opportunities and manages
its investments in Canada and Western Europe. At December 31, 1997, the face
value of the Company's total investment in wholly-owned Asset Portfolios
 
                                       72
<PAGE>   79
 
aggregated approximately $606.9 million, which was composed of approximately
$431.1 million (71%) of collateralized business loans, approximately $91.0
million (15%) of asset-backed securities, approximately $84.8 million (14%) of
real estate.
 
     Special Servicing. The AMRESCO Group provides Special Servicing to
commercial mortgage-backed bond trusts and similar securitized commercial
asset-backed loan portfolios in respect of nonperforming or underperforming
assets included in such trusts or portfolios. As a Special Servicer, the AMRESCO
Group receives an annual fee (typically, approximately 50 basis points of the
face value of the delinquent or nonperforming loan being serviced), plus a 75 to
100 basis points fee based on the total cash flow from resolution of each loan
as it is received. The AMRESCO Group has received a superior rating from
Standard & Poor's, the highest rating currently given by that rating agency for
Special Servicers such as the AMRESCO Group. As of December 31, 1997, the
AMRESCO Group was the designated Special Servicer for securitized pools holding
approximately $13.5 billion face value of loans, of which $459.2 million (face
value) had been assigned to the AMRESCO Group for resolution.
 
     Servicing Risks; Borrower Delinquencies and Claims. When borrowers are
delinquent in making monthly payments on commercial Mortgage Loans serviced by
the AMRESCO Group, the AMRESCO Group may be required to advance interest
payments and certain other property protection expenses such as real estate
taxes with respect to such delinquent loans to the extent that the servicer
deems such advances ultimately recoverable. These advances require funding from
the AMRESCO Group's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month. In addition, in the ordinary course of its business, the AMRESCO Group is
subject to claims made against it by borrowers and private investors arising
from, among other things, losses that are claimed to have been incurred as a
result of alleged breaches of fiduciary obligations, misrepresentations, errors
and omissions of employees and officers of the Company (including its
appraisers), incomplete documentation and failures by the AMRESCO Group to
comply with various laws and regulations applicable to its business. The Company
does not believe that liability with respect to any currently asserted claims or
legal actions is likely to be material to the AMRESCO Group's consolidated
financial position or results of operations; however, any claims asserted in the
future may result in legal expenses or liabilities which could have a material
adverse effect on the AMRESCO Group's financial position and results of
operations and could adversely impact the ability of the AMRESCO Group to
perform its obligations under the Management Agreement.
 
THE MANAGEMENT AGREEMENT
 
     The Company will enter into the Management Agreement with the Manager at
the closing of the Offering. The Management Agreement will have an initial term
(the "Initial Term") of two years from the closing of the Offering. The
Management Agreement may be renewed at the end of the Initial Term (and each
successive term thereafter) for a period of one year, upon review and approval
by a majority of the Independent Trust Managers. If the Independent Trust
Managers do not vote to terminate or renew at least 90 days prior to the end of
the then current period, the Management Agreement will automatically renew for a
one-year period. The Manager will be primarily involved in three activities: (i)
underwriting, originating and acquiring real estate related assets; (ii)
asset/liability management, financing, hedging, management and disposition of
assets, including credit and prepayment risk management; and (iii) capital
management, oversight of the Company's structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the acquisition
of Targeted Investments by the Company, arrange for various types of financing
for the Company, monitor the performance of the Company's Invested Portfolio and
provide administrative and managerial services in connection with the operation
of the Company. The Management Agreement requires the Manager to manage the
business affairs of the Company in conformity with the policies and Guidelines
that are approved and monitored by the Board of Trust Managers. The Manager will
be required to prepare regular reports for the Board of Trust Managers that will
review the Company's acquisitions of Targeted Investments, portfolio composition
and characteristics, credit quality, performance and compliance with the
policies approved by the Board of Trust Managers. If the Manager breaches its
obligations under the Management Agreement (including a breach of its obligation
to manage the business affairs of the Company in conformity with the
 
                                       73
<PAGE>   80
 
Guidelines), or certain other events occur, which breach or events constitute
"cause" as defined in the Management Agreement, the Company may terminate the
Management Agreement upon 60 days' prior written notice, without payment of any
termination fee.
 
     At all times, the Manager will be subject to the direction and oversight of
the Board of Trust Managers and will have only such functions and authority as
the Company may delegate to it. The Manager will be responsible for the
day-to-day operations of the Company and will perform services and activities
relating to the assets and operations of the Company, including, without
limitation, the following:
 
          (i) providing a complete program of investing and reinvesting the
     capital and assets of the Company in pursuit of its investment objectives
     and in accordance with the Guidelines and policies adopted by the Board of
     Trust Managers from time to time;
 
          (ii) serving as the Company's consultant with respect to formulation
     of investment criteria and policies and preparation of the Guidelines by
     the Board of Trust Managers;
 
          (iii) assisting the Company in developing criteria for asset purchase
     commitments that are specifically tailored to the Company's investment
     objectives and making available to the Company its knowledge and experience
     with respect to Mortgage Loans, MBS, real estate and other real estate
     related assets;
 
          (iv) representing and making recommendations to the Company in
     connection with the origination of Mortgage Loans, the purchase and
     commitment to purchase and financing of Mortgage Loans, MBS, real estate
     and other real estate related assets, the sale and commitment to sell such
     assets (including the underwriting of Mortgage Loans, the accumulation of
     Mortgage Loans for securitization and arrangement for the issuance of MBS
     from pools of Mortgage Loans owned by the Company);
 
          (v) furnishing reports and statistical and economic research to the
     Company regarding market conditions in the areas in which the Company
     proposes to invest as well as the Company's activities and the services
     performed for the Company by the Manager;
 
          (vi) monitoring and providing to the Board of Trust Managers on an
     ongoing basis market information and other data, obtained from certain
     nationally recognized brokers or dealers identified by the Board of Trust
     Managers from time to time, and providing data and recommendations to the
     Board of Trust Managers in connection with the identification of such
     brokers or dealers;
 
          (vii) providing the executive and administrative personnel and office
     space and office and administrative services required in rendering services
     to the Company;
 
          (viii) monitoring the operating performance of the Company's
     investments and providing periodic reports with respect thereto to the
     Board of Trust Managers, including comparative information with respect to
     such operating performance and budgeted or projected operating results;
 
          (ix) administering the day-to-day operations of the Company and
     performing and supervising the performance of such other administrative
     functions necessary for the management of the Company and its assets as may
     be agreed upon by the Manager and the Board of Trust Managers, including
     the collection of revenues and the payment of the Company's debts and
     obligations and maintenance of appropriate computer services to perform
     such administrative functions;
 
          (x) communicating on behalf of the Company with the holders of the
     equity and debt securities of the Company as required to satisfy the
     reporting and other requirements of any governmental bodies or agencies and
     to maintain effective relations with such holders;
 
          (xi) counseling the Company in connection with policy decisions made
     or to be made by the Board of Trust Managers;
 
          (xii) advising the Company regarding its status as a REIT, consulting
     with legal counsel as appropriate regarding the application of the REIT
     Provisions of the Code to the proposed investments and operations of the
     Company and monitoring compliance with the REIT Provisions of the Code;
 
                                       74
<PAGE>   81
 
          (xiii) advising the Company regarding the status of its exemption from
     the Investment Company Act, consulting with legal counsel as appropriate
     regarding the nature of its proposed investments and the impact thereof on
     the Company's exemption from registration under such Act and monitoring the
     Company's continuing exemption from registration thereunder;
 
          (xiv) evaluating and recommending hedging strategies to the Board of
     Trust Managers and, upon approval by the Board of Trust Managers, engaging
     in hedging activities on behalf of the Company, consistent with the
     Company's status as a REIT and the Guidelines;
 
          (xv) upon request by and in accordance with the Board of Trust
     Managers, investing or reinvesting any money of the Company, and advising
     the Company as to its capital structure and capital raising;
 
          (xvi) causing the Company to retain qualified accountants and/or legal
     counsel to assist in developing appropriate accounting procedures,
     compliance procedures and testing systems with respect to financial
     reporting obligations and compliance with the REIT Provisions of the Code
     and to conduct quarterly compliance reviews with respect thereto;
 
          (xvii) causing the Company to qualify to do business in all applicable
     jurisdictions;
 
          (xviii) assisting the Company in complying with all regulatory
     requirements applicable to the Company in respect of its business
     activities, including preparing or causing to be prepared all financial
     statements required under applicable regulations and contractual
     undertakings and all reports and documents, if any, required under the
     Exchange Act;
 
          (xix) taking all necessary actions to enable the Company to make
     required tax filings and reports, including soliciting shareholders for
     required information to the extent provided in the REIT Provisions of the
     Code;
 
          (xx) handling and resolving all claims, disputes or controversies
     (including all litigation, arbitration, settlement or other proceedings or
     negotiations) in which the Company may be involved or to which the Company
     may be subject arising out of the Company's day-to-day operations, subject
     to such limitations or parameters as may be imposed from time to time by
     the Board of Trust Managers;
 
          (xxi) using commercially reasonable efforts to cause expenses incurred
     by or on behalf of the Company to be reasonable or customary and within any
     budgeted parameters or Guidelines set by the Board of Trust Managers from
     time to time;
 
          (xxii) performing such other services as may be required from time to
     time for management and other activities relating to the assets of the
     Company as the Board of Trust Managers shall reasonably request or the
     Manager shall deem appropriate under the particular circumstances; and
 
          (xxiii) using commercially reasonable efforts to cause the Company to
     comply with all applicable laws.
 
     The Manager will perform portfolio management services on behalf of the
Company pursuant to the Management Agreement with respect to the Company's
investments. Such services will include, but not be limited to, consulting with
the Company on purchase, sale and other opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, periodic review and evaluation of the
performance of the Company's portfolio of assets, acting as liaison between the
Company and banking, mortgage banking, investment banking and other parties with
respect to the purchase, financing and disposition of assets, and other
customary functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including the AMRESCO Group, to provide any
such services to the Company.
 
     The Manager will perform monitoring services on behalf of the Company
pursuant to the Management Agreement with respect to loan servicing activities
provided by third parties and with respect to the Company's portfolio of Special
Servicing Rights. Such monitoring services will include, but not be limited to,
the following activities: negotiating Special Servicing agreements; acting as a
liaison between the servicers of
 
                                       75
<PAGE>   82
 
the Mortgage Loans and the Company; review of servicers' delinquency,
foreclosure and other reports on Mortgage Loans; supervising claims filed under
any mortgage insurance policies; and enforcing the obligation of any servicer to
repurchase Mortgage Loans. The Manager may enter into subcontracts with other
parties, including its affiliates, to provide any such services for the Manager.
 
     The Manager expects to rely heavily on the resources and expertise of the
AMRESCO Group to fulfill its obligations under the Management Agreement. See
"Risk Factors -- Dependence on the Manager and the AMRESCO Group for Operations
and the Lack of Experience of the Manager May Adversely Affect Operating
Results."
 
     Pursuant to the Management Agreement, the Manager has agreed, at all times
during which it is serving as manager of the Company, to maintain a tangible net
worth of at least $250,000. In addition, the Manager has agreed to maintain
"errors and omissions" insurance coverage (which may be provided by a policy or
policies maintained through, and providing coverage for, other members of the
AMRESCO Group) in an amount which is comparable to that customarily maintained
by other managers or servicers of other assets similar to those held by the
Company.
 
   
     The Management Agreement may be assigned by the Manager to an Affiliate
without the consent of the Company. Upon delivery of written notice to the
Company, the Management Agreement may be assigned to a non-Affiliate only with
the approval of a majority of the Independent Trust Managers.
    
 
TERMINATION
 
     During the Initial Term, the Management Agreement may not be terminated
except by the Company (upon a majority vote of the Independent Trust Managers)
as a result of "cause" as defined therein. After the Initial Term, the
Management Agreement may be terminated at any time by the Company upon at least
90 days prior written notice to the Manager or by the Manager upon at least 180
days prior written notice to the Company.
 
   
     Upon termination of the Management Agreement by the Company after the
Initial Term (except in the case of a termination by the Company for cause) or
failure of the Company to renew the Management Agreement after the Initial Term
(except in the case of a termination by the Company for cause), the Company will
be obligated to pay the Manager a substantial termination fee. The termination
fee will be equal to the sum of the Base Management Compensation (which would be
$7 million in the hypothetical circumstances described below) plus any Incentive
Compensation earned by the Manager during the four calendar quarters immediately
preceding the termination. The payment of such a fee would adversely affect the
results of the Company's operations. In addition, upon termination of the
Management Agreement (if no member of the AMRESCO Group is serving as manager of
the Company), the Right of First Refusal and the Correspondent Agreement may be
terminated by the AMRESCO Group. See "Risk Factors -- Termination of the
Management Agreement Could Adversely Affect the Company's Investments and
Operating Results."
    
 
   
     Further, the Management Agreement provides that, upon termination of the
Management Agreement, the AMRESCO Group will have the right to require the
Company to cease all use of the "AMRESCO" name, which could have a material
adverse effect on the Company.
    
 
MANAGEMENT COMPENSATION
 
     The Manager will receive the Base Management Fee calculated and payable
quarterly in an amount equal to (i) 1% per annum of the "Average Invested
Non-Investment Grade Assets" of the Company for such quarter and (ii) 0.50% per
annum of the "Average Invested Investment Grade Assets" of the Company for such
quarter. "Average Invested Non-Investment Grade Assets" means, for any quarter,
the average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's taxable subsidiaries (excluding from (i) and (ii) all
Average Invested Investment Grade Assets) before reserves for depreciation or
bad debts or other similar noncash reserves, computed by dividing (a) the sum of
such values for each of the three months during such quarter (based on the book
value
 
                                       76
<PAGE>   83
 
of such assets as of the last day of each month) by (b) three. "Average Invested
Investment Grade Assets" means, for any quarter, the average of the aggregate
book value of (i) all assets of the Company on a consolidated basis (as
reflected on the Company's balance sheet), excluding the Company's investment in
its nonconsolidated taxable subsidiaries and (ii) all assets of the Company's
nonconsolidated taxable subsidiaries, in each case which either (a) have
received an Investment Grade Rating from all Rating Agencies which have rated
such assets or (b) are unrated but are guaranteed by the U.S. government or any
agency or instrumentality thereof before reserves for depreciation or bad debts
or other similar noncash reserves, computed by dividing (A) the sum of such
values for each of the three months during such quarter (based on the book value
of such assets as of the last day of each month) by (B) three. The Base
Management Fee is payable in arrears. For example, if the Company had $650
million of Average Invested Non-Investment Grade Assets and $100 million of
Average Invested Investment Grade Assets consistently during each calendar
quarter of any one year period, the Manager would be entitled to a Base
Management Fee for such year of $7 million.
 
     In addition to its Base Management Fee, the Manager will be entitled to
receive Incentive Compensation for each fiscal quarter in an amount equal to the
product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations
(before the Incentive Compensation) of the Company per weighted average number
of Common Shares outstanding for such quarter plus (b) gains (or minus losses)
from debt restructuring and sales of property per weighted average number of
Common Shares, exceed (2) an amount equal to (a) the weighted average of the
price per share at the initial offering and the prices per share of any
subsequent issuances of Common Shares by the Company multiplied by (b) the
Ten-Year U.S. Treasury Rate for such quarter, plus 3.5% multiplied by (B) the
weighted average number of Common Shares outstanding during such period. "Funds
From Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. As used in calculating the
Manager's compensation, the term "Ten Year U.S. Treasury Rate" means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board during
a quarter, or, if such rate is not published by the Federal Reserve Board, any
Federal Reserve Bank or agency or department of the federal government selected
by the Company. If the Company determines in good faith that the Ten Year U.S.
Treasury Rate cannot be calculated as provided above, then the rate shall be the
arithmetic average of the per annum average yields to maturities, based upon
closing asked prices on each business day during a quarter, for each actively
traded marketable U.S. Treasury fixed interest rate security with a final
maturity date not less than eight nor more than 12 years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S. government
securities selected by the Company.
 
     The ability of the Manager to earn the Incentive Compensation described in
the preceding paragraph, is dependent upon the level of credit losses, the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
 
     Base Management Fees and Incentive Compensation are payable in arrears.
Such amounts will be calculated by the Manager within 45 days after the end of
each quarter, and paid by the Company within 60 days after the end of each
quarter. In connection with its audit of the Company's financial statements, an
annual review of Base Management Fees and Incentive Compensation will be
conducted by the Company's independent auditors, with adjustment to be made to
fourth quarter fees if it is determined that fees for any preceding quarter of
the year were not correctly determined. The Manager will not receive any Base
Management Fee for the period prior to the sale of the Common Shares offered
hereby.
 
     The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will initially receive no cash compensation directly from the Company.
 
                                       77
<PAGE>   84
 
     The Company expects to rely primarily on the facilities, personnel and
resources of the Manager and other members of the AMRESCO Group to conduct its
operations. The Manager will be reimbursed for (or charge the Company directly
for) the Manager's costs and expenses in employing third-parties, including
Affiliates of the Manager, to perform due diligence, underwriting and other
tasks with respect to assets purchased or originated, or considered for purchase
or origination by the Company. Further, the Manager will be reimbursed for any
expenses incurred in contracting with third parties, including Affiliates of the
Manager, for the Special Servicing of assets of the Company. Such arrangements
may also be made using an income sharing arrangement such as a joint venture.
Expense reimbursement will be made quarterly.
 
     The Company will adopt the Share Option Plan pursuant to which the Manager
will be granted and certain directors, officers and key employees of the
Company, the Manager and other members of the AMRESCO Group will be granted
options to purchase Common Shares. See "Management of the Company -- Share
Options Outstanding."
 
EXPENSES
 
     The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, filing and other expenses) incurred by
the Company, the Manager or its Affiliates on behalf of the Company in
connection with the Offering, estimated at $1,300,000 (exclusive of underwriting
discounts and commissions).
 
     Subject to the limitations set forth below, the Company will also pay all
operating expenses except those specifically required to be borne by the Manager
under the Management Agreement (including salary, wages, payroll taxes and the
cost of employee benefit plans for such personnel). The operating expenses
required to be borne by the Manager (or other members of the AMRESCO Group)
include the compensation of the Manager's officers and employees, the cost of
office space, telephone, utilities and equipment and other expenses required for
the Company's day-to-day operations, including accounting, clerical, Mortgage
Loan primary or Master Servicing (including all expenses customarily paid by
Master Servicers in performing Master Servicing for third parties) and back
office services provided by the Manager or its Affiliates. The expenses that
will be paid by the Company will include (but not necessarily be limited to)
issuance and transaction costs incident to the acquisition, disposition and
financing of investments, legal and auditing fees and expenses, the compensation
and expenses of the Independent Trust Managers, the costs associated with the
establishment and maintenance of any credit facilities and other indebtedness of
the Company (including commitment fees, legal fees, closing costs, etc.), or any
other securities offerings of the Company, the costs of printing and mailing
proxies and reports to shareholders, costs incurred by employees of the Manager
for travel on behalf of the Company, costs associated with any computer software
or hardware that is used solely for the Company, costs to obtain liability
insurance to indemnify the Company's Trust Managers and officers and the
compensation and expenses of the Company's custodian and transfer agent, if any.
The Company will also be required to pay all expenses incurred in connection
with due diligence of certain assets or transactions (provided that such assets
or transactions which were preliminarily approved for investment by the Chief
Investment Officer or the Board of Trust Managers prior to the time such costs
were incurred), the underwriting and accumulation of Mortgage Loans, the Special
Servicing of Mortgage Loans, the issuance and administration of MBS from pools
of Mortgage Loans or otherwise, the raising of capital, incurrence of debt, the
acquisition of assets, interest expenses, taxes and license fees, non-cash
costs, litigation or other dispute resolution, the Base Management Fee and
Incentive Compensation and extraordinary or non-recurring expenses. Such
services may be provided to the Company by Affiliates of the Manager if the
Manager believes such services are of comparable or superior quality to those
provided by third parties and can be provided at comparable cost. Pursuant to
the Guidelines, fees charged to the Company by members of the AMRESCO Group for
services provided will be reasonable and customary and no more than such member
of the AMRESCO Group would charge an unaffiliated third party for such services.
The Company will reimburse the Manager for expenses within 60 days after the end
of each quarter, following receipt of written certification from the Manager as
to the amount of expenses incurred. The Board of Trust Managers will
periodically review the Company's expense levels, the division of expenses
between the Company and the Manager and reimbursements of expenses advanced by
the Manager. Before incurring extraordinary expenses on behalf of
 
                                       78
<PAGE>   85
 
the Company (typically in excess of $500,000 for one asset or one transaction)
the Manager will seek advance approval from the Board of Trust Managers.
 
     Because employees of the Manager and its Affiliates will perform certain
due diligence investigations that purchasers of real estate related assets
(including managers of REITs) typically hire outside consultants or
professionals to perform, the Manager will be reimbursed for (or charge the
Company directly for) the Manager's out-of-pocket costs in performing such due
diligence (subject to the preapproval requirements set forth above with respect
to extraordinary costs). In addition, certain legal and other services typically
performed by third party professionals may be performed by employees of
Affiliates of the Manager to the extent the Manager determines in good faith
that the requisite expertise is available through the Manager or other members
of the AMRESCO Group and that such services are superior in quality to those
available from third parties or that cost savings or other efficiencies arise
from the use of such employees rather than third party service providers. The
Manager and its affiliates will track the time their respective employees spend
on due diligence investigations and on legal and other services typically
provided by outside consultants or third party professionals and will be
entitled to reimbursement for the allocable portion of salary and benefits of
such employees.
 
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
 
   
     The Company, on the one hand, and the Manager and other members of the
AMRESCO Group, on the other, may enter into a number of relationships other than
those governed by the Management Agreement, some of which may give rise to
conflicts of interest between the Manager and other members of the AMRESCO Group
and the Company. Moreover, three of the seven members of the Board of Trust
Managers and all of the officers of the Company are also employed by members of
the AMRESCO Group. See "Risk Factors -- Conflicts of Interest May Result in
Decisions That Do Not Fully Reflect the Shareholders' Best Interest."
    
 
     The relationships between the Company, on the one hand, and the Manager and
other members of the AMRESCO Group, on the other, will be governed by the
Management Agreement, the Right of First Refusal, the Correspondent Agreement
and the Guidelines. See "Business and Strategy -- Relationship With AMRESCO" for
further description of the Guidelines. The Guidelines are to assist and instruct
the Manager and to establish restrictions applicable to transactions with
Affiliates of the Manager. Transactions with Affiliates of the Manager
(including the purchase of Targeted Investments from, or the co-investment in
Targeted Investments with, members of the AMRESCO Group) that are within the
provisions of the Guidelines need not be specifically approved by a majority of
the Independent Trust Managers. The Independent Trust Managers will review the
Company's transactions on a quarterly basis to ensure compliance with the
Guidelines. Although the Independent Trust Managers will review the Guidelines
periodically and will monitor compliance with those Guidelines, investors should
be aware that, in conducting this review, the Independent Trust Managers will
rely primarily on information provided to them by the Manager.
 
     Pursuant to the Right of First Refusal, AMRESCO will agree not to permit
any member of the AMRESCO Group to invest in (i) the first $100 million of
Targeted Mortgage Loans which are identified by or to any member of the AMRESCO
Group during any calendar quarter, or (ii) any MBS, other than MBS issued in
securitizations sponsored in whole or in part by any member of the AMRESCO
Group, unless the Company's Investment Committee shall have first determined
that the Company should not invest in such asset, or should invest in only a
portion of such asset. The Company believes that the Right of First Refusal will
minimize conflicts of interest and potential competition for Targeted
Investments between the Company and the AMRESCO Group. Pursuant to the
Correspondent Agreement, Holliday Fenoglio Fowler will agree, so long as the
Manager or any other member of the AMRESCO Group is acting as manager of the
Company, to present to the Company (on a nonexclusive basis) Targeted
Investments arising within Holliday Fenoglio Fowler which meet the investment
parameters and objectives of the Company. See "Business and Strategy --
Operating Policies and Guidelines -- Relationship With AMRESCO." Except as
provided in the Right of First Refusal or the Correspondent Agreement, however,
neither the Manager nor any other member of the AMRESCO Group will have any
obligation to make investment opportunities available to the Company, nor
 
                                       79
<PAGE>   86
 
will the Company have a right of first refusal with respect thereto. As a
consequence, the investment opportunities for the Company may be limited if such
investment opportunities would be attractive to the Manager or other members of
the AMRESCO Group.
 
     AMRESCO has agreed that during the term of the Management Agreement no
member of the AMRESCO Group will (i) sponsor, (ii) act as manager to or (iii)
make any significant equity investment in, any other mortgage REIT with
investment objectives substantially similar to that of the Company, without the
prior approval of the Independent Trust Managers; otherwise, and except pursuant
to the Right of First Refusal (described above) there will be no limits or
restrictions on the right of the Manager, the AMRESCO Group or any of their
respective officers, directors, employees or Affiliates to engage in any
business or render services of any kind to any other Person, including the
purchase or origination of, or rendering advice to others purchasing, real
estate related assets that meet the Company's policies and criteria.
 
   
     In addition to its Base Management Fee payable under the Management
Agreement, the Manager will have an opportunity to earn Incentive Compensation,
payable quarterly, based upon Funds From Operations of the Company. As a result,
in evaluating assets for investment and in implementing the Company's other
operating strategies, the Manager may place undue emphasis on the maximization
of income at the expense of other criteria, such as preservation of capital, in
order to achieve a higher Incentive Compensation which could result in increased
risk to the value of the Company's portfolio. However, the Board of Trust
Managers will evaluate the performance of the Manager before entering into or
renewing any management arrangement and the Independent Trust Managers will
review the Manager's compensation in relation to the nature and quality of
services performed. Any material changes in the Company's investment and
operating policies are required to be approved by the Board of Trust Managers.
See "Risk Factors -- Conflicts of Interest May Result in Decisions That Do Not
Fully Reflect the Shareholders' Best Interest" and "Business and
Strategy -- Future Revisions in Policies and Strategies."
    
 
   
     Of the executive officers of the Company and the Manager, the Chief
Investment Officer, the Chief Operating Officer and the Controller are full-time
employees of the Manager. All other officers of the Company and the Manager are
also officers and/or employees of other members of the AMRESCO Group. The
Management Agreement does not specify a minimum amount of time that the Manager
or its officers or employees must devote to the Company's business. See "Risk
Factors -- Conflicts of Interest May Result in Decisions That Do Not Fully
Reflect the Shareholders' Best Interest."
    
 
     Pursuant to the Private Placement, Holdings, a member of the AMRESCO Group,
will purchase 2,222,233 (2,555,567 if the Underwriters' over-allotment option is
separately exercised in full) Common Shares at a price equal to the initial
public offering price. See "Private Placement." As a result of this purchase,
the AMRESCO Group will own approximately 10% of the total Common Shares
outstanding after the Offering. Holdings has agreed not to offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose of any such Common Shares for a period of two years from the closing
of the Offering without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters so long as the Manager or another
member of the AMRESCO Group continues to serve as manager of the Company during
such period. In addition, the Manager will receive options to purchase Common
Shares pursuant to the Company's Share Option Plan. See "Management of the
Company -- Share Options Outstanding."
 
     Directors, officers and employees of the Company, the Manager and other
members of the AMRESCO Group, and certain third parties identified by the
AMRESCO Group, are expected to purchase up to 1,000,000 Common Shares pursuant
to the Offering (or up to approximately 5% of the total Common Shares offered
hereby, exclusive of the Underwriters' over-allotment option) at a price equal
to the initial public offering price. Any Trust Manager or officer of the
Company who purchases Common Shares in the Offering will agree not to sell any
Common Shares or any rights to acquire Common Shares to any unaffiliated third
party for a period of 180 days from the closing of the Offering without the
consent of Prudential Securities Incorporated. See "Underwriting." The Manager
and its employees and the Independent Trust Managers may also receive options to
purchase Common Shares pursuant to the Company's Share Option Plan. See
"Management of the Company -- Share Options Outstanding."
 
                                       80
<PAGE>   87
 
     The market in which the Company expects to purchase Targeted Investments is
characterized by rapid evolution of products and services and, thus, there may
in the future be relationships between the Company, the Manager, and other
members of the AMRESCO Group in addition to those described herein.
 
LIMITS OF RESPONSIBILITY
 
     Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to undertake the services called for thereunder and
will not be responsible for any action of the Board of Trust Managers in
following or declining to follow its advice or recommendations. Neither the
Manager nor any member of the AMRESCO Group, nor any of their respective
directors or its officers will be liable to the Company, any issuer of MBS, any
subsidiary of the Company, the Independent Trust Managers, the Company's
shareholders or any other party for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager does not have significant
assets and may not have significant assets in the future. Consequently, there
can be no assurance that the Company would be able to recover any damages for
claims it may have against the Manager.
 
     The Company and AMRESCO have agreed to indemnify the Manager and its
directors, officers, employees and controlling Persons with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising from
any acts or omissions of the Manager or its employees made in good faith in the
performance of the Manager's duties under the Management Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
 
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
   
     The following table sets forth certain information as of April 20, 1998,
relating to the beneficial ownership of the Common Shares by (i) all Persons
known by the Company to beneficially own more than 5% of the outstanding Common
Shares, (ii) each Trust Manager and (iii) all officers and Trust Managers as a
group.
    
 
<TABLE>
<CAPTION>
                                             AMOUNT AND NATURE OF                PERCENTAGE OF SHARES
                                             BENEFICIAL OWNERSHIP                 BENEFICIALLY OWNED
        NAME AND ADDRESS OF           ----------------------------------   --------------------------------
       BENEFICIAL OWNER(1)(2)         BEFORE OFFERING    AFTER OFFERING    BEFORE OFFERING   AFTER OFFERING
       ----------------------         ---------------   ----------------   ---------------   --------------
<S>                                   <C>               <C>                <C>               <C>
Holdings(3).........................      0 shares      2,222,233 shares(5)        0%             10%(5)
AMRESCO(4)..........................    100 shares            100 shares        100%                *
Officers and Trust Managers as a
  Group (Persons)(6)................      0 shares              0 shares          0%               0%
</TABLE>
 
---------------
 
 *   Less than 1%.
 
(1)  Unless otherwise noted, the Company believes that each Person named in the
     table has sole voting and investment power with respect to all Common
     Shares owned by it.
 
(2)  A Person is deemed to be the beneficial owner of securities that can be
     acquired by such Person within 60 days from the date of this Prospectus
     upon the exercise of warrants or options. Each beneficial owner's
     percentage ownership is determined by assuming that options or warrants
     that are held by such Person (but not those held by any other Person) and
     which are exercisable within 60 days from the date of this Prospectus have
     been exercised. None of the outstanding options to acquire Common Shares of
     the Company are exercisable within 60 days of this Prospectus.
 
   
(3)  Address is 330 E. Warm Springs Road, Las Vegas, Nevada 89119.
    
 
(4)  Address is 700 North Pearl Street, Suite 2400, Dallas, Texas 75201.
 
(5)  Includes Common Shares to be purchased in the Private Placement and assumes
     the Underwriters' over-allotment is not exercised, and therefore Holdings
     does not purchase the additional 333,334 Common Shares it is obligated to
     purchase in the Private Placement if the Underwriters exercise their over-
     allotment option. See "Private Placement."
 
                                       81
<PAGE>   88
 
(6)  Does not include Common Shares which may be purchased in the Offering
     pursuant to the request by the Company to reserve an aggregate of 1,000,000
     Common Shares for sale to Trust Managers, officers and employees of the
     Company and members of the AMRESCO Group, and to certain third parties
     identified by the AMRESCO Group. See "The Manager -- Certain Relationships;
     Conflicts of Interests."
 
                        FEDERAL INCOME TAX CONSEQUENCES
 
     The following is a summary of material federal income tax consequences that
may be relevant to a prospective holder of Common Shares who purchases such
shares in the Offering. Winstead Sechrest & Minick P.C. has acted as special tax
counsel ("Tax Counsel") to the Company in connection with the Offering and the
preparation of this Prospectus. This summary should not be construed as tax
advice. The discussion contained herein does not address all aspects of federal
income taxation that may be relevant to particular holders in light of their
personal investment or tax circumstances, or to certain types of holders
(including, without limitation, insurance companies, financial institutions,
broker-dealers, Persons whose functional currency is other than the United
States dollar, Persons who hold Common Shares as part of a straddle, hedging, or
conversion transaction or, except as specifically described herein, tax-exempt
entities and foreign Persons) who are subject to special treatment under the
federal income tax laws. In addition, this summary is generally limited to
Persons who will hold Common Shares as "capital assets" (generally, property
held for investment) within the meaning of section 1221 of the Code.
 
     The statements in this summary are based on current provisions of the Code
(including provisions enacted by the Taxpayer Relief Act of 1997 (the "1997 Tax
Act") which are effective for taxable years of the Company beginning after
August 5, 1997), Treasury Regulations promulgated thereunder, and administrative
and judicial interpretations thereof, as of the date hereof, all of which are
subject to change, possibly with retroactive effect. The provisions of the Code,
the Treasury Regulations promulgated thereunder and the administrative and
judicial interpretations thereof that concern REITs are highly technical and
complex and this summary is qualified in its entirety by such Code provisions,
Treasury Regulations, and administrative and judicial interpretations. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions will not affect the accuracy of any statements in this
summary. In addition, no ruling will be sought from the Internal Revenue Service
(the "IRS") with respect to any matter discussed herein, and there can be no
assurance that the IRS or a court will agree with the statements made herein.
 
     EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
 
GENERAL
 
     The Company intends to make an election to be taxed as a REIT under
sections 856 through 860 of the Code and the applicable Treasury Regulations
promulgated thereunder, which together set forth the requirements for qualifying
as a REIT (the "REIT Provisions of the Code"), beginning with its taxable year
ending on December 31, 1998. The provisions of the 1997 Tax Act will be fully
applicable to the Company. The Company believes that it will be organized and
will operate in such a manner to qualify for taxation as a REIT under the Code.
No assurance can be given, however, that the Company actually will operate in
such a manner to so qualify as a REIT or will continue to operate in such a
manner so as to remain qualified as a REIT.
 
     Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given the Company an opinion that the Company will qualify to be taxed as a
REIT under the Code beginning with its taxable year ending December 31, 1998 and
that the Company's organization and proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under the Code. An opinion of
 
                                       82
<PAGE>   89
 
counsel is not binding on the IRS or a court and there can be no assurance that
the IRS or a court will not take a position different from that expressed by Tax
Counsel. It also must be emphasized that Tax Counsel's opinion is based on
various assumptions and is conditioned upon numerous representations made by the
Company as to factual matters, including those related to its business and its
assets as set forth in this Prospectus. Tax Counsel has not independently
verified the Company's representations. Moreover, the Company's qualification
and taxation as a REIT depend upon the Company's ability to meet on a continuing
basis the actual operating results, distribution levels, diversity of share
ownership and the various other qualification tests imposed by the Code as
discussed below. Tax Counsel will not review the Company's compliance with these
tests on a continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT. See
"-- Failure to Qualify."
 
TAXATION OF THE COMPANY
 
     For any taxable year in which the Company qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income tax on that portion
of its ordinary income or capital gain that is currently distributed to its
shareholders. The REIT Provisions of the Code generally allow a REIT to deduct
dividends paid to its shareholders. This deduction for dividends paid to
shareholders substantially eliminates the federal "double taxation" on earnings
(once at the corporate level and once again at the shareholder level) that
generally results from an investment in a corporation.
 
   
     Even if the Company continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, the Company will
be taxed at regular corporate rates on any undistributed REIT Taxable Income and
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the corporate "alternative minimum tax" on its
undistributed items of tax preference, if any. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, the Company will be
subject to tax on such income at the highest regular corporate rate (currently,
35%). Fourth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held primarily
for sale to customers in the ordinary course of business, other than foreclosure
property or property that is involuntarily converted), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but
nonetheless maintains its qualification as a REIT because certain other
requirements are met, the Company will be subject to a 100% tax on the gross
income attributable to the greater of the amount by which the Company fails the
75% or the 95% test, multiplied by a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute for each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. However, to the extent the Company elects to retain and
pay income tax on net long-term capital gains it received during the year such
amounts will be treated as having been distributed for purposes of the 4% excise
tax. Finally, if the Company acquires any asset from a C corporation (i.e.,
generally a corporation subject to full corporate level tax) in a transaction in
which the basis of the asset in the Company's hands is determined by reference
to the basis of the asset (or any other property) in the hands of the C
corporation, and the Company subsequently recognizes gain on the disposition of
such asset during the ten-year period (the "Recognition Period") beginning on
the date on which the asset was acquired by the Company, then, pursuant to
guidelines issued by the IRS, the excess of (i) the fair market value of the
asset as of the beginning of the applicable Recognition Period, over (ii) the
Company's adjusted basis in such asset as of the beginning of such Recognition
Period (i.e., "built-in gain") will be subject to tax at the highest regular
corporate rate. The results described above with respect to the tax on "built-in
gain" assume that the Company will elect pursuant to IRS Notice 88-19 to be
subject to the rules described in the preceding sentence if it were to make any
such acquisition. Upon the acquisition of a corporation which is a "Qualified
REIT Subsidiary" the Company also would be taxed on any built-in gain
attributable to the Qualified REIT
    
 
                                       83
<PAGE>   90
 
Subsidiary's assets. See "-- Requirements For Qualification -- Organizational
Requirements -- Qualified REIT Subsidiary."
 
     The Company will be subject to tax at the highest marginal corporate rate
on the portion of any excess inclusion income (see "-- Taxation of
Shareholders -- Taxation of Taxable U.S. Shareholders" for a more complete
discussion of excess inclusion income) derived by the Company from REMIC
Residual Interests ("Excess Inclusion") equal to the percentage of the shares of
the Company held by the United States, any state or political subdivision
thereof, any foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt organization
(other than a farmer's cooperative described in section 521 of the Code) that is
exempt from taxation under the unrelated business taxable income provisions of
the Code, or any rural electrical or telephone cooperative (each, a
"Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to shares of the Company held by a Disqualified Organization
will reduce the cash available for distribution from the Company to all
shareholders.
 
     If the Company invests in properties in foreign countries, the Company's
profits from such investments will generally be subject to tax in the countries
where such properties are located. The precise nature and amount of any such
taxation will depend on the laws of the countries where the properties are
located. If the Company satisfies the annual distribution requirements for
qualification as a REIT and is therefore not subject to federal corporate income
tax on that portion of its ordinary income and capital gain that is currently
distributed to its shareholders, the Company will generally not be able to
recover the cost of any foreign tax imposed on profits from its foreign
investments by claiming foreign tax credits against its U.S. tax liability on
such profits. Moreover, a REIT is not able to pass foreign tax credits through
to its shareholders.
 
     The Company will use the calendar year for both federal income tax purposes
and financial reporting purposes.
 
REQUIREMENTS FOR QUALIFICATION
 
     To qualify as a REIT, the Company must meet and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
 
     ORGANIZATIONAL REQUIREMENTS. The Code requires that a REIT be a
corporation, trust, or association:
 
          (i) which is managed by one or more trustees or directors;
 
          (ii) the beneficial ownership of which is evidenced by transferable
     shares or by transferable certificates of beneficial interest;
 
          (iii) which would be taxable as a domestic corporation but for
     compliance with the REIT requirements;
 
          (iv) which is neither a financial institution nor an insurance company
     subject to certain special provisions of the Code;
 
          (v) the beneficial ownership of which is held by 100 or more Persons;
 
          (vi) at all times during the last half of each taxable year not more
     than 50% in value of the outstanding shares of which is owned, directly or
     indirectly through the application of certain attribution rules, by or for
     five or fewer individuals (as defined in the Code to include certain
     tax-exempt entities other than, in general, qualified domestic pension
     funds)(the "5/50 Rule");
 
          (vii) that makes an election to be a REIT (or has made such election
     for a previous taxable year) and satisfies all relevant filing and other
     administrative requirements established by the IRS that must be met in
     order to elect and maintain REIT status;
 
          (viii) that uses a calendar year for federal income tax purposes; and
 
          (ix) which meets certain other tests, described below, regarding the
     nature of its income and assets.
 
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<PAGE>   91
 
     The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (v) and (vi) do not apply
until after the first taxable year for which a REIT election is made. For
purposes of determining share ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
 
     The Company anticipates issuing sufficient Common Shares with sufficient
diversity of ownership pursuant to the Offering to allow it to satisfy
requirements (v) and (vi). In addition, the Declaration of Trust provides for
restrictions regarding the transfer of the Common Shares that are intended to
assist the Company in continuing to satisfy the share ownership requirements
described in clauses (v) and (vi) above. Such transfer restrictions are
described in "Description of Shares of Beneficial Interest -- Restrictions on
Transfer." For purposes of determining ongoing compliance with the beneficial
share ownership requirements, Treasury Regulations require the Company to issue
letters to certain shareholders demanding information regarding the amount of
shares each such shareholder actually or constructively owns ("shareholder
demand letters"). If the Company fails to comply with these regulatory rules it
will be subject to a $25,000 penalty ($50,000 for intentional violations).
 
     As set forth in (vi) above, to qualify as a REIT, the Company must also
satisfy the requirement set forth in Section 856(a)(6) of the Code that it not
be closely held. The Company will not be closely held so long as at all times
during the last half of any taxable year of the Company (other than the first
taxable year for which the REIT election is made) not more than 50% in value of
its outstanding shares is owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain tax-exempt entities, other than, in general, qualified
domestic pension funds). Although the Declaration of Trust of the Company
contains certain restrictions on the ownership and transfer of the Common
Shares, the restrictions do not ensure that the Company will be able to satisfy
the 5/50 Rule requirement. If the Company fails to satisfy the 5/50 Rule, the
Company's status as a REIT will terminate, and the Company will not be able to
prevent such termination. However, if the Company complies with the procedures
prescribed in the Treasury Regulations for issuing shareholder demand letters
and does not know, or with the exercise of reasonable diligence would not have
known, that the 5/50 Rule was violated, the requirement will be deemed to be
satisfied for the year. See "-- Failure to Qualify."
 
     Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary that is a
"Qualified REIT Subsidiary," within the meaning of section 856(i) of the Code,
that subsidiary is disregarded for federal income tax purposes, and all assets,
liabilities, and items of income, deduction, and credit of the subsidiary are
treated as assets, liabilities and such items of the REIT itself. A "Qualified
REIT Subsidiary" is a corporation all of the capital shares of which are owned
by the REIT. If an existing corporation is acquired by a REIT and is a
"Qualified REIT Subsidiary", all of its pre-REIT earnings and profits must be
distributed before the end of the REIT's taxable year. See "-- Taxation of the
Company."
 
     Ownership of a Partnership Interest. In the case of a REIT that is a
partner in a partnership, Treasury Regulations provide that the REIT is deemed
to own its proportionate share of the assets of the partnership corresponding to
the REIT's capital interest in such partnership and is deemed to be entitled to
the income of the partnership attributable to such proportionate share. In
addition, the character of the assets and gross income of the partnership retain
the same character in the hands of the REIT for purposes of the REIT
requirements, including satisfying the gross income tests and the asset tests.
Pursuant to Treasury Regulations effective January 1, 1997 relating to entity
classification (the "Check-the-Box Regulations"), an unincorporated entity that
has a single owner is disregarded as an entity separate from its owner for
federal income tax purposes.
 
     INCOME TESTS. To maintain its qualification as a REIT, the Company must
satisfy two gross income requirements annually. First, at least 75% of the
Company's gross income (excluding gross income from
 
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<PAGE>   92
 
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments and from dividends, interest, and gain from the sale or disposition
of shares or securities or from any combination of the foregoing.
 
     The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any Person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. Furthermore, to
the extent that interest from a loan that is based on the cash proceeds from the
sale of the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such participation
feature will be treated as gain from the sale of the secured property, which
generally may be qualifying income for purposes of the 75% and 95% gross income
tests.
 
     Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75% gross income test. Any amount includible in gross income with respect to a
regular or residual interest in a REMIC generally is treated as interest on an
obligation secured by a mortgage on real property. If, however, less than 95% of
the assets of a REMIC consists of real estate assets (determined as if the
Company held such assets), the Company will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if the Company
receives interest income with respect to a Mortgage Loan that is secured by both
real property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date the Company acquired the Mortgage Loan, the interest income
will be apportioned between the real property and the other property, which
apportionment may cause the Company to recognize income that is not qualifying
income for purposes of the 75% gross income test.
 
     Tax Counsel is of the opinion that the interest, OID, and any market
discount income that the Company derives from its investments in MBS and
Mortgage Loans generally will be qualifying interest income for purposes of both
the 75% and the 95% gross income tests, except to the extent that less than 95%
of the assets of a REMIC in which the Company holds an interest consists of real
estate assets (determined as if the Company held such assets), and the Company's
proportionate share of the income of the REMIC includes income that is not
qualifying income for purposes of the 75% and 95% gross income tests. Most of
the income that the Company recognizes with respect to its investments in
Mortgage Loans will be qualifying income for purposes of both gross income
tests. In some cases, however, the loan amount of a Mortgage Loan, particularly
with respect to a Distressed Mortgage Loan, a Performing Mortgage Loan, or any
Subordinated Interest in any MBS, may exceed the value of the real property
securing the loan, which will result in a portion of the income from the loan
being classified as qualifying income for purposes of the 95% gross income test,
but not for purposes of the 75% gross income test. It is also possible that, in
some instances, the interest income from a Mortgage Loan may be based in part on
the borrower's profits or net income, which in some instances may disqualify the
income from the loan for purposes of both the 75% and the 95% gross income
tests.
 
     The Company may originate or acquire Mortgage Loans that have shared
appreciation provisions. To the extent interest from a loan that is based on the
cash proceeds from the sale of property constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such participation
feature will be treated as gain from the sale of the secured property, which
generally may be qualifying income for purposes of the 75% and 95% gross income
tests. Also, the Company may be required to recognize income from a shared
 
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<PAGE>   93
 
appreciation provision over the term of the related loan using the constant
yield method pursuant to certain Treasury Regulations.
 
     The Company may originate or acquire Mortgage Loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such transactions,
the Company will retain an equity ownership interest in the Mortgage Loans that
has economic characteristics similar to those of a subordinated interest in a
MBS. In addition, the Company may securitize MBS (or non-REMIC CMOs) through the
issuance of REMIC or non-REMIC CMOs, retaining an equity interest in the MBS
used as collateral in the resecuritization transaction. Such transactions will
not cause the Company to fail to satisfy the gross income tests or the asset
tests described below.
 
     The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. For example, certain
fees for services rendered by the Company will not be qualifying income for
purposes of the gross income tests. It is not anticipated that the Company will
receive a significant amount of such fees. The Company will monitor the amount
of nonqualifying income produced by its assets and intends to manage its
portfolio in order to comply at all times with both the 75% and the 95% gross
income tests.
 
     Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any Person from such property, although an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of gross
receipts or gross sales. Rents received from a tenant that are based on the
tenant's income from the property will not be treated as rents based on income
or profits and thus excluded from the term "rents from real property" if the
tenant derives substantially all of its income with respect to such property
from the leasing or subleasing of substantially all of such property, provided
that the tenant receives from subtenants only amounts that would be treated as
rents from real property if received directly by a REIT. Second, rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an owner of 10% or more of the REIT, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, a REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an "independent contractor" from whom the REIT
derives no income. The independent contractor requirement, however, does not
apply to the extent the services rendered by the REIT are customarily furnished
or rendered in connection with the rental of the real property such that they
are services that a tax-exempt organization could provide to its tenants without
causing its rental income to be unrelated business taxable income under the
Code. A tax-exempt organization may provide services which are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant," without incurring
unrelated business taxable income. A de minimis exception allows a REIT to
provide non-customary services to its tenants and not disqualify income as rents
from real property so long as the amount received or accrued by the REIT from
the impermissible services does not exceed 1.0% of the Company's gross income
from the property. The amount the Company receives that is attributable to
impermissible services cannot be valued at less than 150% of the direct cost to
the REIT of providing these services.
 
     The Company intends to operate so that it will not charge rent for any
portion of any of its real property that is based, in whole or in part, on the
income or profits of any Person (except by reason of being based on a fixed
percentage or percentages of receipts of sales, as described above) to the
extent that the receipt of such rent would jeopardize the Company's status as a
REIT. In addition, the Company intends to operate so that, to the extent that it
receives rent from a Related Party Tenant, such rent will not cause the Company
to fail to satisfy either the 75% or 95% gross income test. The Company also
intends to operate so that it will not allow the rent attributable to personal
property leased in connection with any lease of real property to exceed 15% of
the total rent received under the lease, if the receipt of such rent would cause
the Company to fail to satisfy
 
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<PAGE>   94
 
either the 75% or 95% gross income test. Finally, the Company intends to operate
so that it will not operate or manage its real property or furnish or render
noncustomary services to the tenants of its real property other than through an
"independent contractor," to the extent that such operation or the provision of
such services would jeopardize the Company's status as a REIT.
 
     Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid not qualifying as a REIT. The Company may for instance
transfer certain nonqualifying activities to a taxable corporation, from which
it would receive dividends. If this should occur, the Company would be entitled
to receive dividends as a shareholder of such corporation. The amount of
dividends available for distribution to the Company would be reduced below the
comparable amount of income that would otherwise be received by the Company
because such a corporation would be subject to a corporate level tax on its
taxable income, thereby reducing the amount of cash available for distribution.
 
     REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% and 95% gross income tests, but,
if the Company does receive any such income, the Company intends to make an
election to treat the related property as foreclosure property.
 
     If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
 
     It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that the Company enters into an interest rate swap or
cap agreement, option, futures contract, forward rate agreement, or any similar
financial instrument to reduce its interest rate risk with respect to debt that
was or will be incurred to acquire or carry real estate assets, any periodic
income or gain from the disposition of such contract should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test. To
the extent that the Company hedges with other types of financial instruments
that are not similar to the above or in other situations, it may not be entirely
clear how the income from those transactions will be treated for purposes of the
various income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT. If necessary, the Company may conduct some or all of its
hedging activities through a corporate subsidiary that is fully subject to
federal corporate income tax.
 
     If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if (i) the Company's failure
to meet such test(s) was due to reasonable cause and not due to willful neglect,
(ii) the Company reported the nature and amount of each item of its income
included in the test(s) for such taxable year on a schedule attached to its
return, and (iii) any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether, in all
circumstances, the Company would be entitled to the benefit of these relief
 
                                       88
<PAGE>   95
 
   
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally earns exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. As discussed above in
"-- Taxation of the Company" even if these relief provisions apply, the Company
will still be subject to a 100% tax on the gross income attributable to the
greater of the amount by which the Company failed the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
    
 
     ASSET TESTS. The Company, at the close of each quarter of each taxable
year, also must satisfy two tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
cash or cash items (including certain receivables), government securities, "real
estate assets," or, in cases where the Company raises new capital through shares
or long-term (at least five-year) debt offerings, temporary investments in
shares or debt instruments during the one-year period following the Company's
receipt of such capital. The term "real estate assets" includes interests in
real property, interests in mortgages on real property to the extent the
principal balance of a mortgage does not exceed the fair market value of the
associated real property, regular or residual interests in a REMIC (except that,
if less than 95% of the assets of a REMIC consists of "real estate assets"
(determined as if the Company held such assets), the Company will be treated as
holding directly its proportionate share of the assets of such REMIC), and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property" includes an interest in Mortgage Loans or land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). An "interest" in real property also generally
includes an interest in Mortgage Loans secured by controlling equity interests
in entities treated as partnerships for federal income tax purposes that own
real property, to the extent that the principal balance of the mortgage does not
exceed the fair market value of the real property that is allocable to the
equity interest. Second, of the investments not included in the 75% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own more
than 10% of any one issuer's outstanding voting securities (except for its
interests in any Qualified REIT Subsidiary).
 
     The Company expects that any Mortgage Loans, MBS or commercial real
property and temporary investments that it acquires generally will be qualifying
assets for purposes of the 75% asset test, except to the extent that less than
95% of the assets of a REMIC in which the Company owns an interest consists of
"real estate assets" and the Company's proportionate share of those assets
includes assets that are non-qualifying assets for purposes of the 75% asset
test. In addition, the Company expects that any preferred equity investments in
partnerships that own real estate would also be treated as qualifying real
estate assets for such purposes as long as the assets were qualifying assets in
the hands of such partnership. Similarly, a preferred equity investment in a
corporation, which if acquired by the Company would constitute a Qualified REIT
Subsidiary, would be treated as a qualifying asset to the extent that the
principal balance of a Mortgage Loan does not exceed the value of the associated
real property. The Company will monitor the status of the assets that it
acquires for purposes of the various asset tests and intends to manage its
portfolio in order to comply at all times with such tests.
 
     If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
 
     ANNUAL DISTRIBUTION REQUIREMENTS. To continue to qualify as a REIT, the
Company is required to distribute dividends (other than capital gain dividends
and retained capital gains) to its shareholders each year in an amount at least
equal to (i) the sum of (A) 95% of the Company's REIT Taxable Income plus (B)
95% of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of non-cash income. Such distributions must be paid in
the taxable year to which they relate, or in the following
 
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<PAGE>   96
 
taxable year if declared before the Company timely files its tax return for such
year and if paid on or before the first regular dividend payment after such
declaration. A distribution which is not pro rata within a class of shares
entitled to a dividend or which is not consistent with the rights to
distributions between classes of shares (a "preferential dividend") is not taken
into consideration for the purpose of meeting the distribution requirement.
Accordingly, the payment of a preferential dividend could affect the Company's
ability to meet this distribution requirement.
 
     To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT Taxable
Income, as adjusted, it will be subject to tax on the undistributed amount at
regular capital gains or ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute for each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, plus (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. However, to the extent the Company elects to retain and pay income
tax on net long-term capital gains it received during the year such amounts will
be treated as having been distributed for purposes of the 4% excise tax. The
Company intends to make timely distributions sufficient to satisfy the annual
distribution requirements.
 
     It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT Taxable Income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID accrues with respect to its MBS. Furthermore, some Distressed and
Participating Loans may be deemed to have OID, in which case the Company will be
required to recognize taxable income in advance of the related cash flow. OID
generally will be accrued using a methodology that does not allow credit losses
to be reflected until they are actually incurred. In addition, the Company may
recognize taxable market discount income upon the receipt of proceeds from the
disposition of, or principal payments on, MBS and Mortgage Loans that are
"market discount bonds" (i.e., obligations with a stated redemption price at
maturity that is greater than the Company's tax basis in such obligations),
although such proceeds often will be used to make non-deductible principal
payments on related borrowings. The Company also may recognize Excess Inclusion
or other "phantom" taxable income from REMIC Residual Interests. It also is
possible that, from time to time, the Company may recognize net capital gain
attributable to the sale of depreciated property that exceeds its cash receipts
from the sale. In addition, pursuant to certain Treasury Regulations, the
Company may be required to recognize the amount of any payment to be made
pursuant to a shared appreciation provision over the term of the related loan
using the constant yield method. Also, because the Company is an accrual-basis
taxpayer, it may have to recognize income on Distressed Mortgage Loans even
though the borrower is unable to pay the full amount due. Finally, the Company
may recognize taxable income without receiving a corresponding cash distribution
if it forecloses on or makes a "significant modification" (as defined in
Regulations section 1.1001-3(e)) to a loan, to the extent that the fair market
value of the underlying property or the principal amount of the modified loan,
as applicable, exceeds the Company's basis in the original loan. Although the
Code allows certain items of excess noncash income (including OID) to be
disregarded for purposes of the distribution requirements, the Company may have
less cash than is necessary to meet its annual 95% distribution requirement or
to avoid corporate income tax or the excise tax imposed on certain undistributed
income. In such a situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of Preferred Shares or additional Common Shares.
 
     If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to the Company's tax return by the IRS upon audit, the Company
may retroactively cure the failure by paying "deficiency dividends" to its
shareholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest to the IRS based upon the amount of
any deduction taken for deficiency dividends.
 
     Any gross income derived from a prohibited transaction is not taken into
account in applying the 95% and 75% gross income tests necessary to qualify as a
REIT (but the net income from such a transaction is subject
 
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to a 100% tax). The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property or property that
was involuntarily converted) that is held primarily for sale to customers in the
ordinary course of a trade or business. The Company believes that no asset owned
by it will be held for sale to customers and that a sale of any such asset will
not be in the ordinary course of the Company's business. Whether property is
held "primarily for sale to customers in the ordinary course of a trade or
business" depends, however, on the facts and circumstances in effect from time
to time, including those related to a particular property. When relevant, the
Company will attempt to comply with the terms of safe-harbor provisions in the
Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
 
FAILURE TO QUALIFY
 
     If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify as a REIT will not be required and, if made, will not
be deductible by the Company. As a result, the Company's failure to qualify as a
REIT will reduce the cash available for distribution by the Company to its
shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to the Company's shareholders will be taxable as ordinary dividend
income to the extent of the Company's then current and accumulated earnings and
profits, and, subject to certain limitations in the Code, corporate distributees
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, the Company also will be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to determine whether the
Company would be entitled to such statutory relief in all circumstances.
 
TAXATION OF SHAREHOLDERS
 
     TAXATION OF TAXABLE U.S. SHAREHOLDERS. As used herein, the term "U.S.
Shareholder" means a holder of Common Shares who (for United States federal
income tax purposes) (i) is a citizen or resident of the United States, (ii) is
a corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any state unless, in the case of a partnership,
Treasury Regulations provide otherwise, (iii) is an estate whose income is
subject to taxation in the United States regardless of its connection with the
conduct of a U.S. trade or business or (iv) is a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States Persons have the authority to control
all substantial decisions of the trust.
 
     As long as the Company continues to qualify as a REIT, distributions made
by the Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
U.S. Shareholders as ordinary income. Such distributions will not be eligible
for the dividends-received deduction in the case of U.S. Shareholders that are
corporations.
 
     Dividends paid to U.S. Shareholders will be treated as portfolio income.
Such income, therefore, will not be subject to reduction by losses from passive
activities (i.e., any interest in a rental activity or in a trade or business in
which the holder does not materially participate, such as certain interests held
as a limited partner) of any holder who is subject to the passive activity loss
rules. Such distributions will, however, be considered investment income which
may be offset by certain investment expense deductions.
 
     Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her Common Shares. The highest marginal
individual income tax rate currently is 39.6%. The maximum tax rate on long-term
capital gains applicable to noncorporate taxpayers is 28% for sales and exchange
of assets held for more than one year but not more than 18 months and 20% for
 
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<PAGE>   98
 
sales and exchange of assets held for more than 18 months. Thus, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital gain
or ordinary income may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against noncorporate
taxpayers' ordinary income only up to a maximum annual amount of $3,000. Unused
capital losses may be carried forward indefinitely by individuals. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years. U.S. Shareholders that are corporations may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
 
     The Company may elect to retain amounts representing long-term capital gain
income on which the Company will be taxed at regular corporate rates. In that
case, each shareholder will be taxed on a proportionate share of the total
long-term capital gains retained by the Company and will also receive a credit
for a proportionate share of the tax paid by the Company. Finally, each
shareholder shall increase the adjusted basis in his/her shares by the
difference between the allocable amount of long-term capital gain and the tax
deemed paid by the shareholder. If the Company should elect to retain long-term
capital gains, it will notify each shareholder of the relevant tax information
after the close of the taxable year.
 
     To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his/her shares of Common Shares for tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a U.S. Shareholder's adjusted basis in his/her shares taxable as capital
gains (provided that the shares have been held as a capital asset). Dividends
declared by the Company in October, November, or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders may
not include in their own income tax returns any net operating losses or capital
losses of the Company.
 
     The Company's investment in Subordinated Interests and certain types of MBS
may cause it under certain circumstances to recognize taxable income in excess
of its economic income ("phantom income") and to experience an offsetting excess
of economic income over its taxable income in later years. As a result,
shareholders may from time to time be required to pay federal income tax on
distributions that economically represent a return of capital, rather than a
dividend. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes. Accordingly, if the Company receives phantom
income, its shareholders may be required to pay federal income tax with respect
to such income on an accelerated basis, i.e., before such income is realized by
the shareholders in an economic sense. Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
shareholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. For example, if an investor subject to an effective income tax rate of
30% purchased a bond (other than a tax-exempt bond) with an annual interest rate
of 10% for its face value, his before-tax return on his investment would be 10%,
and his after-tax return would be 7%. However, if the same investor purchased
shares of the Company at a time when the before-tax rate of return was 10%, his
after-tax rate of return on his shares might be somewhat less than 7% as a
result of the Company's phantom income. In general, as the ratio of the
Company's phantom income to its total income increases, the after-tax rate of
return received by a taxable shareholder of the Company will decrease.
 
     Because the Company expects to own REMIC Residual Interests, it is likely
that shareholders (other than certain thrift institutions) will not be permitted
to offset certain portions of the dividend income they derive from the Company
with their current deductions or net operating loss carryovers or carrybacks.
The portion of a shareholder's dividends that will be subject to this limitation
will equal his allocable share of any Excess Inclusion income derived by the
Company with respect to the REMIC Residual Interests. The Company's Excess
Inclusion income for any calendar quarter will equal the excess of its income
from REMIC
 
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<PAGE>   99
 
Residual Interests over its "daily accruals" with respect to such REMIC Residual
Interests for the calendar quarter. Daily accruals for a calendar quarter are
computed by allocating to each day on which a REMIC Residual Interest is owned a
ratable portion of the product of (i) the "adjusted issue price" of the REMIC
Residual Interest at the beginning of the quarter and (ii) 120% of the long-term
federal interest rate (adjusted for quarterly compounding) on the date of
issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC
Residual Interest at the beginning of a calendar quarter equals the original
issue price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to the
Company with respect to the REMIC Residual Interest. To the extent provided in
future Treasury Regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by the Company that do not have significant value
will equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a Qualified REIT
Subsidiary) acquires or originates Mortgage Loans and uses those loans to
collateralize one or more multiple-class offerings of CMOs for which no REMIC
election is made ("Non-REMIC Transactions"), it is possible that, to the extent
provided in future Treasury Regulations, shareholders (other than certain thrift
institutions) will not be permitted to offset certain portions of the dividend
income that they derive from the Company that are attributable to Non-REMIC
transactions with current deductions or net operating loss carryovers or
carrybacks. Although no applicable Treasury regulations have yet been issued, no
assurance can be provided that such regulations will not be issued in the future
or that, if issued, such regulations will not prevent the Company's shareholders
from offsetting some portion of their dividend income with deductions or losses
from other sources.
 
     Upon any sale or other disposition of Common Shares, the holder will
generally recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received on such sale or other disposition, and (ii) the
holder's adjusted basis in the shares. Such gain or loss will generally be
capital gain or loss and will be long-term capital gain or loss if such shares
have been held for more than twelve months. In general, any loss recognized by a
U.S. Shareholder upon the sale or other disposition of Common Shares that have
been held for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss, to the extent of distributions
received by such U.S. Shareholder from the Company which were required to be
treated as long-term capital gains.
 
     TAXATION OF TAX-EXEMPT SHAREHOLDERS. Tax-exempt entities, including
qualified employee pension and profit sharing trusts and individual retirement
accounts ("Exempt Organizations"), generally are exempt from federal income
taxation. However, they are subject to taxation on their unrelated business
taxable income ("UBTI"). While many investments in real estate generate UBTI,
the IRS has issued a published ruling that dividend distributions from a REIT to
an exempt employee pension trust do not constitute UBTI, provided that the
shares of the REIT are not otherwise used in an unrelated trade or business of
the exempt employee pension trust. Based on that ruling, amounts distributed by
the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of the Common Shares
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c)
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company and any gain realized on the sale of
Common Shares as UBTI.
 
   
     Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension held REIT" at any time during a taxable year.
Such a pension fund must treat a certain percentage of all dividends received
from the REIT during the year as UBTI. The percentage is equal to the ratio of
the REIT's gross income (less direct expenses related thereto) derived from the
conduct of unrelated trades or businesses determined as if the REIT were a
tax-exempt pension fund, to the REIT's gross income (less direct expenses
related thereto) from all sources. The special rules will not apply to require a
pension fund to recharacterize a portion of its dividends as UBTI unless the
percentage computed is at least 5%.
    
 
                                       93
<PAGE>   100
 
     A REIT will be treated as a "pension held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would fail to
satisfy the 5/50 Rule discussed above, see "-- Requirements For
Qualification -- Organizational Requirements," if the shares of the REIT held by
such tax-exempt pension funds were not treated as held directly by their
respective beneficiaries. A REIT is predominantly held by tax-exempt pension
funds if at least one tax-exempt pension fund holds more than 25% (measured by
value) of the REIT's shares, or if one or more tax-exempt pension funds (each of
which owns more than 10% (measured by value) of the REIT's shares) own in the
aggregate more than 50% (measured by value) of the REIT's shares. The Company
believes that it will not be treated as a pension-held REIT. However, because
the shares of the Company will be publicly traded, no assurance can be given
that the Company is not or will not become a pension-held REIT.
 
     Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion income derived by the Company from REMIC Residual Interests
that is allocable to shares of the Company held by Disqualified Organizations.
Any such tax would be deductible by the Company against its income that is not
Excess Inclusion income.
 
     If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on shareholders who are (i) pass-through entities
(i.e., partnerships, estates, trusts, regulated investment companies, REITs,
common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Shares on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds Common Shares in a "street name" account for a
Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares.
 
     The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of CMOs in Non-REMIC transactions. If such Treasury
regulations are issued in the future preventing taxable shareholders from
offsetting some percentage of the dividends paid by the Company with deductions
or losses from other sources, that same percentage of the Company's dividends
would be treated as UBTI for shareholders that are Exempt Organizations. See
"-- Taxation of Taxable U.S. Shareholders."
 
     TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing United States
federal income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships, foreign trusts and estates and other foreign shareholders
(collectively, "Non-U.S. Shareholders") are highly complex, and the following
discussion is intended only as a summary of such rules. PROSPECTIVE NON-U.S.
SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT
OF UNITED STATES FEDERAL, STATE, AND LOCAL INCOME TAX LAWS ON AN INVESTMENT IN
COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
 
     In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in Common Shares in the same manner
as a U.S. Shareholder if such investment is "effectively connected" with the
Non-U.S. Shareholder's conduct of a trade or business in the United States. A
corporate Non-U.S. Shareholder that receives income with respect to its
investment in Common Shares that is (or is treated as) effectively connected
with the conduct of a trade or business in the United States also may be subject
to the 30% branch profits tax imposed by the Code, which is payable in addition
to regular United States corporate income tax. The following discussion
addresses only the United States taxation of Non-U.S. Shareholders whose
investment in Common Shares is not effectively connected with the conduct of a
trade or business in the United States.
 
     Distributions made by the Company that are not attributable to gain from
the sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be treated
as ordinary income dividends to the extent made out of current or accumulated
earnings and profits of the Company. Generally, such ordinary income dividends
will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividends paid unless reduced or eliminated by an applicable
United States income tax treaty. The Company expects to withhold United States
 
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<PAGE>   101
 
income tax at the rate of 30% on the gross amount of any such dividends paid to
a Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S.
Shareholder has filed an IRS Form 1001 with the Company certifying the Non-U.S.
Shareholder's entitlement to treaty benefits.
 
     Distributions made by the Company in excess of its current and accumulated
earnings and profits will be treated first as a tax-free return of capital to
each Non-U.S. Shareholder, reducing the adjusted basis which such Non-U.S.
Shareholder has in his Common Shares for U.S. tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a Non-U.S.
Shareholder's adjusted basis in his shares being treated as gain from the sale
or exchange of such shares, the tax treatment of which is described below. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of the Company's current and accumulated earnings
and profits, the distribution will be subject to withholding at the rate
applicable to a dividend distribution. However, the Non-U.S. Shareholder may
seek a refund from the IRS of any amount withheld if it is subsequently
determined that such distribution was, in fact, in excess of the Company's then
current and accumulated earnings and profits.
 
     If the Company derives Excess Inclusion income from REMIC Residual
Interests, the portion of the dividends paid to Non-U.S. Shareholders that is
allocable to the Excess Inclusion income may not be eligible for exemption from
the 30% withholding tax or a reduced treaty rate. In addition, the U.S. Treasury
Department has been authorized to issue regulations regarding issuances by a
REIT of multi-class MBS in Non-REMIC Transactions. If Treasury Regulations are
issued in the future preventing taxable shareholders from offsetting some
percentage of the dividends paid by the Company with deductions or losses from
other sources, that same percentage of the Company's dividends would not be
eligible for exemption from the 30% withholding tax or a reduced treaty rate.
See "-- Taxation of Taxable U.S. Shareholders."
 
     As long as the Company continues to qualify as a REIT, distributions made
by the Company that are attributable to gain from the sale or exchange by the
Company of United States real property interests will be taxed to a Non-U.S.
Shareholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder
as if such distributions were gains "effectively connected" with the conduct of
a trade or business in the United States. Accordingly, a Non-U.S. Shareholder
will be taxed on such distributions at the same capital gain rates applicable to
U.S. Shareholders (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of non-resident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the case of a corporate Non-U.S. Shareholder that is not entitled to
treaty relief or exemption. The Company will be required to withhold tax from
any distribution to a Non-U.S. Shareholder that could be designated by the
Company as a capital gain dividend in an amount equal to 35% of the gross
distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the
Non-U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
 
     Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
Common Shares generally will not be subject to United States taxation unless the
Common Shares constitute a "United States real property interest" within the
meaning of FIRPTA. The Common Shares will not constitute a "United States real
property interest" so long as the Company is a "domestically controlled REIT." A
"domestically controlled REIT" is a REIT in which at all times during a
specified testing period less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Shareholders. However, because the shares of Common
Shares will be publicly traded, no assurance can be given that the Company is or
will continue to be a "domestically-controlled REIT." Notwithstanding the
foregoing, gain from the sale or exchange of Common Shares not otherwise subject
to FIRPTA will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder
is a nonresident alien individual who is present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States.
In such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
 
                                       95
<PAGE>   102
 
     If the Company did not constitute a "domestically-controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Shareholder of Common Shares
would be subject to United States taxation under FIRPTA as a sale of a "United
States real property interest" only if the selling Non-U.S. Shareholder's
interest in the Company exceeded 5% at any time during the five years preceding
the sale or exchange. If gain on the sale or exchange of Common Shares was
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
regular United States income tax with respect to such gain in the same manner as
a U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the Common Shares (including the Company in
a redemption transaction) would be required to withhold and remit to the IRS 10%
of the purchase price. Additionally, in such case, distributions on the Common
Shares to the extent they represent a return of capital or capital gain from the
sale of the shares, rather than dividends, would be subject to a 10% withholding
tax.
 
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
 
     The Company will report to its U.S. Shareholders and to the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a U.S.
Shareholder may be subject to backup withholding at the rate of 31% on dividends
paid unless such U.S. Shareholder (i) is a corporation or falls within certain
other exempt categories and, when required, can demonstrate this fact, or (ii)
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. A U.S. Shareholder who does not provide the
Company with his correct taxpayer identification number also may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the U.S. Shareholder's federal income tax liability. In
addition, the Company may be required to withhold a portion of any capital gain
distributions made to U.S. Shareholders who fail to certify their non-foreign
status to the Company. See "-- Taxation of Non-U.S. Shareholders."
 
     Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
 
PROPOSED TAX LEGISLATION AND POSSIBLE OTHER LEGISLATIVE ACTIONS AFFECTING TAX
CONSEQUENCES
 
     On February 2, 1998 President Clinton released his budget proposal for
fiscal year 1999 (the "Budget Proposal"). Two provisions contained in the Budget
Proposal could affect the Company if enacted in final form. First, the Budget
Proposal would prohibit a REIT from owning, directly or indirectly, more than
10% of the voting power or value of all classes of a C corporation's stock
(other than the stock of a Qualified REIT Subsidiary). Currently, a REIT may own
no more than 10% of the voting stock of a C corporation (other than a Qualified
REIT Subsidiary), but its ownership of the nonvoting stock of a C corporation is
not limited (other than by the rule that the value of a REIT's combined equity
and debt interest in a C corporation may not exceed 5% of the value of a REIT's
total assets). That provision is proposed to be effective with respect to stock
in a C corporation acquired by a REIT on or after the date of "first committee
action" (i.e., first action by the House Ways and Means Committee with respect
to the provision) ("First Committee Action"). A REIT that owns stock in a C
corporation in excess of the new ownership limit prior to First Committee Action
would be "grandfathered," but only to the extent that the corporation does not
engage in a new trade or business or acquire substantial new assets on or after
the date of First Committee Action. If enacted as presently written, that
provision would limit the Company's use of AMREIT II, Inc. and other taxable
subsidiaries to conduct businesses the income from which would be nonqualifying
income if received directly by the Company.
 
     Second, the Budget Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its conversion
to REIT status or merger into a REIT. That provision is proposed to be effective
for conversions to REIT status effective for taxable years beginning after
January 1, 1999 and mergers of C corporations into
 
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<PAGE>   103
 
REITs that occur after December 31, 1998. This provision would require immediate
recognition of gain if, at any time after December 31, 1998, a "large" C
corporation merges into the Company.
 
     On March 26, 1998, bills were introduced in both the House of
Representatives and the Senate (H.R. 3558 and S.1871) which would limit the
operations of certain "stapled" REITs. Since the Company is not a "stapled"
REIT, such proposed legislation, if enacted, is not expected to affect the
Company. Neither bill, as introduced, included the other provisions from the
Budget Proposal which, if enacted, would apply to all REITs.
 
     Prospective holders should recognize that the present federal income tax
treatment of the Company may be modified by other future legislative, judicial
or administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments and
commitments previously made. The rules dealing with federal income taxation are
constantly under review by Persons involved in the legislative process and by
the IRS and the Treasury Department, resulting in statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its shareholders. Revisions in
federal income tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the Common Shares.
 
     The Company or the Company's shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The state and local
tax treatment of the Company and its shareholders in such jurisdictions may
differ from the federal income tax treatment described above. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Shares.
 
                              ERISA CONSIDERATIONS
 
     The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser. The discussion does not purport to deal
with all aspects of ERISA or Section 4975 of the Code that may be relevant to
particular shareholders (including employee benefit plans subject to Title I of
ERISA, other retirement plans and individual retirement accounts ("IRAs")
subject to the prohibited transaction provisions of Section 4975 of the Code, as
well as governmental plans or church plans that are exempt from ERISA and
Section 4975 of the Code but that may be subject to state law requirements) in
light of their particular circumstances.
 
     The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
 
     A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON SHARES BY
SUCH PLAN OR IRA.
 
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
 
     Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Shares is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the
best interests of the Plan, its participants, and its
 
                                       97
<PAGE>   104
 
beneficiaries, (ii) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to do so, and (iii) authorized under the terms
of the Plan's governing documents (provided the documents are consistent with
ERISA). In determining whether an investment in the Common Shares is prudent for
purposes of ERISA, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment responsibility, to meet the objectives of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow, and funding requirements of the
Plan's portfolio. A fiduciary also should take into account the nature of the
Company's business, the management of the Company, the length of the Company's
operating history, the fact that certain investment assets may not have been
identified yet, and the possibility of the recognition of UBTI.
 
     The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
 
     Fiduciaries of Plans and Persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified Person" with respect to a Plan
or with respect to a Plan or IRA subject to Code section 4975 other than a
fiduciary acting as such is subject to (i) an initial 15% excise tax on the
amount involved in any prohibited transaction involving the assets of the plan
or IRA and (ii) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not timely corrected. If the disqualified Person who
engages in the transaction is the individual on behalf of whom an IRA is
maintained (or his beneficiary), the IRA will lose its tax-exempt status and its
assets will be deemed to have been distributed to such individual in a taxable
distribution (and no excise tax will be imposed) on account of the prohibited
transaction. In addition, a fiduciary who permits a Plan to engage in a
transaction that the fiduciary knows or should know is a prohibited transaction
may be liable to the Plan for any loss the Plan incurs as a result of the
transaction or for any profits earned by the fiduciary in the transaction.
 
STATUS OF THE COMPANY UNDER ERISA
 
     The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to Section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
 
     Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act, the Plan's or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity interest,
unless one or more exceptions specified in the Plan Asset Regulations are
satisfied.
 
     If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
Persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Shares, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold the Common Shares could be liable under Part 4 of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of
 
                                       98
<PAGE>   105
 
prudence and fiduciary responsibility, and (iv) certain transactions that the
Company might enter into in the ordinary course of its business and operations
might constitute "prohibited transactions" under ERISA and the Code.
 
     The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred). The Common Shares are
being sold in an offering registered under the Securities Act and will be
registered under the Exchange Act. The Plan Asset Regulations provide that a
security is "widely held" only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another. A
security will not fail to be widely held because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company anticipates that upon
completion of this offering, the Common Shares will be "widely held."
 
     The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with the Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
Person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Declaration of Trust on the transfer of the
Company's shares will not result in the failure of the Common Shares to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Shares other than those
enumerated in the Plan Asset Regulations as those not affecting free
transferability. However no assurance can be given that the DOL or the United
States Department of Treasury will not reach a contrary conclusion.
 
     Assuming that the Common Shares will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Shares, the Common Shares
should be publicly offered securities and the assets of the Company should not
be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan that invests in
the Common Shares.
 
                                       99
<PAGE>   106
 
                  DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
 
GENERAL
 
     The Declaration of Trust provides that the Company may issue up to
250,000,000 shares of beneficial interest of the Company consisting of
200,000,000 Common Shares and 50,000,000 Preferred Shares. Upon completion of
the Offering and the Private Placement, 22,222,333 Common Shares will be issued
and outstanding (assuming no exercise of the Underwriters' over-allotment
option) and no Preferred Shares will be issued or outstanding.
 
     Both the Texas REIT Act and the Declaration of Trust provide that no
shareholder of the Company will be personally liable for any debt, act, omission
or obligation incurred by the Company or its Trust Managers. Conducting business
in other states, however, may give rise to shareholder liability in those states
that may not recognize the status of a Texas REIT or the limited liability
afforded shareholders under the Texas REIT Act. For this reason, the Company may
hold assets or conduct business in states other than Texas through wholly owned
subsidiaries of the Company, if, among other reasons, it determines that there
would exist in that state a significant risk of shareholder liability if the
assets were owned or the business conducted directly by the Company. Although
the Company is not aware of any state which has attempted to impose liability on
shareholders of a Texas REIT, the Company will use such subsidiaries to the
fullest extent it can in those states where the law is unclear regarding limited
shareholder liability in an effort to minimize the possibility of shareholder
liability.
 
     In addition, the Bylaws provide that the Company will indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of being or having been a shareholder, and that the Company
will reimburse each shareholder for all legal and other expenses reasonably
incurred by such shareholder in connection with any such claim or liability.
Further, the Company may, if it deems necessary, include a provision in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to tort
claims, contractual claims where liability is not so negated, claims for taxes
and certain statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent such claims are not paid by the Company. Because
the Company will carry public liability insurance which it believes is adequate
for tort claims, any risk of personal liability to shareholders is limited to
situations in which the Company's unencumbered assets plus its insurance
coverage would be insufficient to satisfy the claims against the Company and its
shareholders.
 
COMMON SHARES
 
     VOTING RIGHTS. Subject to the provisions of the Declaration of Trust
regarding Beneficial Ownership or Constructive Ownership in excess of the
Aggregate Share Ownership Limit and to such preferential rights as may be
granted by the Board of Trust Managers in connection with the future issuance of
Preferred Shares, each outstanding Common Share entitles the holder to one vote
on all matters submitted to a vote of shareholders, including the election of
Trust Managers. There is no cumulative voting in the election of Trust Managers,
which means that the holders of a majority of the outstanding Common Shares can
elect all of the Trust Managers then standing for election.
 
   
     DIVIDENDS. Subject to the provisions of the Declaration of Trust regarding
Beneficial Ownership or Constructive Ownership in excess of the Aggregate Share
Ownership Limit and to such preferential rights as may be granted by the Board
of Trust Managers in connection with the future issuance of Preferred Shares,
holders of Common Shares are entitled to receive ratably such dividends, in
cash, property or Shares, as may be declared from time to time by the Board of
Trust Managers. The Company is prohibited from declaring or paying any dividend
when the Company is unable to pay its debts as they become due in the usual
course or when the payment of such dividend would result in the Company becoming
unable to pay its debts as they become due. See "Dividend Policy and
Distributions."
    
 
     LIQUIDATION RIGHTS. Subject to the provisions of the Declaration of Trust
regarding the Aggregate Share Ownership Limit, in the event of any liquidation,
dissolution or winding-up of the affairs of the Company,
 
                                       100
<PAGE>   107
 
holders of Common Shares will be entitled to share ratably in the assets of the
Company remaining after provision for liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares.
 
     OTHER TERMS. Holders of Common Shares have no redemption, preference,
conversion, exchange or preemptive rights to subscribe to any securities of the
Company. All outstanding Common Shares will be fully paid and nonassessable.
 
     MEETINGS OF SHAREHOLDERS. The Bylaws provide that annual meetings of
shareholders, commencing with the 1999 annual meeting, will be held no later
than the last day of May of each year. Special meetings of the shareholders may
be called by the Trust Managers, any officer of the Company or the holders of at
least 10% of all of the Shares entitled to vote at the meetings.
 
PREFERRED SHARES
 
     The Board of Trust Managers is empowered to issue Preferred Shares from
time to time in one or more series, without shareholder approval, and with
respect to each series to determine, subject to limitations prescribed by law,
(i) the number of shares constituting such series, (ii) the dividend rate on the
shares of each series, whether such dividends shall be cumulative and the
relation of such dividends to the dividends payable on any other class of
shares, (iii) whether the shares of each series shall be redeemable and the
terms thereof, (iv) whether the shares will be convertible into Common Shares
and the terms thereof, (v) the amount per share payable on each series or other
rights of holders of such shares on liquidation or dissolution of the Company,
(vi) the voting rights, if any, of shares of each series, and (vii) generally
any other rights and privileges not in conflict with the Declaration of Trust or
the Texas REIT Act for each series and any qualifications, limitations or
restrictions thereof.
 
     Because the Trust Managers have the power to establish the preferences and
rights of each class or series of Preferred Shares, it may afford the holders in
any series or class of Preferred Shares dividend rights, preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Common Shares.
Issuance of a series of Preferred Shares also could, depending on the terms of
such series, either impede or facilitate the completion of a merger, tender
offer or other takeover attempt. Although the Board of Trust Managers is
required to make a determination as to the best interest of the shareholders of
the Company when issuing Preferred Shares, the Board of Trust Managers could act
in a manner that would discourage an acquisition attempt or other transaction
that some, or a majority, of the shareholders might believe to be in the best
interest of the Company or in which shareholders might receive a premium for
their shares over the then-prevailing market price. The authorized Preferred
Shares are available for issuance without further action by the Company's
shareholders, unless such action is required by applicable law or the rules of
any stock exchange on which the Common Shares may then be listed.
 
REGISTRATION RIGHTS
 
     The Company has agreed that, upon the demand of Holdings, it will file and
use its best efforts to have declared effective a resale registration statement
covering the resale of the Common Shares sold in the Private Placement. The
Company has agreed with Holdings that it will keep such resale registration
statement effective until such time as sales may be made in reliance on Rule
144(k) under the Securities Act. See "Private Placement."
 
RESTRICTIONS ON TRANSFER
 
     For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and such Shares must
be beneficially owned by 100 or more Persons during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a shorter taxable
year. See "Federal Income Tax Consequences -- Requirements For Qualification."
 
                                       101
<PAGE>   108
 
     Because the Board of Trust Managers believes it is essential for the
Company to continue to qualify as a REIT, the Declaration of Trust, subject to
certain exceptions, provides that no holder may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% (the "Aggregate
Share Ownership Limit") of the total outstanding Shares. The Trust Managers may
waive the Aggregate Share Ownership Limit and have waived such Aggregate Share
Ownership Limit with respect to the Manager and other members of the AMRESCO
Group. Any Transfer of Shares that would (i) create a direct or indirect
ownership of Shares in excess of the Aggregate Share Ownership Limit, (ii)
result in the Shares being owned by fewer than 100 Persons, (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
or (iv) result in the disqualification of the Company as a REIT, shall be null
and void.
 
     If any Transfer of Shares (whether or not such Transfer is the result of a
transaction entered into through the facilities of any national securities
exchange or automated inter-dealer quotation system) occurs which, if effective,
would result in any Person becoming the Beneficial Owner or Constructive Owner
of Shares in violation of the Aggregate Share Ownership Limit: (i) then that
number of Shares the Beneficial Ownership or Constructive Ownership of which
otherwise would cause such Person to violate the Aggregate Share Ownership
Limit, (rounded to the nearest whole Share) will be automatically, without any
further action on the part of any Person, deemed to be transferred to a
Charitable Trust for the benefit of a Charitable Beneficiary, effective as of
the close of business on the business day prior to the date of such Transfer,
and such Person shall acquire no rights in such Shares; or (ii) if the Transfer
to the Charitable Trust described above would not be effective for any reason to
prevent the violation of the Aggregate Share Ownership Limit, then the Transfer
of that number of Shares that otherwise would cause any Person to violate the
Aggregate Share Ownership Limit, shall be void ab initio, and the intended
transferee shall acquire no rights in such Shares.
 
     Upon any purported Transfer or other event that would result in a Transfer
of Shares to a Charitable Trust, such Shares will be deemed to have been
transferred to the trustee of a Charitable Trust for the exclusive benefit of
one or more Charitable Beneficiaries. Such Transfer to the trustee shall be
deemed to be effective as of the close of business on the business day prior to
the purported Transfer or other event that results in the Transfer to the
Charitable Trust. The trustee will be appointed by the Company and will be a
Person unaffiliated with the prohibited owner. Each Charitable Beneficiary will
be designated by the Company as provided below.
 
     Shares held by a trustee of a Charitable Trust will be issued and
outstanding Shares of the Company. The prohibited owner will have no rights in
the Shares held by the trustee. The prohibited owner will not benefit
economically from ownership of any Shares held in the Charitable Trust by the
trustee, shall have no rights to dividends or other distributions and will not
possess any rights to vote or other rights attributable to the Shares held in
the Charitable Trust.
 
     The trustee of the Charitable Trust will have all voting rights and rights
to dividends or other distributions with respect to Shares held in the
Charitable Trust, which rights will be exercised for the exclusive benefit of
the Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the Company that Shares have been transferred to the trustee will
be paid with respect to such Shares to the trustee upon demand and any dividend
or other distribution authorized but unpaid shall be paid when due to the
trustee. Any dividends or distributions so paid over to the trustee will be held
in trust for the benefit of the Charitable Beneficiary for distribution at such
times as may be determined by the trustee. The prohibited owner will have no
voting rights with respect to Shares held in the Charitable Trust and, subject
to Texas law, effective as of the date that Shares have been transferred to the
trustee, the trustee will have the authority (at the trustee's sole discretion)
(i) to rescind as void any vote cast by a prohibited owner prior to the
discovery by the Company that Shares have been transferred to the trustee and
(ii) to recast such vote in accordance with the desires of the trustee acting
for the benefit of the Charitable Beneficiary.
 
     Within 20 days of receiving notice from the Company that Shares have been
Transferred to the Charitable Trust, the trustee of the Charitable Trust will
sell the Shares held in the Charitable Trust to a Person, designated by the
trustee, whose ownership of the Shares will not violate the Aggregate Share
 
                                       102
<PAGE>   109
 
   
Ownership Limit. Upon such sale, the interest of the Charitable Beneficiary in
the Shares sold will terminate and the trustee will distribute the net proceeds
of the sale to the prohibited owner and to the Charitable Beneficiary. The
prohibited owner will receive the lesser of (i) the price paid by the prohibited
owner for the Shares or, if the prohibited owner did not give value for the
Shares in connection with the event causing the Shares to be held in the
Charitable Trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price of the Shares on the day of the event causing the
Shares to be held in the Charitable Trust and (ii) the price per Share (net of
costs of sales) received by the trustee from the sale or other disposition of
the Shares held in the Charitable Trust. Any net sales proceeds in excess of the
amount payable to the prohibited owner shall be immediately paid to the
Charitable Beneficiary. If, prior to the discovery by the Company that Shares
have been Transferred to the trustee, such Shares are sold by a prohibited
owner, then (i) such Shares will be deemed to have been sold on behalf of the
Charitable Trust and (ii) to the extent that the prohibited owner received an
amount for such Shares that exceeds the amount that such prohibited owner was
entitled to receive, such excess shall be paid to the trustee upon demand.
    
 
   
     Shares Transferred to the trustee will be deemed to have been offered for
sale to the Company, or its designee, at a price per Share equal to the lesser
of (i) the price per Share in the transaction that resulted in such Transfer to
the Charitable Trust (or, in the case of a devise or gift, the Market Price at
the time of such devise or gift) and (ii) the Market Price on the date the
Company, or its designee, accepts such offer. The Company will have the right to
accept such offer until the trustee has sold the Shares held in the Charitable
Trust. Upon such a sale to the Company, the interest of the Charitable
Beneficiary in the Shares sold will terminate and the trustee will distribute
all net sales proceeds of the sale to the prohibited owner.
    
 
   
     By written notice to the trustee, the Company will designate one or more
nonprofit organizations to be the Charitable Beneficiary of the interest in the
Charitable Trust such that (i) Shares held in the Charitable Trust would not
violate the Aggregate Share Ownership Limit in the hands of such Charitable
Beneficiary and (ii) each such organization must fit within the definition of a
Charitable Beneficiary set forth in the Declaration of Trust.
    
 
     All certificates representing Common Shares will bear a legend referring to
the restrictions described above.
 
     Any Person who acquires or attempts or intends to acquire Beneficial
Ownership or Constructive Ownership of Shares that will or may violate or any
Person who would have owned Shares that resulted in a transfer to the Charitable
Trust, must immediately give written notice to the Company of such event, or in
the case of such a proposed or attempted transaction, give at least 15 days
prior written notice, and must provide to the Company such other information as
the Company may request in order to determine the effect, if any, of such
Transfer on the Company's status as a REIT.
 
     The Aggregate Share Ownership Limit may have the effect of precluding
acquisition of control of the Company unless the Board of Trust Managers
determines that maintenance of REIT status is no longer in the best interest of
the Company. See "Certain Provisions of Texas Law and of the Declaration of
Trust and Bylaws."
 
     Holdings has agreed not to offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of the Common
Shares acquired by it pursuant to the Private Placement for a period of two
years from the closing of the Offering without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters, so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. In addition, the Trust Managers and executive
officers of the Company have each agreed for a period of 180 days from the
closing of the Offering, not to offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) Common Shares or any securities
convertible into or exchangeable or exercisable therefor to any unaffiliated
third party without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters. See "Shares Eligible for Future
Sale."
 
                                       103
<PAGE>   110
 
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
 
     The Company intends to implement a dividend reinvestment and share purchase
plan whereby shareholders may automatically reinvest their dividends and make
additional cash purchases of the Common Shares. The details of such plan will be
sent to the Company's shareholders following the adoption thereof by the Board
of Trust Managers.
 
                      CERTAIN PROVISIONS OF TEXAS LAW AND
                     OF THE DECLARATION OF TRUST AND BYLAWS
 
     The following paragraphs summarize certain provisions of Texas law and the
Declaration of Trust and Bylaws. The summary does not purport to be complete and
reference is made to Texas law and the Declaration of Trust and Bylaws for
complete information. Copies of the Declaration of Trust and Bylaws have been
filed with the Commission as exhibits to the Registration Statement of which
this Prospectus is a part.
 
     Certain provisions of the Declaration of Trust and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Trust Managers and
in the policies formulated by the Board of Trust Managers and to discourage
certain types of transactions that may involve an actual or threatened change in
control of the Company. These provisions are designed to reduce the
vulnerability of the Company to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, such
provisions might discourage third parties from making tender offers for the
Shares. As a result, the Market Price of the Shares might not benefit from any
premium which might occur in anticipation of a threatened or actual change in
control. Such provisions also might have the effect of preventing changes in the
management of the Company.
 
BOARD OF TRUST MANAGERS
 
     The Bylaws provide that the number of Trust Managers cannot be fewer than
two nor more than nine. At all times after the closing of the Offering and
except for a period of 90 days following a vacancy, at least a majority of the
Trust Managers must be Independent Trust Managers. Upon the closing of the
Offering, the Board of Trust Managers will consist of seven members. Trust
Managers will hold office until their successors are duly elected and qualified
or until their death, resignation or removal. Under the Texas REIT Act, the
Trust Managers must be natural Persons but do not need to be residents of Texas
or shareholders of the real estate investment trust unless the declaration of
trust or bylaws of such real estate investment trust so require. The Declaration
of Trust and Bylaws do not require that Trust Managers be residents of Texas or
shareholders of the Company.
 
REMOVAL OF TRUST MANAGERS
 
     The Declaration of Trust and the Bylaws provide that a Trust Manager may be
removed at any time with or without cause by the vote of holders of Shares
representing two-thirds of the total votes authorized to be cast by Shares then
outstanding and entitled to vote thereon. Upon the resignation or removal of any
Trust Manager, or his otherwise ceasing to be a Trust Manager, he must execute
and deliver such documents as the remaining Trust Managers may require for the
conveyance of any Company property held in his name, must account to the
remaining Trust Managers as they require for all property which he holds as
Trust Manager and will thereupon be discharged as Trust Manager. Upon the
incapacity or death of any Trust Manager, his legal representative must perform
the acts set forth in the preceding sentence and the discharge mentioned therein
will run to such legal representative and to the incapacitated Trust Manager or
the estate of the deceased Trust Manager, as the case may be.
 
                                       104
<PAGE>   111
 
STAGGERED BOARD
 
     The Declaration of Trust provides that immediately after the closing of the
Offering, the Board of Trust Managers will be divided into three classes, each
class to consist as nearly as possible of one-third of the Trust Managers. The
term of office of one class of Trust Managers will expire each year. The initial
term of office of the Class I, Class II and Class III Trust Managers will expire
at the 1999, 2000 and 2001 annual meeting of shareholders, respectively.
Commencing with the 1999 annual meeting of shareholders, the Trust Managers of
the class elected at each annual meeting of shareholders will hold office for a
term of three years.
 
     The staggered board provision could have the effect of making the removal
of incumbent Trust Managers more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Trust Managers. Thus, the staggered board provision
could increase the likelihood that incumbent Trust Managers will retain their
positions.
 
     Further, holders of Common Shares have no right to cumulative voting for
the election of Trust Managers. Consequently, at each annual meeting of
shareholders, the holders of a majority of the outstanding Shares will be able
to elect all of the successors of the class of Trust Managers whose term expires
at the meeting.
 
BUSINESS COMBINATIONS
 
     The Declaration of Trust requires that, except in certain circumstances, a
Business Combination (as defined below) between the Company and a Related Person
(as defined below) must be approved by the affirmative vote of the holders of
80% of the outstanding Shares, including the vote of the holders of not less
than 50% of the Shares not owned by the Related Person.
 
     The Declaration of Trust provides that a "Business Combination" is: (i) any
merger or consolidation, if and to the extent permitted by law, of the Company
or a subsidiary with or into a Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, of all or any Substantial Part
(as defined in the Declaration of Trust) of the total assets of the Company as
of the end of the last fiscal year, to or with a Related Person; (iii) the
issuance or transfer by the Company or a subsidiary (other than by way of a pro
rata dividend to all shareholders) of any securities of the Company or a
subsidiary to a Related Person; (iv) any reclassification of securities
(including a reverse share split) or recapitalization by the Company that would
increase the voting power of the Related Person; or (v) the adoption of any plan
or proposal for the liquidation or dissolution of the Company proposed by or on
behalf of a Related Person which involves any transfer of assets or any other
transaction in which the Related Person has any direct or indirect interest
(except proportionately as a shareholder); (vi) any series or combination of
transactions having, directly or indirectly, substantially the same effect as
the foregoing; and (vii) any agreement, contract or other arrangement providing,
directly or indirectly, for any of the foregoing.
 
     A "Related Person" generally is defined in the Declaration of Trust to
include any individual, corporation, partnership or other Person and the
affiliates and associates of any such individual, corporation, partnership or
other Person which individually or together is the Beneficial Owner in the
aggregate of more than 50% of the Shares of the Company.
 
     The 50% voting requirement referred to above will not be applicable if the
Business Combination is approved by the affirmative vote of holders of not less
than 90% of the outstanding Shares. Neither the 80% nor the 50% voting
requirements outlined above will apply if: (i) the Board of Trust Managers by a
vote of not less than 80% of the Trust Managers then holding office (a) have
expressly approved in advance the acquisition of Shares that caused the Related
Person to become a Related Person or (b) have expressly approved the Business
Combination prior to the date on which the Related Person involved in the
Business Combination became a Related Person; or (ii) the Business Combination
is solely between the Company and a corporation, 100% of the voting shares of
which is owned directly or indirectly by the Company; or (iii) the Business
Combination is proposed to be consummated within one year of the closing of a
Fair Tender Offer
 
                                       105
<PAGE>   112
 
(as defined in the Declaration of Trust) by the Related Person in which Business
Combination the cash or the Fair Market Value (as defined in the Declaration of
Trust) of the property, securities or other consideration to be received per
Share by all remaining holders of Shares in the Business Combination is not less
than the price offered in the Fair Tender Offer; or (iv) the Rights (as defined
below) have become exercisable; or (v) all of the following conditions have been
met: (a) the Business Combination is a merger or consolidation, closing of which
is proposed to take place within one year of the date of the transaction
pursuant to which such Person became a Related Person and the cash or Fair
Market Value of the property, securities or other consideration to be received
per Share by all remaining holders of Shares in the Business Combination is not
less than the highest per Share price paid by the Related Person in acquiring
any of its holdings of Shares, determined as of the date of closing of such
Business Combination (a "Fair Price"); (b) the consideration to be received by
such holders is either cash or, if the Related Person has acquired the majority
of its holdings of Shares for a form of consideration other than cash, in the
same form of consideration with which the Related Person acquired such majority;
(c) after such Person has become a Related Person and prior to closing of such
Business Combination; (1) except as approved by a majority of the Independent
Trust Managers continuing in office, there has been no reduction in the annual
rate of dividends, if any, paid per Share on the Shares except any reduction
proportionate with any decline in the Company's net income, and (2) such Related
Person has not received the benefit, directly or indirectly, of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Company prior to the closing of such
Business Combination (other than in connection with financing a Fair Tender
Offer); and (d) a proxy statement that conforms in all respects with the
provisions of the Exchange Act is mailed to shareholders of the Company at least
30 days prior to the closing of the Business Combination for the purpose of
soliciting shareholder approval of the Business Combination.
 
     If a Person has become a Related Person and within one year after the date
(the "Acquisition Date") of the transaction pursuant to which the Related Person
became a Related Person (i) a Business Combination meeting all of the
requirements of clause (v) above regarding the applicability of the 80% voting
requirement has not been consummated and (ii) a Fair Tender Offer has not been
consummated and (iii) the Company has not been dissolved and liquidated, then,
in such event, the Beneficial Owner of each Share (not including Shares
beneficially owned by the Related Person) will have the right (individually a
"Right" and collectively the "Rights"), which may be exercised, subject to
certain conditions, commencing at the opening of business on the one-year
anniversary date of the Acquisition Date and continuing for a period of 90 days
thereafter (the "Exercise Period"), to sell to the Company one Share upon
exercise of such Right. At 5:00 p.m., Dallas, Texas time, on the last day of the
Exercise Period, each Right not exercised will become void, and, except as
otherwise provided in the Declaration of Trust, the certificates representing
Shares beneficially owned by a Beneficial Owner will no longer represent Rights.
The purchase price for a Share upon exercise of an accompanying Right generally
will be equal to the then-applicable Fair Price paid by the Related Person
pursuant to the exercise of the Right relating thereto.
 
     The fair price provision is designed to prevent a purchaser from utilizing
two-tier pricing and similar tactics in an attempted takeover of the Company,
and it may have the overall effect of making it more difficult to acquire and
exercise control of the Company. The fair price provision may provide the Trust
Managers with enhanced ability to block any proposed acquisition of the Company
and to retain their positions in the event of a takeover bid, even if their
continued service for the Company would not be in the best interest of the
Company. In certain situations, the fair price provision may require a Related
Person to pay a higher price for the Shares or structure the transaction
differently than would be the case in the absence of the fair price provision.
 
AMENDMENT TO THE DECLARATION OF TRUST
 
     The Texas REIT Act and the Declaration of Trust require the affirmative
vote of the holders of at least two-thirds of the outstanding Shares entitled to
vote on the proposed amendment in order to amend the Declaration of Trust,
unless any class or series of Shares is entitled to vote on the amendment as a
class, in which case the amendment must be adopted on receiving the affirmative
vote of the holders of at least two-thirds of the Shares within each series of
outstanding Shares entitled to vote as a class and of at least two-
 
                                       106
<PAGE>   113
 
thirds of the total outstanding Shares entitled to vote on the amendment, except
that (i) the provision relating to the approval of Business Combinations; (ii)
the provision relating to the Aggregate Share Ownership Limit; and (iii) the
provision relating to the amendment of the Declaration of Trust may not be
amended or repealed, except by the affirmative vote of the holders of at least
80% of the outstanding Shares.
 
AMENDMENT OF BYLAWS
 
     Except as otherwise provided by applicable law or the Declaration of Trust,
the power to alter, amend or repeal the Bylaws or to adopt new Bylaws will be
vested in the Trust Managers and (to the extent not inconsistent with the Texas
REIT Act and the Declaration of Trust and specified in the notice of the
meeting) the shareholders. Such action to amend the Bylaws may be taken (i) with
respect to all Bylaw provisions, by the affirmative vote of a majority of the
Trust Managers, or (ii)(a) with respect to the provisions relating to the
meetings of the shareholders, the provisions relating to the Trust Managers, or
the provision relating to the amendment of the Bylaws, by the affirmative vote
of the holders of two-thirds of the Shares entitled to vote on the matter, or
(b) with respect to all other Bylaws, by the affirmative vote of the holders of
a majority of the outstanding Shares entitled to vote on the matter.
 
TERMINATION OF THE COMPANY
 
     The Texas REIT Act and the Declaration of Trust provide that, subject to
the provisions of any class or series of Shares at the time outstanding, the
Company may be terminated at any meeting of the shareholders, by the affirmative
vote of two-thirds of all votes entitled to be cast on the matter.
 
SPECIAL MEETINGS OF THE SHAREHOLDERS
 
     Under the Bylaws, special meetings of the shareholders may be called by
shareholders only if such shareholders hold outstanding Shares representing at
least 10% of all votes entitled to be cast on any issue proposed to be
considered at any such special meeting.
 
ADVANCE NOTICE OF TRUST MANAGER NOMINATIONS AND NEW BUSINESS
 
     The Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of Persons for election to the Board of Trust Managers
and the proposal of business to be considered by shareholders may be made only
(1) pursuant to the Company's notice of the meeting, (2) by the Board of Trust
Managers or, (3) by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws, and (b)
with respect to special meetings of shareholders, only the business specified in
the Company's notice of meeting may be brought before the meeting of
shareholders and nominations of Persons for election to the Board of Trust
Managers or (c) provided that the Board of Trust Managers has determined that
Trust Managers shall be elected at such meeting, by a shareholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
 
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF TEXAS LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
 
     The business combination provisions and the staggered board provisions of
the Declaration of Trust and the advance notice provisions of the Bylaws could
delay, defer or prevent a change in control of the Company or other transaction
that might involve a premium price for holders of Common Shares or otherwise be
in their best interest.
 
TRANSFER AGENT AND REGISTRAR
 
     The Company intends to appoint The Bank of New York as its transfer agent
and registrar for the Common Shares.
 
                                       107
<PAGE>   114
 
REPORTS TO SHAREHOLDERS
 
     As stated in the Bylaws, the Company will furnish its shareholders with
annual reports containing audited financial statements and such other periodic
reports as it may determine to furnish or as may be required by law.
 
                                       108
<PAGE>   115
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon completion of the Offering and the Private Placement, the Company will
have 22,222,333 Common Shares issued and outstanding (25,555,667 if the
Underwriters' over-allotment option is exercised in full). After the effective
date of this Registration Statement, the Company intends that all of the Common
Shares issued in the Offering will be freely tradeable without registration or
other restrictions under the Securities Act, except for any Common Shares
purchased by an Affiliate of the Company.
 
     The 2,222,233 (2,555,567 if the Underwriters' over-allotment option is
exercised in full) Common Shares sold in the Private Placement will be
"restricted securities" for purposes of Rule 144 under the Securities Act. See
"Private Placement." However, upon the demand of Holdings, the Company will file
and seek to have declared effective a resale registration statement covering the
sale of such shares in the public market. See "Description of Shares of
Beneficial Interest--Registration Rights" and "Private Placement." Following
expiration of the lock-up restrictions described in "Underwriting," assuming
such resale registration statement is filed and declared effective, these shares
will be available for sale in the public market. If such resale registration
statement is not filed and declared effective, these shares will be available
for sale, following expiration of the lock-up restrictions discussed in
"Underwriting," pursuant to Rule 144 including the manner of sale and volume
limitations thereof. See "Private Placement."
 
     In addition, the Company anticipates that it will file a registration
statement during 1998 with respect to the 3,333,350 Common Shares issuable under
the Share Option Plan and any Common Shares which may be issued in connection
with other incentive compensation arrangements thereby allowing such shares to
be transferred or resold without restriction under the Securities Act (subject
to the restrictions on transfer agreed to by the Company, Trust Managers and
executive officers of the Company, as described above). See "Management of the
Company -- Share Option Plan" and "Management of the Company -- Share Options
Outstanding."
 
     In general, under Rule 144 under the Securities Act, as currently in
effect, as soon as one year has elapsed from the date of the closing of the
Offering, any Affiliate of the Company purchasing shares in the Offering or in
the Private Placement will be entitled to sell a limited number of such shares
within any three-month period, subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of any Common
Shares which are Restricted Securities (as defined in Rule 144 under the
Securities Act) from the Company or from any Affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an Affiliate of
the Company at any time during the 90 days preceding a sale, such Person would
be entitled to sell such Common Shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
 
     In addition, Rule 144A under the Securities Act, as currently in effect,
generally permits unlimited resales of certain Restricted Securities of any
issuer provided that the purchaser is an institution that owns or invests on a
discretionary basis at least $100 million in securities or is a registered
broker-dealer that owns and invests on a discretionary basis at least $10
million in securities. Rule 144A allows the existing shareholders of the Company
to sell their Common Shares which are Restricted Securities to such institutions
and registered broker-dealers without regard to any volume or other
restrictions. Unlike Rule 144, Restricted Securities sold under Rule 144A to
non-affiliates do not lose their status as Restricted Securities.
 
     Notwithstanding the foregoing, Holdings has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant any option to purchase or other sale or
disposition) of any Common Shares acquired by it pursuant to the Private
Placement for a period of two years from the closing of the Offering without the
prior written consent of Prudential Securities Incorporated, so long as the
Manager or another member of the AMRESCO Group continues to serve as manager of
the Company during such period. The Trust Managers and executive officers of the
Company have also agreed for a period of 180 days from the closing of the
Offering, not to offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose of (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant any option to purchase or other
sale or disposition) of any Common Shares or any securities convertible into or
exchangeable or
 
                                       109
<PAGE>   116
 
   
exercisable therefor to any unaffiliated third party without the prior written
consent of Prudential Securities Incorporated on behalf of the Underwriters.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without notice, release all or any portion of the shares subject to such lock-up
agreements.
    
 
                                       110
<PAGE>   117
 
                                  UNDERWRITING
 
   
     The underwriters named below (the "Underwriters") for whom Prudential
Securities Incorporated, Credit Suisse First Boston, ABN AMRO Incorporated, J.C.
Bradford & Co., NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the underwriting agreement (the
"Underwriting Agreement"), to purchase from the Company the number of Common
Shares set forth below opposite their respective names:
    
 
   
<TABLE>
<CAPTION>
                                                                NUMBER OF
UNDERWRITER                                                   COMMON SHARES
-----------                                                   -------------
<S>                                                           <C>
Prudential Securities Incorporated..........................
Credit Suisse First Boston..................................
ABN AMRO Incorporated.......................................
J.C. Bradford & Co..........................................
NationsBanc Montgomery Securities LLC.......................
Piper Jaffray Inc...........................................
 
                                                               ----------
Total.......................................................   20,000,000
                                                               ==========
</TABLE>
    
 
     Under the terms and conditions of the Underwriting Agreement, the Company
is obligated to sell, and the Underwriters are obligated to purchase, all of the
Common Shares offered hereby, if any are purchased.
 
     The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Shares initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $          per Common Share; and that
such dealers may reallow a concession of $          per Common Share to certain
other dealers. After the initial public offering, the public offering price and
the concessions may be changed by the Representatives.
 
     The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 3,000,000 additional
Common Shares at the initial public offering price, less underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Common Shares offered hereby. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table.
 
     The Company and the Trust Managers and executive officers of the Company
have agreed not to offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose of (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition of) any Common Shares, or any securities
convertible into, or exchangeable or exercisable therefor, for a period of 180
days after the closing of the Offering, without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters, except that
during such period, Common Shares may be issued upon the exercise of outstanding
Share Options and the Company may issue Share Options which are exercisable
after the 180th day after the closing of the Offering. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the Common Shares subject to such lock-up
agreements.
 
     At the request of the Company, the Underwriters have reserved up to 5% of
the Common Shares offered hereby for sale at the initial public offering price
to Trust Managers, directors, officers and employees of the
 
                                       111
<PAGE>   118
 
Company and members of the AMRESCO Group, and third parties identified by the
AMRESCO Group. The number of Common Shares available for sale to the general
public will be reduced to the extent such Persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby. To the extent any such shares are purchased by Trust Managers or
officers of the Company, they will be subject to the lock-up restrictions
described above.
 
     Pursuant to the Private Placement, Holdings will purchase 2,222,233
(2,555,567 if the Underwriters' over-allotment option in the Offering is
separately exercised in full) Common Shares at a price equal to the initial
public offering price. See "Private Placement." As a result of this purchase,
the AMRESCO Group will own approximately 10% of the total Common Shares
outstanding after the closing of the Offering. Holdings has agreed not to offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition of) such Common Shares for a period of two years from the closing of
the Offering without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters, so long as the Manager or another
member of the AMRESCO Group continues to serve as manager of the Company during
such period. Prudential Securities Incorporated may, in its sole discretion, at
any time and without notice release all or any portion of the shares subject to
such lock-up. In addition, the Manager will receive options to purchase Common
Shares pursuant to the Company's Share Option Plan. See "Management of the
Company -- Share Options Outstanding."
 
     The Company and AMRESCO have agreed to indemnify the several Underwriters
against and contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act.
 
     The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
 
     Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be prevailing market
conditions, the Company's prospects and prospects for the industry in general,
the management of the Company and the market prices of securities for companies
in businesses similar to that of the Company.
 
   
     In connection with the Offering, certain Underwriters and selling group
members (if any), and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Shares. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such Persons may bid
for or purchase Common Shares for the purpose of stabilizing the market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Shares in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of the Offering to cover
all or a portion of such short position, up to 3,000,000 shares, by exercising
the Underwriters' over-allotment option referred to above. In addition,
Prudential Securities Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
the Common Shares that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market.
    
 
   
     PSCC, an affiliate of PSI, one of the Underwriters, has issued a commitment
to provide up to $500 million of financing to the Company. Such financing is
expected to close upon closing of the Offering. See "Management's Discussion and
Analysis of Liquidity and Capital Resources." In connection with such financing,
the Company is expected to agree to engage PSI as underwriter and/or placement
agent for any sale or securitization of Mortgage Loans financed with proceeds
from the Warehouse Line, upon such terms and conditions as are customary in
comparable commercial Mortgage Loan securitization transactions. In addition, an
Affiliate of Credit Suisse First Boston is the senior lender on Loan One. See
"Business and Strategy -- Initial Assets -- Loan One." If the Company acquires
Loan One, it will be subject to the terms of an intercreditor agreement with
such Affiliate. PSI acted as a manager in various transactions for the sale of
    
 
                                       112
<PAGE>   119
 
   
securities in securitization transactions sponsored by AMRESCO in 1996 and 1997
for which PSI received customary underwriting commissions. PSCC provides a
secured warehouse facility to AMRESCO Residential Capital Markets, Inc.
("ARCM"), which is subject to various conditions. PSCC also provides a secured
warehouse facility to ACLC, which is subject to various conditions.
    
 
     Certain of the Underwriters have also previously acted as underwriters in
connection with public offerings of securities by AMRESCO for which they have
received customary compensation. Most recently, Credit Suisse First Boston,
Piper Jaffray Inc., Prudential Securities Incorporated and certain other
investment banking firms acted as underwriters in connection with the public
offering by AMRESCO of $155,250,000 of its common stock and Credit Suisse First
Boston, Piper Jaffray Inc., NationsBanc Montgomery Securities LLC, together with
another investment banking firm, acted as underwriters in connection with
AMRESCO's public offering of $330,200,000 of Senior Subordinated Notes.
 
                               PRIVATE PLACEMENT
 
     The Company received a commitment from AMRESCO prior to the filing of the
Registration Statement of which this Prospectus is a part for the purchase, in a
private placement (the "Private Placement"), of up to 2,555,567 Common Shares at
the initial public offering price. Holdings (a member of the AMRESCO Group) will
purchase 2,222,233 of such Common Shares simultaneously with the closing of the
Offering. No underwriting discounts or commissions will be paid on Common Shares
purchased in the Private Placement. Consummation of the Private Placement is
contingent only upon the closing of the Offering. Upon closing of the sale of
any Common Shares sold by the Company to the Underwriters pursuant to the
Underwriters' over-allotment option, Holdings will purchase an additional number
of Common Shares, up to a maximum of 333,334 Common Shares, equal to (i) the
number of Common Shares purchased by the Underwriters pursuant to the
over-allotment option, divided by 3,000,000, multiplied by (ii) 333,334.
Consummation of such purchase is contingent only upon the closing of the sale of
the shares purchased by the Underwriters pursuant to the over-allotment option.
The Common Shares sold in the Private Placement will be sold without
registration under the Securities Act, in reliance on the exemption provided by
Section 4(2) thereof.
 
     The Company has agreed that, upon the demand of Holdings, it will file and
use its best efforts to have declared effective a resale registration statement
covering the sale of the Common Shares purchased in the Private Placement. These
shares will be subject to certain lock-up restrictions as described in
"Underwriting" but will be available for public sale following expiration of
such restrictions.
 
                                 LEGAL MATTERS
 
     The validity of the Common Shares offered hereby will be passed upon for
the Company by Winstead Sechrest & Minick P.C., and certain legal matters will
be passed upon for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California. In addition, the description of federal income tax consequences
contained in this Prospectus entitled "Federal Income Tax Consequences" is based
upon the opinion of Winstead Sechrest & Minick P.C.
 
                                    EXPERTS
 
     The balance sheet of AMRESCO Capital Trust included in this Prospectus has
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
 
                                       113
<PAGE>   120
 
                             ADDITIONAL INFORMATION
 
     Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission (the "Commission") in Washington, D.C., and may be obtained
from the Commission at rates prescribed by the Commission upon request to the
Commission or inspected, without charge, at the offices of the Commission. In
addition, the Commission maintains a Web site (at http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, and the
Registration Statement of which this Prospectus is a part, and the exhibits
thereto, are available on that site. The Company will be subject to the
informational requirements of the Exchange Act, and in accordance therewith,
will periodically file reports and other information with the Commission. Such
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Commission at prescribed rates through its Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained
in this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
 
     The Company intends to furnish the holders of Common Shares with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
 
                                    GLOSSARY
 
     There follows an abbreviated definition of all defined terms used in this
Prospectus. Whenever used in this Prospectus, the following terms shall have the
meanings set forth below, unless the context indicates otherwise. The singular
shall include the plural and the masculine gender shall include the feminine,
and vice versa, as the context requires. In addition, the term "Person" and its
pronouns "he," "she," "him," and "her" as used in this Prospectus shall include
natural Persons of the masculine and feminine gender and entities, including,
without limitation, corporations, partnerships, limited liability companies and
trusts, unless the context indicates otherwise.
 
     "5/50 Rule" means at all times during the last half of each taxable year
not more than 50% in value of the Company's outstanding shares may be owned,
directly or indirectly through the application of certain attribution rules, by
or for five or fewer individuals (as defined in the Code to include certain
tax-exempt entities other than, in general, qualified domestic pension funds).
 
     "75% of Assets Test" means the asset-based test requiring that on the last
day of each calendar quarter at least 75% of the Company's assets must consist
of Qualified REIT Real Estate Assets, government securities, cash and cash
items, as described in "Federal Income Tax Consequences -- Requirements For
Qualification -- Asset Tests."
 
     "75% Gross Income Test" means the income-based test that the Company must
meet to qualify as a REIT described in "Federal Income Tax
Consequences -- Requirements For Qualification -- Income Tests."
 
     "95% Gross Income Test" means the income-based test that the Company must
meet to qualify as a REIT described in "Federal Income Tax
Consequences -- Requirements For Qualification -- Income Tests."
 
     "1996 Lender Liability Act" means Asset Conservation, Lender Liability and
Deposit Insurance Act of 1996, as amended.
 
     "1997 Tax Act" means The Taxpayer Relief Act of 1997.
 
     "ACLC" means AMRESCO Commercial Lending Corporation, a member of the
AMRESCO Group.
 
     "ADA" means the Americans with Disabilities Act of 1990, as amended.
 
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<PAGE>   121
 
     "ARMC" means AMRESCO Residential Capital Markets, Inc., a member of the
AMRESCO Group.
 
     "Affiliates" means, when used with reference to a specified Person, (i) any
Person that directly or indirectly controls or is controlled by or is under
common control with the specified Person, (ii) any Person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified Person or of which the specified Person is an officer, partner or
trustee, or with respect to which the specified Person serves in a similar
capacity, and (iii) any Person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified Person or
of which the specified Person is directly or indirectly the owner of 5% or more
of any class of equity securities; provided, however, that the Company will not
be treated as an Affiliate of the Manager and its Affiliates.
 
     "Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and
FHLMC Certificates.
 
     "Aggregate Share Ownership Limit" means not more than 9.8% in value of the
aggregate of the outstanding Shares. The value of the outstanding Shares shall
be determined by the Board of Trust Managers in good faith, which determination
shall be conclusive for all purposes.
 
     "AMREIT I, Inc." means the wholly-owned Qualified REIT Subsidiary of the
Company.
 
     "AMREIT II, Inc." means the non-Qualified REIT Subsidiary of the Company.
 
     "AMREIT Managers G.P., Inc." means the wholly-owned subsidiary of AMRESCO
which owns the general partnership interest in the Manager.
 
     "AMREIT Managers, L.P." means the Manager of the Company which is also a
newly formed member of the AMRESCO Group.
 
     "AMRESCO" means AMRESCO, INC., a Delaware corporation.
 
     "AMRESCO Capital" means AMRESCO Capital, L.P., a subsidiary of AMRESCO.
 
     "AMRESCO Funding" means AMRESCO Funding Corporation, a member of the
AMRESCO Group.
 
     "AMRESCO Group" means AMRESCO, together with its affiliated entities.
 
     "AMRESCO Services" means AMRESCO Services, L.P., a subsidiary of AMRESCO.
 
     "Asset Portfolio" means a pool or portfolio of performing, nonperforming or
underperforming commercial, industrial, agricultural and/or real estate loans.
 
     "Audit Committee" means the committee comprised of certain Independent
Trust Managers charged with the responsibility of reviewing the functions of the
Company's management, the Manager and the Company's independent auditors
pertaining to the Company's financial statements and performing such other
duties and functions as are deemed appropriate by the Audit Committee or the
Board of Trust Managers.
 
     "Average Invested Investment Grade Assets" means, for any quarter, the
average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's nonconsolidated taxable subsidiaries, which either (a)
have received an Investment Grade Rating from all Rating Agencies which have
rated such asset, or (b) are unrated but are guaranteed by the U.S. government
or any agency or instrumentality thereof, before reserves for depreciation or
bad debts or other similar noncash reserves, computed by dividing (A) the sum of
such values for each of the three months during such quarter (based on the book
value of such assets as of the last day of each month) by (B) three.
 
     "Average Invested Non-Investment Grade Assets" means, for any quarter, the
average of the aggregate book value of (i) all assets of the Company on a
consolidated basis (as reflected on the Company's balance sheet), excluding the
Company's investment in its nonconsolidated taxable subsidiaries and (ii) all
assets of the Company's nonconsolidated taxable subsidiaries, excluding from (i)
and (ii) all Average Invested Investment Grade Assets, before reserves for
depreciation or bad debts or other similar noncash reserves, computed by
dividing (a) the sum of such values for each of the three months during such
quarter (based on the book value of such assets as of the last day of each
month) by (b) three.
 
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<PAGE>   122
 
     "Bankruptcy Code" means Title 11, United States Code, as amended.
 
     "Base Management Fee" means the compensation of the Manager payable and
calculated quarterly in an amount equal to (i) 1% per annum of the Average
Invested Non-Investment Grade Assets for such calendar quarter, and (ii) 0.50%
per annum of the Average Invested Investment Grade Assets for such calendar
quarter.
 
     "Beneficial Ownership" means ownership of Shares by a Person, whether the
interest in Shares is held directly or indirectly, and shall include interests
that would be treated as owned through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial
Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
 
     "Board of Trust Managers" means the Board of Trust Managers of AMRESCO
Capital Trust, a Texas real estate investment trust.
 
     "Bridge Loan" means a Mortgage Loan used for temporary financing.
 
     "Business Combination" means (i) any merger or consolidation, if and to the
extent permitted by law, of the Company or a subsidiary with or into a Related
Person; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as defined in the Declaration of
Trust) of the total assets of the Company as of the end of the last fiscal year,
to or with a Related Person; (iii) the issuance or transfer by the Company or a
subsidiary (other than by way of a pro rata dividend to all shareholders) of any
securities of the Company or a subsidiary to a Related Person; (iv) any
reclassification of securities (including a reverse share split) or
recapitalization by the Company that would increase the voting power of the
Related Person; or (v) the adoption of any plan or proposal for the liquidation
or dissolution of the Company proposed by or on behalf of a Related Person which
involves any transfer of assets or any other transaction in which the Related
Person has any direct or indirect interest (except proportionately as a
shareholder); (vi) any series or combination of transactions having, directly or
indirectly, substantially the same effect as the foregoing; and (vii) any
agreement, contract or other arrangement providing, directly or indirectly, for
any of the foregoing.
 
     "Bylaws" means the Bylaws of the Company.
 
     "CERCLA" means Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
 
     "Charitable Beneficiary" means one or more beneficiaries of the Charitable
Trust, provided that each such organization must be described in Section
501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the
Code.
 
     "Charitable Trust" means a trust that is the transferee of that number of
Common Shares the Beneficial Ownership or Constructive Ownership of which
otherwise would cause a Person to acquire or hold, directly or indirectly,
Common Shares in an amount that violates the Declaration of Trust, which trust
shall be for the exclusive benefit of one or more Charitable Beneficiaries.
 
     "Check-the-Box Regulations" means the entity classification for tax
purposes pursuant to the Treasury Regulations.
 
     "CMBS" means commercial or multifamily MBS.
 
     "CMO Residuals" means Mortgage Derivative Securities issued by agencies of
the U.S. government or by private originators of, or investors in, Mortgage
Loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
 
     "CMOs" means debt obligations (bonds) that are collateralized by Mortgage
Loans or mortgage certificates other than Mortgage Derivative Securities and
Subordinated Interests. CMOs are structured so that principal and interest
payments received on the collateral are sufficient to make principal and
interest payments on the bonds. Such bonds may be issued by United States
government agencies or private issuers in
 
                                       116
<PAGE>   123
 
one or more classes with fixed or variable interest rates, maturities and
degrees of subordination that are characteristics designed for the investment
objectives of different bond purchasers.
 
     "Code" means the Internal Revenue Code of 1986, as amended.
 
     "Commission" means the Securities and Exchange Commission.
 
     "Common Share Ownership Limit" means not more than 9.8% (in value or in
number of Shares, whichever is more restrictive) of the aggregate of the
outstanding Common Shares. The number and value of outstanding Common Shares
shall be determined by the Board of Trust Managers in good faith, which
determination shall be conclusive for all purposes.
 
     "Common Shares" means the common shares of beneficial interest, $.01 par
value per share of AMRESCO Capital Trust, a Texas real estate investment trust.
 
     "Company" means either (i) AMRESCO Capital Trust, a Texas real estate
investment trust, or (ii) AMRESCO Capital Trust, a Texas real estate investment
trust, collectively with its affiliated entities (which does not include the
Manager or any other member of the AMRESCO Group), as the context may require.
 
   
     "Construction Loan" means a Mortgage Loan the proceeds of which are to be
used to finance the costs of the initial construction of real property.
    
 
     "Constructive Ownership" means ownership of Shares by a Person, whether the
interest in Shares is held directly or indirectly, and shall include interests
that would be treated as owned through the application of Section 318(a) of the
Code, as modified by Section 856(d)(5) of the Code. Constructive Ownership shall
include ownership of convertible securities, which are any securities of AMRESCO
Capital Trust, a Texas real estate investment trust, that are convertible into
Shares. The terms "Constructive Owner," "Constructively Owns" and
"Constructively Owned" shall have the correlative meanings.
 
     "Correspondent Agreement" means the nonexclusive correspondent agreement
between Holliday Fenoglio Fowler and the Company.
 
     "Crime Control Act" means Comprehensive Crime Control Act of 1984, as
amended.
 
     "Declaration of Trust" means the Amended and Restated Declaration of Trust
of AMRESCO Capital Trust, a Texas real estate investment trust.
 
     "Disqualified Organization" means a tax-exempt organization or any rural
electrical or telephone cooperative that is exempt from taxation under the
unrelated business taxable income provisions of the Code.
 
     "Distressed Mortgage Loans" means Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
 
     "Distressed Real Estate" means REO Properties and other underperforming or
otherwise distressed real estate.
 
     "DOL" means the Department of Labor.
 
     "Domestically Controlled REIT" means a REIT in which, at all times during a
specified testing period, less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Shareholders.
 
     "Duff and Phelps" means Duff & Phelps Credit Rating Co.
 
     "DUS" means Fannie Mae's Delegated Underwriting and Servicing Program.
 
     "ERISA" means Employee Retirement Income Security Act of 1974, as amended.
 
     "Excepted Holder" means a shareholder of the Company for whom an Excepted
Holder Limit is created by the Board of Trust Managers.
 
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<PAGE>   124
 
     "Excepted Holder Limit" means, provided that the affected Excepted Holder
agrees to comply with the requirements established by the Board of Trust
Managers, the percentage limit established by the Board of Trust Managers.
 
     "Excess Inclusion" has the meaning specified in Section 860E(c) of the
Code.
 
     "Excess Shares" means the number of shares of beneficial interest in the
Company held by any Person or group of Persons in excess of 9.8% of the
outstanding shares.
 
     "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
     "Exempt Organizations" means tax-exempt entities, such as qualified
employee benefit plans, profit sharing trusts and individual retirement
accounts.
 
     "Fair Market Value" means (i) in the case of securities, the highest
closing sale price during the 30-day period immediately preceding the date in
question of such security on the Composite Tape for NYSE-Listed Stocks, or, if
such security is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such security is not listed on such Exchange, on the principal
United States securities exchange registered under the Exchange Act on which
such security is listed, or, if such security is not listed on any such
exchange, the highest closing bid quotation with respect to such security during
the 30-day period preceding the date in question on the Nasdaq or any system
then in use, or if no such quotations are available, the Fair Market Value on
the date in question of such security as reasonably determined by an independent
appraiser selected by a majority of the Continuing Trust Managers(as defined in
the Declaration of Trust) (or, if there are no Continuing Trust Managers, as
reasonably determined by Prudential Securities Incorporated) in good faith; and
(ii) in the case of property other than cash or stock, the Fair Market Value of
such property on the date in question as reasonably determined by an independent
appraiser selected by a majority of the Continuing Trust Managers (or, if there
are no Continuing Trust Managers, by Prudential Securities Incorporated) in good
faith. In each case hereunder in which an independent appraiser is to be
selected to determine Fair Market Value, (i) in the event (x) there are no
Continuing Trust Managers and (y) Prudential Securities Incorporated is unable
or elects not to serve as such appraiser or (ii) in the event there are
Continuing Trust Managers that do not select an independent appraiser within ten
(10) Business Days of a request for such appointment made by a Related Person,
such independent appraiser may be selected by such Related Person.
 
     "Fair Price" means the highest per-Share price (which, to the extent not
paid in cash, shall equal the Fair Market Value of any other consideration
paid), with appropriate adjustments for recapitalizations and for Share splits,
reverse Share splits and Share dividends, paid by a Person in acquiring any of
its holdings of the Shares.
 
     "Fair Tender Offer" means a bona fide tender offer for all of the Shares
outstanding (and owned by Persons other than a Related Person if the tender
offer is made by the Related Person), whether or not such offer is conditional
upon any minimum number of Shares being tendered, in which the aggregate amount
of cash or the Fair Market Value of any securities or other property to be
received by all holders who tender their Shares for each Share so tendered shall
be at least equal to the then applicable Fair Price paid by a Related Person or
paid by the Person making the tender offer if such Person is not a Related
Person. In the event that at the time such tender offer is commenced the terms
and conduct thereof are not directly regulated by Section 14(d) or 13(e) of the
Exchange Act and the general rules and regulations promulgated thereunder, then
the terms of such tender offer regarding the time such offer is held open and
regarding withdrawal rights shall conform in all respects with such terms
applicable to tender offers regulated by either of such Sections of the Exchange
Act. A Fair Tender Offer shall not be deemed to be "consummated" until Shares
are purchased and payment in full has been made for all duly tendered Shares.
 
     "Fannie Mae" means the federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C., (S)1716 et seq.), formerly known as the Federal National
Mortgage Association.
 
     "FASIT" means a Financial Asset Securitization Investment Trust.
 
     "FHLMC" means the Federal Home Loan Mortgage Corporation.
 
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<PAGE>   125
 
     "FIRPTA" means Foreign Investment in Real Property Tax Act of 1980, as
amended.
 
     "First Loss Class" means the most subordinated class of a multi-class
issuance of pass-through or debt securities and is the first to bear the loss
upon a default on the underlying Mortgage Collateral.
 
     "Fitch" means Fitch IBCA, Inc.
 
     "Foreclosure Property" means real estate acquired at or in lieu of
foreclosure of the mortgage secured by such real estate or as a result of a
default under a lease of such real estate.
 
     "Fowler Goedecke" means Fowler, Goedecke, Ellis & O'Connor Incorporated.
 
     "Funds From Operations" or "FFO" means net income (computed in accordance
with GAAP) excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets and after
adjustments for unconsolidated partnerships and joint ventures.
 
     "GAAP" means generally accepted accounting principles.
 
     "GNMA" means the Government National Mortgage Association.
 
     "Grantee" means the lending party to a deed securing debt.
 
     "Grantor" means the borrowing party to a deed securing debt.
 
     "Guidelines" means general guidelines adopted by the Board of Trust
Managers for the Company's investments, borrowings and operations as the same
may be modified from time to time.
 
     "Holdings" means AMREIT Holdings, Inc., a Nevada corporation.
 
     "Holliday Fenoglio Fowler" means Holliday Fenoglio Fowler, L.P., a
subsidiary of AMRESCO.
 
     "Incentive Compensation" means the compensation of the Manager, for each
fiscal quarter, in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds From Operations of the Company (before the
Incentive Compensation) per Common Share (based on the weighted average number
of shares outstanding) for such quarter plus (b) gains (or minus losses) from
debt restructuring and sales of property per Common Share (based on the weighted
average number of shares outstanding), exceeds (2) an amount equal to (a) the
weighted average of the price per share of the Offering and the prices per share
of all subsequent issuances of Common Shares by the Company multiplied by (b)
the Ten-Year U.S. Treasury Rate for such quarter plus 3.5% multiplied by (B) the
weighted average number of Common Shares outstanding during such quarter.
 
     "Independent Trust Managers" means those members of the Board of Trust
Managers that are not affiliated, directly, or indirectly, with the Manager or
AMRESCO, whether by ownership of, ownership interest in, employment by, any
material business or professional relationship with, or serving as an officer or
Trust Manager of the Manager or AMRESCO or an Affiliated business entity of the
Manager or AMRESCO.
 
     "Ineligible Property" means property that is not eligible for the election
to be treated as foreclosure property.
 
     "Initial Assets" means those Mortgage Loans identified by the Company which
the Company may originate or acquire with a portion of the net proceeds of the
Offering.
 
     "Initial Term" means the Management Agreement's initial term of two years
from the closing of the Offering.
 
     "Interest in Real Property" means, among other things, an interest in
Mortgage Loans or land and improvements thereon, such as buildings or other
inherently permanent structures (including items that are structural components
of such buildings or structures), a leasehold of real property, and an option to
acquire real property (or a leasehold of real property). An "interest" in real
property also generally includes an interest in Mortgage Loans secured by
controlling equity interests in entities treated as partnerships for federal
income
 
                                       119
<PAGE>   126
 
tax purposes that own real property, to the extent that the principal balance of
the mortgage does not exceed the Fair Market Value of the real property that is
allocable to the equity interest.
 
     "Invested Portfolio" means, as of any given date, the portfolio of real
estate related assets in which the Company has invested as of such date.
 
     "Investment Committee" means the committee(s) maintained by the Manager
(which committee(s) will include the President and the Chief Investment Officer
of the Company) which must approve the purchase, acquisition or origination by
the Company of any Targeted Investment.
 
     "Investment Company Act" means the Investment Company Act of 1940, as
amended.
 
     "Investment Grade Rating" means a rating at least equal to "BBB-" by
Standard & Poor's, "Baa3" by Moody's, "2" by NAIC, "BBB-" by Duff and Phelps or
"BBB-" by Fitch.
 
     "IO" means MBS representing the right to receive interest only from the
underlying loans or a disproportionately large amount of interest in relation to
principal payments from the underlying loans.
 
     "IRA" means individual retirement account.
 
     "IRS" means the Internal Revenue Service.
 
     "ISO" means the qualified incentive share options.
 
   
     "Leverage Ratio" means the ratio of (i) total indebtedness with respect to
which the Company is the primary obligor, to (ii) the Company's total
shareholders' equity.
    
 
     "LIBOR" means the London InterBank Offering Rate in effect from time to
time.
 
   
     "Loan One" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
    
 
   
     "Loan Two" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
    
 
   
     "Loan Three" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
    
 
   
     "Loan Four" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
    
 
   
     "Loan Five" means one of the Initial Assets, as described in "Business and
Strategy -- The Initial Assets."
    
 
     "Loan-to-Value Ratios" means the percentage obtained by dividing the
principal amount of a Mortgage Loan by the appraised value of the mortgaged
property when the Mortgage Loan is originated.
 
     "Management Agreement" means the agreement by and between the Company and
the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
 
     "Manager" means AMREIT Managers, L.P., a Delaware limited partnership, a
subsidiary of AMRESCO.
 
     "Market Price" on any day means, with respect to a class or series of
outstanding Shares, the closing price for such shares on such date.
 
     "Master Servicer" means an entity acceptable to the Rating Agencies that
regularly engages in the business of Master Servicing.
 
     "Master Servicing" means providing administrative and reporting services to
securitized pools of MBS.
 
     "MBS" means mortgage-backed securities (including CMBS and RMBS).
 
                                       120
<PAGE>   127
 
     "Mezzanine Loan" means a commercial real estate loan the repayment of which
is subordinated to a senior Mortgage Loan and which is secured either by a
second lien mortgage or a pledge of the ownership interests of the borrower.
Such loans can also take the form of a joint venture interest in or equity
investment in the borrower.
 
     "Moody's" means Moody's Investors Service, Inc.
 
     "Mortgage Collateral" means mortgage pass-through securities or pools of
whole loans securing or backing a series of CMBS.
 
     "Mortgage Derivative Securities" means mortgage securities that provide for
the holder to receive interest only, principal only, or interest and principal
in amounts that are disproportionate to those payable on the underlying Mortgage
Loans and may include other derivative instruments.
 
     "Mortgage Loans" means, collectively, loans secured by real property and
Mezzanine Loans.
 
     "Mortgagee" means the lending party to a mortgage.
 
     "Mortgages" means mortgages, deeds of trust and deeds to secure debt.
 
     "Mortgagor" means the borrowing party to a mortgage.
 
     "NAIC" means the National Association of Insurance Commissioners.
 
     "NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
 
     "Nasdaq National Market" means the Nasdaq Stock Market's National Market.
 
     "Net Income" means the taxable income of the Company.
 
     "Net Leased Real Estate" means real estate that is net leased on a
long-term basis (ten years or more) to tenants who are typically responsible for
paying a majority of the costs of owning, operating, and maintaining the leased
property during the term of the lease, in addition to the payment of a monthly
rent to the landlord for the use and occupancy of the premises.
 
     "Non-Conforming Mortgage Loans" means single-family Mortgage Loans secured
by liens on residential property that do not qualify for sale to GNMA, FNMA OR
FHLMC.
 
     "Non-Economic Residual Interest" means CMO Residuals that are required to
report taxable income or loss but receive no cash flow from the underlying
Mortgage Loans.
 
     "Non-ERISA Plan" means a qualified retirement plan not subject to Title I
of ERISA because it is a governmental or church plan or because it does not
cover common law employees.
 
     "Nonperforming Mortgage Loans" means Mortgage Loans for which the payment
of principal and/or interest is more than 90 days delinquent.
 
     "Non-REMIC Residual Interest" means a class of MBS that is not designated
as the residual interest in one or more REMICS.
 
     "Non-REMIC Transactions" means transactions in which an entity acquires or
originates Mortgage Loans and uses those loans to collateralize one or more
multiple class offerings of CMOS for which no REMIC election is made.
 
     "Offering" means the offering of Common Shares hereby.
 
     "OID" means original issue discount.
 
     "Participating Loan" means a Mortgage Loan that entitles the lender to the
receipt of interest at a stated rate, plus a percentage of the pledged real
estate's revenues or cash flow, or a specified percentage or fixed amount of the
net proceeds from any sale of the property, which Participating Loan may be a
Mezzanine Loan, Construction Loan, Bridge Loan or other Mortgage Loan.
 
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<PAGE>   128
 
     "Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family properties.
 
     "Pension Held REIT" means a REIT that is predominantly held by tax-exempt
pension funds and fails to satisfy the 5/50 Rule.
 
     "Permanent Mortgage Loans" means long-term senior Mortgage Loans.
 
     "Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity and also includes a group as that term is used for purposes of
Section 13(d)(3) of the Exchange Act.
 
     "Phantom Income" means taxable income in excess of economic income.
 
     "Plan" means pension, profit sharing or other employee benefit plans.
 
     "Plan Asset Regulations" means regulations of the DOL defining "plan
assets."
 
     "PO" means classes of MBS representing the right to receive principal only
from the underlying loans or a disproportionate amount of principal from the
underlying loans.
 
     "Preferential Dividend" means a distribution which is not pro rata within a
class of shares entitled to a dividend or which is not consistent with the
rights to distributions between classes of shares.
 
   
     "Preferred Shares" means the preferred shares of beneficial interest of
AMRESCO Capital Trust, a Texas real estate investment trust.
    
 
     "Private Placement" means the consummation of the transactions described
herein under the caption "Private Placement."
 
     "Prospectus" means this Prospectus of the Company dated             , 1998,
as the same may be amended or supplemented from time to time.
 
     "PSCC" means Prudential Securities Credit Corporation, an Affiliate of
Prudential Securities Incorporated, one of the Underwriters.
 
     "PSI" means Prudential Securities Incorporated.
 
     "Qualified Hedges" means bona fide interest rate swap or cap agreements
entered into by the Company to hedge variable-rate indebtedness only that the
Company incurred to acquire or carry Qualified REIT Real Estate Assets and any
futures and options, or other investments (other than Qualified REIT Real Estate
Assets) made by the Company to hedge its mortgage assets or borrowings that have
been determined by a favorable opinion of counsel to generate qualified income
for purposes of the 95% source of income test applicable to REITS.
 
     "Qualified REIT Real Estate Assets" means Mortgage Loans, real property and
other assets of the type described in Section 856(c)(6)(B) of the Code.
 
     "Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by AMRESCO Capital Trust at all times during such corporation's existence.
 
     "Qualifying Interests" means interests obtained by primarily engaging in
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate.
 
     "Rating Agencies" means, with respect to securities of U.S. issuers, any
nationally recognized statistical rating organization, such as Standard & Poor's
and Moody's, and, with respect to non-U.S. issuers, any of the
 
                                       122
<PAGE>   129
 
foregoing or any equivalent organization operating in the jurisdiction where the
issuer's principal operations are located.
 
     "Real Estate Assets" means, among other things, interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the Fair Market Value of the associated real property,
regular or residual interests in a REMIC (except that, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if the Company
held such assets), the Company will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of other REITs.
 
     "Recognition Period" means the period, defined pursuant to guidelines
issued by the IRS, during which an entity recognizes gain on the disposition of
an asset.
 
     "Registration Statement" means this Form S-11, together with any exhibits
and amendments, filed on behalf of or by the Company.
 
   
     "Rehabilitation Loan" means a Mortgage Loan the proceeds of which are used
to finance the acquisition and renovation or rehabilitation of existing real
property.
    
 
     "REIT" means a real estate investment trust, as defined under Section 856
of the Code.
 
     "REIT Provisions of the Code" means Sections 856 through 860 of the Code.
 
     "REIT Taxable Income" means Taxable Income, computed without regard to the
dividends paid deduction or any net capital gain.
 
     "Related Person" means any individual, corporation, partnership or other
Person and the affiliates and associates of any such individual, corporation,
partnership or other Person which individually or together is the Beneficial
Owner in the aggregate of more than 50% of the Shares of the Company.
 
     "Relief Act" means Soldier's and Sailor's Civil Relief Act of 1940, as
amended.
 
     "REMIC" means a real estate mortgage investment conduit.
 
     "REMIC Residual Interest" means a class of MBS that is designated as the
residual interest in one or more REMICS.
 
     "REO Property" means real estate acquired at foreclosure (or by deed in
lieu of foreclosure).
 
   
     "Representatives" means, collectively, Prudential Securities Incorporated,
Credit Suisse First Boston, ABN AMRO Incorporated, J.C. Bradford & Co.,
NationsBanc Montgomery Securities LLC and Piper Jaffray Inc.
    
 
     "Repurchase Agreement" means the reverse repurchase agreement to be entered
into by the Company and PSCC to provide the Company up to $100 million to
finance the purchase of MBS.
 
     "Residual Interests" means REMIC Residual Interests and non-REMIC Residual
Interests collectively.
 
     "Restricted Securities" has the meaning set forth in Rule 144 under the
Securities Act.
 
     "RICO" means Racketeer Influenced and Corrupt Organizations statute, as
amended.
 
     "Right of First Refusal" means the right to be granted by AMRESCO to the
Company with respect to Targeted Mortgage Loans and MBS, pursuant to which
AMRESCO will agree, upon closing of the Offering, not to permit any member of
the AMRESCO Group to invest in (i) the first $100 million of Targeted Mortgage
Loans which are identified by or to any member of the AMRESCO Group during any
calendar quarter, or (ii) any MBS, other than MBS issued in securitizations
sponsored in whole or in part by any member of the AMRESCO Group, unless the
Investment Committee shall have first determined, in each case, that the Company
should not invest in such asset or assets, or should invest in only a portion of
such asset or assets.
 
     "RMBS" means a series of one- to four-family residential MBS.
 
                                       123
<PAGE>   130
 
     "Rule 144" means Rule 144 contained in the Securities Act.
 
     "Rule 144A" means Rule 144A as contained in the Securities Act.
 
     "Securities Act" means the Securities Act of 1933, as amended.
 
     "Share Option Plan" means the AMRESCO Capital Trust 1998 Share Option and
Award Plan.
 
     "Share Options" means the options issued by the Company under the Share
Option Plan.
 
     "Share Ownership Limits" means the Aggregate or Common Share Ownership
Limit or the Excepted Holder Limit.
 
     "Shares" means the Common Shares and, solely to the extent specifically
required by law or as specifically provided in any resolution or resolutions of
the Trust Managers providing for the issuance of any particular series of
Preferred Shares, the Preferred Shares.
 
     "Special Servicer" means an entity which services delinquent and/or
defaulted Mortgage Loans, including the oversight and management of the
resolution of such Mortgage Loans by modification, foreclosure, deed in lieu of
foreclosure or otherwise.
 
     "Special Servicing" means the oversight and management of the resolution of
Mortgage Loans by workout or modification of loan provisions, foreclosure, deed
in lieu of foreclosure or otherwise, and to control decisions with respect to
the preservation of the collateral generally, including property management and
maintenance decisions.
 
     "Special Servicing Rights" means rights to control the oversight and
management of the resolution of Mortgage Loans by workout or modification of
loan provisions, foreclosure, deed in lieu of foreclosure or otherwise, and to
control decisions with respect to the preservation of the collateral generally,
including property management and maintenance decisions.
 
     "Standard & Poor's" means Standard & Poor's Rating Services, a division of
the McGraw-Hill Companies.
 
     "Sub IOs" means an IO with characteristics of a Subordinated Interest.
 
     "Subordinated Interests" means classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes.
 
     "Subperforming Mortgage Loans" means Mortgage Loans for which default is
likely or imminent or for which the borrower is making payments in accordance
with a forbearance plan.
 
     "Targeted Investments" means, as of any time, the various types of real
estate related assets targeted to be invested in by the Company at such time.
 
     "Targeted Mortgage Loan" means any Mortgage Loan which (i) meets the
investment criteria and objectives of the Company and (ii) has been
preliminarily reviewed and approved for further consideration by any member of
the AMRESCO Group.
 
     "Tax Counsel" means Winstead Sechrest & Minick P.C.
 
     "Tax-Exempt Entity" means a qualified pension, profit sharing or other
employee retirement benefit plan, Keogh plan, bank commingled trust funds for
such plans, or IRA, and other similar entities intended to be exempt from
federal income taxation.
 
     "Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held primarily
for sale to customers or from Foreclosure Property) subject to certain
adjustments provided in the REIT Provisions of the Code.
 
     "TBCA" means the Texas Business Corporation Act.
 
     "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to a constant maturity of
 
                                       124
<PAGE>   131
 
ten years) published by the Federal Reserve Board during a quarter, or, if such
rate is not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.
 
     "Texas REIT Act" means the Texas Real Estate Investment Trust Act, found at
Article 6138A of the Texas Revised Civil Statutes, as amended.
 
     "Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
 
     "Transfer" means any issuance, sale, transfer, gift, assignment, devise or
other disposition, as well as any other event that causes any Person to acquire
Beneficial Ownership or Constructive Ownership, or any agreement to take any
such actions or cause any such events, of Shares or the right to vote or receive
dividends on Shares, including (i) the granting or exercise of any option (or
any disposition of any option), (ii) any disposition of any securities or rights
convertible into or exchangeable for Shares or any interest in Shares or any
exercise of any such conversion or exchange right and (iii) transfers of
interests in other entities that result in changes in Beneficial Ownership or
Constructive Ownership of Shares; in each case, whether voluntary or
involuntary, whether owned of record, Constructively Owned or Beneficially Owned
and whether by operation of law or otherwise. The terms "Transferring" and
"Transferred" shall have the correlative meanings.
 
     "Treasury Regulations" means the Federal Income Tax Regulations, including
Temporary Regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
 
     "Trust Manager" means a member of the Board of Trust Managers.
 
   
     "UBTI" means unrelated trade or business income as defined in Section 512
of the Code.
    
 
     "UCC" means Uniform Commercial Code, as amended.
 
     "Underwriters" means the firms identified in this Prospectus as
underwriters of the Offering.
 
     "Underwriting Agreement" means the agreement by and among the Underwriters
pursuant to which the Underwriters will purchase Common Shares.
 
     "U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United States,
(ii) is a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any state unless, in the case of a
partnership, Treasury Regulations provide otherwise, (iii) is an estate whose
income is subject to taxation in the United States regardless of its connection
with the conduct of a U.S. trade or business or (iv) is a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States Persons have the
authority to control all substantial decisions of the trust.
 
     "Warehouse Line" means the $400 million warehouse financing arrangement to
be entered into by the Company, PSCC and certain other institutional lenders to
provide financing to the Company for the origination or acquisition of Mortgage
Loans.
 
                                       125
<PAGE>   132
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGES
                                                              -----
<S>                                                           <C>
Independent Auditors' Report................................    F-2
Balance Sheet...............................................    F-3
Notes to Balance Sheet......................................    F-4
</TABLE>
 
                                       F-1
<PAGE>   133
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Shareholder of AMRESCO Capital Trust:
 
     We have audited the accompanying balance sheet of AMRESCO Capital Trust
(the "Trust") as of February 2, 1998. This financial statement is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
 
     In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of AMRESCO Capital Trust as of February 2,
1998, in conformity with generally accepted accounting principles.
 
                                            Deloitte & Touche LLP
 
Dallas, Texas
February 2, 1998
 
                                       F-2
<PAGE>   134
 
                             AMRESCO CAPITAL TRUST
 
                                 BALANCE SHEET
                                FEBRUARY 2, 1998
 
                                     ASSETS
 
<TABLE>
<CAPTION>
 
<S>                                                           <C>
Cash........................................................  $1,000
                                                              ======
 
                    SHAREHOLDER'S EQUITY
 
SHAREHOLDER'S EQUITY
  Preferred Shares, par value $.01 per share; 50,000,000
     shares authorized, none outstanding; Common Shares, par
     value $.01 per share; 200,000,000 shares authorized;
     100 shares issued and outstanding......................  $    1
  Additional paid-in-capital................................     999
                                                              ------
Total Shareholder's Equity..................................  $1,000
                                                              ======
</TABLE>
 
                    See accompanying notes to balance sheet.
 
                                       F-3
<PAGE>   135
 
                             AMRESCO CAPITAL TRUST
 
                             NOTES TO BALANCE SHEET
                                FEBRUARY 2, 1998
 
NOTE 1 -- ORGANIZATION
 
     AMRESCO Capital Trust (the "Trust") is a Texas real estate investment trust
and was initially capitalized through the sale of 100 Common Shares for $1,000
on February 2, 1998. The Trust will seek to acquire primarily mortgage loans,
mortgage-backed securities, real estate and certain other real estate related
assets.
 
     The Trust has had no operations to date other than matters relating to the
organization and start-up of the Trust. Accordingly, no statement of operations
is presented.
 
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Cash -- Cash includes cash on hand and deposits in banks. The Trust has no
cash equivalents.
 
     Federal and State Income Taxes -- The Trust will elect to be taxed as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended, and generally will not be subject to federal and state taxes on its
income to the extent it distributes annually 95% of its predistribution taxable
income to shareholders and maintains its qualification as a real estate
investment trust.
 
     Income recognition -- Income and expenses are to be recorded on the accrual
basis of accounting.
 
NOTE 3 -- TRANSACTIONS WITH AFFILIATES
 
     The Trust intends to enter into a Management Agreement (the "Management
Agreement") with AMREIT Managers, L.P. (the "Manager"), a subsidiary of AMRESCO,
Inc. ("AMRESCO"), under which the Manager will manage its day-to-day operations,
subject to the direction and oversight of the Trust's Board of Trust Managers.
The Trust will pay the Manager quarterly base management compensation and
incentive compensation based on Funds From Operations of the Trust in excess of
a minimum return on equity.
 
NOTE 4 -- PUBLIC OFFERING OF COMMON SHARES
 
     The Trust is in the process of filing a Registration Statement for the sale
of its common shares. Contingent upon the consummation of the public offering,
the Trust will be liable for organization and offering expenses in connection
with the sale of the shares offered. AMRESCO has committed to cause a subsidiary
of AMRESCO to purchase 10% of the Trust's common shares at the initial public
offering price in a private placement simultaneous with the closing of the
public offering.
 
NOTE 5 -- SHARE OPTION PLAN
 
     The Trust intends to adopt a share option and award plan (the "Share Option
Plan") that will provide for the grant of both qualified incentive share options
and non-qualified share options and restricted shares. Trust Managers,
directors, officers and key employees of the Trust and the Manager are eligible
to participate in the Share Option Plan. The Share Option Plan will authorize
the grant of options to purchase an aggregate of up to 15% of the Trust's
outstanding common shares.
 
     No options or rights have yet been granted under the Share Option Plan. The
Trust intends to grant options to the Manager to purchase 2,222,233 common
shares, effective on the closing of the public offering of common shares and the
execution of the Management Agreement. The fair value of the options cannot be
determined until the closing of the public offering.
 
                                       F-4
<PAGE>   136
 
             ======================================================
 
   
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the common shares offered by this Prospectus, nor does it constitute
an offer to sell or a solicitation of any offer to buy the common shares by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
    
 
   
Until       , 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
    
 
                             ---------------------
 
                           SUMMARY TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
Prospectus Summary....................    1
Risk Factors..........................   16
Use of Proceeds.......................   34
Dividend Policy and Distributions.....   34
Capitalization........................   35
Management's Discussion and Analysis
  of Liquidity and Capital
  Resources...........................   36
Business and Strategy.................   37
Management of the Company.............   62
The Manager...........................   69
Security Ownership of Certain
  Beneficial Owners and Management....   81
Federal Income Tax Consequences.......   82
ERISA Considerations..................   97
Description of Shares of Beneficial
  Interest............................  100
Certain Provisions of Texas Law and of
  the Declaration of Trust and
  Bylaws..............................  104
Shares Eligible for Future Sale.......  109
Underwriting..........................  111
Private Placement.....................  113
Legal Matters.........................  113
Experts...............................  113
Additional Information................  114
Glossary..............................  114
Financial Statements..................  F-1
</TABLE>
    
 
             ======================================================
             ======================================================
 
                               20,000,000 Shares
 
                                 [AMRESCO LOGO]
 
                                Common Shares of
                              Beneficial Interest
 
                             ---------------------
                                   PROSPECTUS
                             ---------------------
 
   
                       PRUDENTIAL SECURITIES INCORPORATED
    
                           CREDIT SUISSE FIRST BOSTON
   
                             ABN AMRO INCORPORATED
    
                              J.C. BRADFORD & CO.
                             NATIONSBANC MONTGOMERY
                                 SECURITIES LLC
 
                               PIPER JAFFRAY INC.
 
   
                                     , 1998
    
 
             ======================================================
<PAGE>   137
 
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not Applicable.
 
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Shares being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
 
                               AMOUNT TO BE PAID
 
<TABLE>
<S>                                                            <C>
SEC Registration Fee........................................   $  108,560
NASDAQ Stock Market Filing Fee..............................   $   95,000
NASD Filing Fee.............................................   $   30,500
Printing and Engraving Expenses.............................   $  200,000
Legal Fees and Expenses.....................................   $  650,000
Accounting Fees and Expenses................................   $  125,000
Transfer Agent Fees and Custodian Fees......................   $   10,000
Miscellaneous...............................................   $   80,940
                                                               ----------
Total.......................................................   $1,300,000
                                                               ==========
</TABLE>
 
ITEM 32. SALES TO SPECIAL PARTIES
 
     The securities described in Item 33(a) were issued to AMRESCO, Inc., in
exchange for cash.
 
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
 
     Pursuant to the exemption provided by Section 4(2) of the Securities Act,
on February 2, 1998 the Company issued 100 Common Shares for an aggregate
purchase price of $1,000 to AMRESCO, Inc.
 
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS.
 
     The Declaration of Trust provides for the indemnification of the directors
and officers of the Company and the Manager and its employees, officers,
directors and controlling Persons to the fullest extent permitted by the Texas
REIT Act. The Texas REIT Act generally permits the indemnification of a trust
manager, officer, employee, or agent of the real estate investment trust, who
was, is or is threatened to be made a named defendant or respondent in a
proceeding because of the Person's affiliation with the real estate investment
trust only if that Person: (i) conducted himself in good faith; (ii) reasonably
believed: (a) in the case of conduct in his official capacity, that his conduct
was in the real estate investment trust's best interest; and (b) in all other
cases, that his conduct was at least not opposed to the real estate investment
trust's best interest; and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Furthermore, except
to the extent permitted by the Texas REIT Act, such Person may not be
indemnified in respect of a proceeding (i) in which the Person is found liable
on the basis that personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the Person's official capacity;
or (ii) in which the Person is found liable to the real estate investment trust.
 
     If, in connection with a proceeding against the real estate investment
trust, such Person is found liable to the real estate investment trust or is
found liable on the basis that personal benefit was improperly received by the
Person, the indemnification (i) is limited to reasonable expenses actually
incurred by the Person in connection with the proceeding, and (ii) shall not be
made to a Person that has been found liable for willful or intentional
misconduct in the performance of his duty to the real estate investment trust.
 
     The Texas REIT Act also provides that the real estate investment trust may
indemnify Persons who are not or were not officers, employees, or agents of the
real estate investment trust but who are or were serving at
 
                                      II-1
<PAGE>   138
 
the request of the real estate investment trust as a trust manager, director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another real estate investment trust or of a foreign or domestic
corporation, partnership, or other enterprise to the same extent that it may
identify its own trust managers, officers, employees, or agents.
 
     Pursuant to the Texas REIT Act and the Declaration of Trust, no Trust
Manager will be liable for any act, omission, loss, damage or expense arising
from his or her duty to a real estate investment trust, except for such trust
manager's own willful misfeasance, willful malfeasance or gross negligence.
Under the Texas REIT Act, a trust manager is not subject to any liabilities
imposed by law upon trust managers of a real estate investment trust nor liable
for any claims or damages that may result from his acts in the discharge of any
duty imposed or power conferred upon him by the real estate investment trust,
if, in the exercise of ordinary care, he acted in good faith and in reliance
upon information, opinions, reports or statements, including financial
statements and other financial data, concerning the real estate investment trust
or another Person, that were prepared or presented by: (i) one or more officers
or employees of the real estate investment trust, other than the real estate
investment trust manager; (ii) legal counsel, public accountants, investment
bankers, or other Persons as to matters the trust manager reasonably believes
are within the Person's professional or expert competence; or (iii) a committee
of the trust managers of which the trust manager is not a member.
 
     The Company has obtained directors' and officers' liability insurance
coverage in the aggregate amount of approximately $10 million. Directors' and
officers' insurance insures (i) the officers and Trust Managers of the Company
from any claim arising out of an alleged wrongful act by the Trust Managers and
officers of the Company in their respective capacities as Trust Managers and
officers of the Company, and (ii) the Company, to the extent that the Company
has indemnified the Trust Managers and officers for such loss.
 
     The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its Trust Managers and
officers and Persons who control the Company within the meaning of Section 15 of
the Securities Act with respect to certain liabilities, including liabilities
arising under the Securities Act.
 
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
 
     Not applicable.
 
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
 
     (a) Financial Statements included in the Prospectus are:
 
        Balance sheet at February 2, 1998
 
        Notes to Balance Sheet
 
     All schedules have been omitted because they are not applicable.
 
     (b) Exhibits
 
   
<TABLE>
<C>                      <S>
           1.1           -- Form of Underwriting Agreement(4)
           3.1           -- Amended and Restated Declaration of Trust of the
                            Registrant(1)
           3.2           -- Form of Bylaws of the Registrant(2)
           4.1           -- Form of Common Share Certificate(5)
           5.1           -- Form of Opinion of Winstead Sechrest & Minick P.C.
                            regarding legality(2)
           8.1           -- Opinion of Winstead Sechrest & Minick P.C. regarding
                            tax matters(5)
          10.1           -- Management Agreement between the Registrant and
                            AMRESCO Capital Trust Managers, L.P.(3)
          10.2           -- Form of AMRESCO Capital Trust 1998 Share Option and
                            Award Plan(3)
          10.3           -- Form of Registration Rights Agreement among the
                            Registrant, AMREIT Holdings, Inc. and AMREIT
                            Managers, L.P.(2)
</TABLE>
    
 
                                      II-2
<PAGE>   139
   
<TABLE>
<C>                      <S>
          10.4           -- Form of Correspondent Agreement between the
                            Registrant and Holliday Fenoglio Fowler, L.P.(2)
          10.6           -- Warehouse Loan Agreement(3)
          10.7           -- Repurchase Agreement(3)
          10.8           -- Form of Right of First Refusal and Non-Competition
                            Agreement(3)
          21.1           -- Subsidiaries of the Registrant(2)
          23.1           -- Consent of Deloitte & Touche LLP(5)
          23.2           -- Consent of Winstead Sechrest & Minick P.C. (included
                            in Exhibits 5.1 and 8.1)
          24.1           -- Power of Attorney(2)
          99.1           -- Consent of Mr. Duncan to be named as a trust manager
                            pursuant to Rule 438(3)
          99.2           -- Consent of Mr. Leinberger to be named as a trust
                            manager pursuant to Rule 438(3)
          99.3           -- Consent of Mr. Leslie to be named as a trust manager
                            pursuant to Rule 438(3)
          99.4           -- Consent of Mr. Deterding to be named as a trust
                            manager pursuant to Rule 438(5)
</TABLE>
    
 
---------------
 
   
(1) Previously filed with the Company's initial Registration Statement on Form
    S-11 (on February 3, 1998).
    
   
(2) Previously filed with Amendment No. 1 to the Company's Registration
    Statement on Form S-11 (on April 1, 1998).
    
   
(3) Previously filed with Amendment No. 2 to the Company's Registration
    Statement on Form S-11 (on April 13, 1998).
    
   
(4) To be filed by amendment.
    
   
(5) Filed herewith.
    
 
ITEM 37. UNDERTAKINGS
 
     The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing of the Offering certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to each
purchaser.
 
     Insofar as indemnification by Registrant for liabilities arising under the
Securities Act may be permitted to trust managers, officers and controlling
Person of the Registrant pursuant to the provisions referenced in Item 34 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trust manager,
officer, or controlling Person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trust manager, officer or
controlling Person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
 
     The undersigned Registrant hereby undertakes:
 
          (1) That for purposes of determining any liability under the
     Securities Act, the information omitted from the Prospectus filed as part
     of this Registration Statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-3
<PAGE>   140
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in Dallas, Texas, on the 20th day of April, 1998.
    
 
                                            AMRESCO CAPITAL TRUST
 
                                            By:     /s/ MARK D. GIBSON
                                              ----------------------------------
                                                       Mark D. Gibson,
                                                President and Chief Executive
                                                            Officer
 
     PURSUANT TO REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
 
   
<TABLE>
<CAPTION>
                         SIGNATURE                                     TITLE                  DATE
                         ---------                                     -----                  ----
<C>                                                           <S>                        <C>
 
                  /s/ ROBERT L. ADAIR III                     Chairman of the Board      April 20, 1998
------------------------------------------------------------
                    Robert L. Adair III
 
                     /s/ MARK D. GIBSON                       Trust Manager, President   April 20, 1998
------------------------------------------------------------  and Chief Executive
                       Mark D. Gibson                         Officer (Principal
                                                              Executive Officer)
 
                    /s/ THOMAS J. ANDRUS                      Executive Vice President   April 20, 1998
------------------------------------------------------------  and Chief Financial
                      Thomas J. Andrus                        Officer (Principal
                                                              Financial and Accounting
                                                              Officer)
 
            /s/ MARK D. GIBSON, ATTORNEY IN FACT              Trust Manager              April 20, 1998
------------------------------------------------------------
                    Robert H. Lutz, Jr.
</TABLE>
    
 
                                      II-4
<PAGE>   141
 
                                 EXHIBIT INDEX
 
   
<TABLE>
<CAPTION>
      EXHIBIT NO.                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
 
           1.1           -- Form of Underwriting Agreement(4)
           3.1           -- Amended and Restated Declaration of Trust of the
                            Registrant(1)
           3.2           -- Form of Bylaws of the Registrant(2)
           4.1           -- Form Common Share Certificate(5)
           5.1           -- Form of Opinion of Winstead Sechrest & Minick P.C.
                            regarding legality(2)
           8.1           -- Opinion of Winstead Sechrest & Minick P.C. regarding tax
                            matters(5)
          10.1           -- Management Agreement between the Registrant and AMRESCO
                            Capital Trust Managers, L.P.(3)
          10.2           -- Form of AMRESCO Capital Trust 1998 Share Option and Award
                            Plan(3)
          10.3           -- Form of Registration Rights Agreement among the
                            Registrant, AMREIT Holdings, Inc. and AMREIT Managers,
                            L.P.(2)
          10.4           -- Form of Correspondent Agreement between the Registrant
                            and Holliday Fenoglio Fowler, L.P.(2)
          10.6           -- Warehouse Loan Agreement(3)
          10.7           -- Repurchase Agreement(3)
          10.8           -- Form of Right of First Refusal and Non-Competition
                            Agreement(3)
          21.1           -- Subsidiaries of the Registrant(2)
          23.1           -- Consent of Deloitte & Touche LLP(5)
          23.2           -- Consent of Winstead Sechrest & Minick P.C. (included in
                            Exhibits 5.1 and 8.1)
          24.1           -- Power of Attorney(2)
          99.1           -- Consent of Mr. Duncan to be named as a trust manager
                            pursuant to Rule 438(3)
          99.2           -- Consent of Mr. Leinberger to be named as a trust manager
                            pursuant to Rule 438(3)
          99.3           -- Consent of Mr. Leslie to be named as a trust manager
                            pursuant to Rule 438(3)
          99.4           -- Consent of Mr. Deterding to be named as a trust manager
                            pursuant to Rule 438(5)
</TABLE>
    
 
---------------
 
   
(1) Previously filed with the Company's initial Registration Statement on Form
    S-11 (on February 3, 1998).
    
 
(2) Previously filed with Amendment No. 1 to the Company's Registration
    Statement on Form S-11 (on April 1, 1998).
 
   
(3) Previously filed with Amendment No. 2 to the Company's Registration
    Statement on Form S-11 (on April 13, 1998).
    
 
   
(4) To be filed by amendment.
    
 
   
(5) Filed herewith.