SPECIALTY MORTGAGE TRUST INC
424B3, 2001-01-19
REAL ESTATE INVESTMENT TRUSTS
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PROSPECTUS                                      FILED PURSUANT TO RULE 424(b)(3)
JANUARY 19, 2001                                      REGISTRATION NO. 333-44860

                               UP TO $250,000,000

                         SPECIALTY MORTGAGE TRUST, INC.
                        COLLATERALIZED INVESTMENT NOTES
                           -------------------------
 CONSIDER CAREFULLY THE RISK
 FACTORS BEGINNING ON PAGE 13
 OF THIS PROSPECTUS, INCLUDING
 THE FOLLOWING:
 - The Notes are not insured
   or guaranteed and your
   recourse for payment is
   limited to our assets.
 - The Notes have limited
   liquidity and you may not
   be able to sell your Notes
   for cash. There is no
   secondary trading market
   and none is likely to
   develop.
 - The volatility of the
   market value of the pledged
   mortgage loans may result
   in a deficiency upon
   liquidation and in losses
   to noteholders.

 - We depend heavily on our
   manager and any change in
   managers could adversely
   affect our operations.
 - We have potential conflicts
   of interest with our
   manager that arise under
   the management agreement
   which, among other things,
   could lead to the
   acquisition of riskier or
   more speculative mortgage
   loans.
 - The manager negotiates
   origination and renewal
   fees and the first 2 1/2
   points collected from a
   borrower is paid to the
   manager. This presents a
   potential conflict of
   interest in that higher
   points could mean a lower
   interest rate which would
   reduce interest income over
   the life of a loan.
 - If we terminate our manager
   without cause, the
   termination fee payable to
   the manager would reduce
   cash available for
   operations and the
   repayment of Notes.
 - There are no charter or
   bylaw limitations on our
   use of leverage. We have a
   targeted debt to equity
   ratio of approximately 1:1.
   Any failure to refinance
   outstanding borrowings as
   they come due, whether
   under lines of credit or
   our note program, may
   materially adversely impact
   our operations and solvency
   and our ability to repay
   the Notes.
 - Should we fail to maintain
   REIT status, we would be
   subject to tax as a regular
   corporation which could
   reduce our earnings and our
   ability to make timely
   payments on the Notes.

 - Future revisions in
   policies and strategies at
   the discretion of the board
   of directors may adversely
   affect our operations and
   your investment.

 - We face loss exposure due
   to the credit risks of
   mortgage lending which
   could adversely affect our
   ability to make timely
   payments on the Notes.

 - There is no limit on the
   types of mortgage loans we
   may acquire.

 - There are no limits on the
   geographic concentration of

   the loans we may acquire.

Specialty Mortgage Trust, Inc. is a specialty mortgage finance company that
                                  acquires and holds, in a tax-advantaged real
                                  estate investment trust or REIT structure,
                                  mortgage loans secured by property located
                                  primarily in the State of Nevada. Specialty
                                  Financial, formerly Gonzo Financial, as the
                                  manager for the REIT, originates and services
                                  our mortgage loans and is responsible for our
                                  day-to-day operations. Nello Gonfiantini III,
                                  a director and our sole executive officer, is
                                  also an executive officer, director and the
                                  sole stockholder of Specialty Financial. We
                                  have no separate employees from the manager
                                  and we share its facilities. We have no
                                  ownership interest in the manager. Specialty
                                  Financial has significant operating discretion
                                  as to the implementation of our business
                                  strategy and policies. These relationships
                                  create potential conflicts of interest to the
                                  extent Specialty Financial's own interests at
                                  any given time are not identical to our
                                  interests.

Specialty Mortgage Trust, Inc. is offering up to $250,000,000 of its
                                  Collateralized Investment Notes with issuances
                                  expected to take place on a monthly basis. The
                                  maximum principal of Notes that can be
                                  outstanding at any time may not exceed $50
                                  million. There is no minimum amount of Notes
                                  that may be sold. Unless otherwise stated in a
                                  supplement to this prospectus, no selling
                                  commissions will be deducted from the proceeds
                                  received by us from the issuance of the Notes.
  THE COLLATERALIZED INVESTMENT NOTES:

- will be secured by pledged assets of Specialty Mortgage Trust, Inc.,
  consisting of mortgage loans, short-term money market instruments and/or cash;

- will have a maturity that is fixed on the date of issuance within a range of a
  minimum of 1 month to a maximum of 12 months from the date of issuance; and

- will bear interest rates as established from time to time, with interest
  payable, at the election of the noteholder, either monthly in arrears or,
  compounding monthly, at maturity.

Investors may select the term and corresponding interest rate offered in a
                                  supplement to this prospectus.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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                               TABLE OF CONTENTS

<TABLE>
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PROSPECTUS SUMMARY....................     1
  Summary of the Offering.............     1
  Summary Risk Factors................     2
  The Company.........................     9
  Use of Proceeds.....................     9
  Dividend Policy and Distributions...     9
  Business............................    10
  The Manager.........................    11
  Ratio of Earnings to Fixed
     Charges..........................    12
RISK FACTORS..........................    13
  Risk Factors Associated with an
     Investment in Collateralized
     Investment Notes.................    13
       The Notes are not insured or
          guaranteed and your recourse
          for payment is limited to
          our assets..................    13
       The Notes have limited
          liquidity and you may not be
          able to sell your Notes for
          cash........................    13
       The volatility of the market
          value of the pledged
          mortgage loans may result in
          a deficiency upon
          liquidation and in losses to
          noteholders.................    13
       The indenture governing the
          securities contains limited
          events of default which
          means there will be limited
          opportunities for a trustee
          to foreclose on behalf of
          noteholders on the pledged
          mortgage loans..............    13
       At the time of your investment,
          we may not have identified
          the mortgage loans that we
          will invest in with the
          proceeds of the offering and
          there is no assurance that
          our manager will identify
          and fund mortgage loans at
          favorable spreads...........    13
       At the time of your investment,
          you may not have sufficient
          information to make an
          informed investment decision
          because of our limited
          operating history...........    14
       Our Notes are unrated and your
          investment decision must be
          made without rating agency
          input.......................    14
       Timely payment to noteholders
          of amounts due on the Notes
          could be adversely affected
          by bankruptcy laws..........    14
</TABLE>

<TABLE>
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                                        PAGE
                                        ----
<S>                                     <C>
  Risk Factors Associated with the
     Overall Enterprise of Specialty
     Mortgage Trust, Inc..............    14
       We depend heavily on our
          manager and any change in
          managers could adversely
          affect our operations.......    14
       We have potential conflicts of
          interest with our manager
          that arise under the
          management agreement........    14
       If we terminate our manager
          without cause, the
          termination fee payable to
          the manager would reduce
          cash available for
          operations and the repayment
          of Notes....................    15
       Failure to refinance
          outstanding borrowings may
          materially adversely impact
          our operations and solvency
          and our ability to repay the
          Notes.......................    15
       Should we fail to maintain REIT
          status, we would be subject
          to tax as a regular
          corporation which could
          reduce our earnings and our
          ability to make timely
          payments on the Notes.......    16
       Future revisions in policies
          and strategies at the
          discretion of board of
          directors may adversely
          affect our operations and
          your investment.............    16
       If we should cease to qualify
          for an Investment Company
          Act exemption, our ability
          to use leverage and to
          conduct our business would
          be materially adversely
          affected as would our
          ability to make timely
          payments on the Notes.......    16
  Risk Factors Associated with the
     Business of Mortgage Lending and
     Managing a Mortgage Loan
     Portfolio........................    17
       We face loss exposure due to
          the credit risks of mortgage
          lending which could
          adversely affect our ability
          to make timely payments on
          the Notes...................    17
       Intense competition in the
          mortgage loan industry may
          result in reduced net income
          or in revised underwriting
          standards which would
          adversely affect our
          operations and your
          investment..................    19
</TABLE>

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<PAGE>   3

<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
       General economic and financial
          conditions in mortgage and
          financial markets may affect
          our results of operations
          and your investment.........    20
       We face adverse effects of
          using leverage to finance
          mortgage loan
          originations................    20
       New laws and regulations, new
          administrative or judicial
          interpretations or our
          failure to comply with
          existing federal, state, or
          local legislation or
          regulation could adversely
          affect our operations and
          your investment.............    21
       Our mortgage portfolio has
          limited liquidity which
          could impact our ability to
          make timely payment on the
          Notes.......................    22
THE COMPANY...........................    23
USE OF PROCEEDS.......................    24
DIVIDEND POLICY AND DISTRIBUTIONS.....    25
CAPITALIZATION........................    26
SELECTED FINANCIAL AND OTHER DATA.....    27
MANAGEMENT'S DISCUSSION AND ANALYSIS
  OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.......................    28
  Overview............................    28
  Financial Condition.................    28
  Assets..............................    28
  Liabilities.........................    28
  Results of Operations...............    29
  Recent Developments.................    31
  Interest Rate/Market/Credit Risk....    31
  Liquidity and Capital Resources.....    32
  Quantitative and Qualitative
     Disclosures about Market Risk....    33
BUSINESS..............................    34
  Investment Strategies and Polices...    34
  Leverage Strategies and Policies....    39
  Operating Strategies and Policies...    40
  Other Company Policies..............    42
  Legal Proceedings...................    42
THE MANAGER...........................    43
  Management Fees.....................    43
  Administrative Services Provided by
     the Manager......................    44
  Expenses............................    45
  Term and Termination................    45
  Potential Conflicts of Interest and
     Limits of Responsibility.........    46
</TABLE>

<TABLE>
<CAPTION>
                                        PAGE
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MANAGEMENT............................    47
  Directors and Officers..............    47
  Terms of Directors and Officers.....    48
  Committees of the Board.............    48
  Compensation Committee Interlocks...    49
  Compensation of Directors...........    49
  Executive Compensation..............    49
  Stock Option Plan...................    49
PRINCIPAL SECURITYHOLDERS.............    52
  Beneficial Ownership of Capital
     Stock by Large Securityholders...    52
  Beneficial Ownership of Capital
     Stock by Directors and
     Management.......................    52
DESCRIPTION OF THE NOTES..............    54
  General.............................    54
  Collateral..........................    55
  Calculation of the Value of the
     Collateral.......................    56
  Withdrawals and Substitutions of
     Collateral.......................    57
  Payments on Pledged Assets..........    57
  Purchase and Resale of Notes........    57
  Redemption..........................    57
  Financial Reports...................    58
  Events of Default...................    58
  Priority............................    59
  Merger..............................    59
  The Trustee.........................    59
  Modification........................    60
  List of Noteholders.................    60
  Annual Compliance Statement.........    60
  Trustee's Annual Report.............    60
  Trustee.............................    61
FEDERAL INCOME TAX CONSEQUENCES.......    61
  Tax Classification of the Notes.....    61
  Tax Classification of Specialty
     Mortgage Trust...................    61
  Tax Classification of the Collateral
     Pool.............................    62
  Tax Consequences to Noteholders.....    63
STATE AND LOCAL TAX CONSIDERATIONS....    64
ERISA INVESTORS.......................    64
PLAN OF DISTRIBUTION..................    64
LEGAL MATTERS.........................    65
EXPERTS...............................    66
WHERE YOU CAN FIND MORE INFORMATION...    66
SALES LITERATURE......................    66
GLOSSARY..............................    67
FINANCIAL STATEMENTS..................   F-1
</TABLE>

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<PAGE>   4

                               PROSPECTUS SUMMARY

     This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus carefully to
understand all of the terms of the offering. We include a glossary beginning on
page 49.

                            SUMMARY OF THE OFFERING

     Securities offered. This prospectus relates to up to $250,000,000 of
Specialty Mortgage Trust, Inc.'s Collateralized Investment Notes. The maximum
principal amount outstanding at any time may not exceed $50,000,000.

     Term. The Notes are expected to be issued monthly with maturities ranging
from one month to twelve months from the date of issuance.

     Minimum denominations. $25,000.

     Date of Issuance. The 20th day of the month, or the first business day
thereafter unless otherwise provided in the prospectus supplement.

     Interest. We will establish interest rates on the Notes offered in this
prospectus from time to time, based on market conditions and our financial
requirements. Once fixed at issuance, the interest rate on a Note will not
change unless the term of the Note is extended. Interest on the Notes is payable
at the election of the noteholder either (a) monthly in arrears on the 20th day
of each month and at stated maturity or (b) compounding monthly, at stated
maturity. Accrued interest is to be computed on the basis of a 360-day year
consisting of twelve 30-day months. Investors may select the term and
corresponding interest rate offered in a supplement to this prospectus.

     Collateral. The Notes will be collateralized by pledged assets consisting
of (a) our mortgage loans in an aggregate principal amount at least equal to one
and a half (1 1/2) times the aggregate principal amount outstanding on the
Notes, (b) short-term money market instruments and cash at least equal to the
aggregate principal amount outstanding on the Notes or (c) a combination of the
foregoing. We anticipate that initially the pledged assets will consist
primarily of various mortgage loans.

     The Trustee. Pursuant to the terms of an indenture, Bankers Trust Company
of California, N.A. shall serve as trustee and shall hold the pledged assets for
the benefit of the noteholders.

     Valuation of collateral. On the 20th day of each month, we are required to
calculate and certify to the trustee the value of the collateral securing the
Notes within the last five business days using the current principal amount of
the pledged mortgage loans, the principal or face amount of the pledged short-
term money market instruments and the face value of pledged cash.

     Maintenance of collateral. If on any valuation date the value of the
pledged assets is less than that required to be maintained, we shall, not later
than the month-end following the valuation date, (i) deliver to the trustee
additional eligible collateral and/or (ii) purchase outstanding Notes, such that
after taking such actions the value of the collateral is equal to or greater
than that required to be maintained.

     Withdrawal or substitution of pledged assets. We may, upon request to the
trustee, withdraw or substitute pledged assets at any time if, after giving
effect to any such withdrawal or substitution, the value of the pledged assets
is at least equal to the amount required to be maintained.

     Payments and distributions on the pledged assets. Unless an event of
default has occurred and is continuing with respect to the Notes, we shall be
entitled to collect all payments on the pledged assets. Upon the occurrence of
an event of default and while it shall be continuing, the trustee may require
that payments on pledged assets be paid directly to it and, if we then receive
any payments on the pledged assets, we shall hold such payments in trust for the
benefit of the trustee and the holders of the Notes.

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<PAGE>   5

     Redemption. The Notes are not subject to redemption at our option or at the
option of a noteholder or otherwise.

     Form. Book-entry and nonnegotiable unless otherwise provided in the
prospectus supplement. We will provide the holder with a confirmation of the
transaction. We will not issue promissory notes to individual holders.

     Automatic Extension. We will send you at an address you provide us notice
of maturity generally about two weeks prior to maturity. We will automatically
rollover a maturing Note by issuing a new Note with a term equal to the maturing
Note's original term unless we receive notice from the noteholder at least one
business day before the maturity date of the Note to pay the maturing Note in
cash or we give the holder notice at least five business days before the Note's
maturity that the Notes will be paid in cash. We will rollover Notes at their
maturity dates at the interest rate we are offering on newly-issued Notes of the
same term and denomination as the maturing Note. A noteholder whose note is
rolled over shall be paid the interest due at maturity in cash and only the
principal amount shall be rolled over.

                              SUMMARY RISK FACTORS

     Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this prospectus and, in
particular, should evaluate the factors set forth in "Risk Factors." These risk
factors include:

RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN COLLATERALIZED INVESTMENT NOTES

     THE NOTES ARE NOT INSURED OR GUARANTEED AND YOUR RECOURSE FOR PAYMENT IS
LIMITED TO OUR ASSETS. The Notes represent obligations solely of Specialty
Mortgage Trust and are not insured or guaranteed by any governmental agency or
instrumentality or any other person or entity.

     THE NOTES HAVE LIMITED LIQUIDITY AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES
FOR CASH. There is no secondary trading market for the Notes and one is unlikely
to develop. As a result, the ability of a noteholder to transfer the Note to
another party for cash, or to pledge a Note as collateral, is expected to be
very limited.

     THE VOLATILITY OF THE MARKET VALUE OF THE PLEDGED MORTGAGE LOANS MAY RESULT
IN A DEFICIENCY UPON LIQUIDATION AND IN LOSSES TO NOTEHOLDERS. There is no
well-developed secondary trading market for a substantial portion, if not all,
of our portfolio. Many of our mortgage loans are construction or development
loans whose value depends not only on favorable economic conditions but also the
continued financial viability of the developer. Accordingly, the market value of
the pledged mortgage loans, and of our mortgage loans generally, may fluctuate
significantly. In addition, our mortgage loans, including those that are
pledged, may prove to be illiquid. Consequently, such mortgage loans may need to
be liquidated at a discount, in which case the proceeds of liquidation might be
less than the outstanding principal amount of, and interest payable on, the
Notes.

     THE INDENTURE GOVERNING THE SECURITIES CONTAINS LIMITED EVENTS OF DEFAULT
WHICH MEANS THERE WILL BE LIMITED OPPORTUNITIES FOR A TRUSTEE TO FORECLOSE ON
BEHALF OF NOTEHOLDERS ON THE PLEDGED MORTGAGE LOANS. The securities offered in
this prospectus are governed by a trust indenture which is an agreement between
us and the trustee about the terms of the securities. The indenture governing
the securities contains only limited events of default other than our failure to
pay principal or interest on time.

     AT THE TIME OF YOUR INVESTMENT, WE MAY NOT HAVE IDENTIFIED THE MORTGAGE
LOANS THAT WE WILL INVEST IN WITH THE PROCEEDS OF THE OFFERING AND THERE IS NO
ASSURANCE THAT OUR MANAGER WILL IDENTIFY AND FUND MORTGAGE LOANS AT FAVORABLE
SPREADS. We rely on our manager to identify mortgage loans to be originated by
it and acquired by us. Our earnings, and our ability to make payments on the
Notes, depend on our ability to acquire mortgage loans at favorable rates
compared to our borrowing costs. There is no assurance that the favorable
spreads we require can be attained. At the time of your investment in Notes, we
may not have identified the mortgage loans that we will invest in with the
proceeds of the offering, except to

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the extent mortgages have been funded with bank lines or other borrowings that
are being repaid with such proceeds. For example, on September 30, 2000, the
balance outstanding on bank lines of credit was $3.04 million. If we had closed
a sale of notes on the 20th of that month, proceeds would be used first to pay
down those bank lines and then fund "pipeline" loans which might close
thereafter. Prior to your investment, you will be unable to evaluate the manner
in which proceeds are to be invested and the economic merit of the particular
mortgage loan. In addition, there may be a substantial period of time before the
proceeds of the offering are invested and therefore a delay in receiving the
maximum return on the money we have available to invest.

     AT THE TIME OF YOUR INVESTMENT, YOU MAY NOT HAVE SUFFICIENT INFORMATION TO
MAKE AN INFORMED INVESTMENT DECISION BECAUSE OF OUR LIMITED OPERATING
HISTORY. We began operations on January 31, 1998. Because we have not developed
an extensive earnings history nor experienced a wide variety of interest rate or
market conditions, our historical operating performance may not predict our
future performance. In addition, our manager, Specialty Financial commenced
operations as Gonzo Financial in 1995, primarily originating and servicing
mortgage loans, and had no experience in the day-to-day management of a mortgage
REIT until we began our operations. This lack of experience could adversely
affect our operating performance, particularly if we are called upon to respond
to changing market conditions.

RISK FACTORS ASSOCIATED WITH THE OVERALL ENTERPRISE OF SPECIALTY MORTGAGE TRUST,
INC.

     WE DEPEND HEAVILY ON OUR MANAGER AND ANY CHANGE IN MANAGERS COULD ADVERSELY
AFFECT OUR OPERATIONS. Our operations depend heavily on the contributions of Mr.
Gonfiantini and our manager Specialty Financial. Mr. Gonfiantini, a director and
our sole executive officer, is also an executive officer, director and the sole
stockholder of Specialty Financial. We have no separate employees from the
manager and we share its facilities. We have no ownership interest in the
manager. Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies. We rely on Specialty
Financial for day-to-day management and mortgage origination and servicing.
Accordingly, our success depends in significant part on Mr. Gonfiantini and our
manager, who would be difficult to replace. This dependence, if misplaced, and
any change in the manager could adversely affect our operations and our ability
to make timely payments of amounts due on the Notes.

     WE HAVE POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGER THAT ARISE UNDER
THE MANAGEMENT AGREEMENT.

     Origination Fee. The first 2.5% (2 1/2 points) of any origination fees
(points) collected from the borrower is paid to the manager as part of the
management fee. The size of the mortgage origination fees are market driven but
may vary through negotiation with the borrower. To the extent higher origination
fees are paid, the interest rate on the loan may be reduced. This would reduce
the interest income we would receive from the loan.

     Loan Servicing Fee. As part of the management fee, one-half of one percent
of the total mortgage loan portfolio is retained by the manager as a loan
servicing fee. An undue emphasis on increasing the size of the mortgage loan
portfolio, thereby increasing the manager's compensation, could result in the
acquisition of riskier or more speculative loans.

     Incentive Fee. We also pay our manager an incentive fee equal to 50% of our
quarterly taxable income in excess of an annualized return of 12% on our net
worth for that quarter. If the marketplace works as expected, i.e., higher risk,
higher reward, the incentive fee structure to the extent it encourages an undue
short-term emphasis on the acquisition of higher yielding loans could result in
the acquisition of riskier or more speculative loans.

     Services to Others. The management agreement does not limit or restrict the
right of the manager to engage in any business or render services of any kind to
any other person, including the purchase of, or rendering advice to others
purchasing, mortgages that meet our policies and criteria.

     No Minimum Time Commitment. The management agreement does not impose a
minimum time commitment that the manager and its personnel must devote to
providing services to us. The ability of the

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<PAGE>   7

manager to engage in other business activities could reduce the time and effect
spend by the manager on our management.

     Limits of Manager Responsibility. The manager assumes no responsibility
other than to render the services called for under the management agreement in
good faith and shall not be responsible for any action of the board of directors
in following or declining to follow any advice or recommendations of the
manager. The manager, its directors, officers, stockholders and employees will
not be liable to us, any subsidiary of ours, our subsidiary's stockholders or
the unaffiliated directors for any acts or omissions by the manager, its
directors, officers, stockholders or employees under or in connection with the
management agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the management agreement.

     Indemnification. We have agreed to indemnify the manager, its directors,
officers, stockholders and employees with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from any acts or
omissions of the manager made in good faith in the performance of its duties
under the management agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties.

     IF WE TERMINATE OUR MANAGER WITHOUT CAUSE, THE TERMINATION FEE PAYABLE TO
THE MANAGER WOULD REDUCE CASH AVAILABLE FOR OPERATIONS AND THE REPAYMENT OF
NOTES. Upon nonrenewal by us of the management agreement without cause, a
termination fee will be payable to the manager in an amount equal to the greater
of the fair value of the management agreement as established by an independent
appraiser or 4% of our mortgage loan portfolio. At September 30, 2000, 4% of our
mortgage loan portfolio would be approximately $2.3 million. The termination
fee, if paid, would adversely affect the cash available for our operations and
the repayment of the Notes.

     FAILURE TO REFINANCE OUTSTANDING BORROWINGS MAY MATERIALLY ADVERSELY IMPACT
OUR OPERATIONS AND SOLVENCY AND OUR ABILITY TO REPAY THE NOTES. We have a
targeted debt-to-equity ratio of 1:1. Our ability to achieve our investment
objectives depends not only on our ability to borrow money in sufficient amounts
and on favorable terms from investors in our Notes but also on our ability to
renew or replace on a continuous basis our maturing short-term bank borrowings,
known as warehouse facilities, and our maturing Notes. We currently have lines
of credit at three commercial banks in the aggregate amount of $12.5 million. If
we are unable to maintain these facilities or to obtain alternative lending
facilities on terms similar to the existing facilities, it may negatively impact
our ability to continue to fund our operations and, as a result, our ability to
repay indebtedness, including principal and interest due on the securities
offered in this prospectus. In the event we are not able to renew or replace
borrowings maturing under bank lines or our Note program, we could be required
to sell mortgage loans under adverse market conditions and could incur losses as
a result.

     SHOULD WE FAIL TO MAINTAIN REIT STATUS, WE WOULD BE SUBJECT TO TAX AS A
REGULAR CORPORATION WHICH COULD REDUCE OUR EARNINGS AND OUR ABILITY TO MAKE
TIMELY PAYMENTS ON THE NOTES. We intend, at all times, to operate so as to
qualify as a REIT for federal income tax purposes. In order to maintain our
qualification as a REIT, we must satisfy tests with respect to the sources of
our income, the nature and diversification of our assets, the amount of our
distributions to stockholders and the ownership of our stock. If we fail to
qualify as a REIT in any taxable year and specific relief provisions of the Code
do not apply, we would be subject to federal income tax as a regular, domestic
corporation. As a result, we could be subject to income tax liability, thereby
significantly reducing or eliminating the amount of cash available to make
payments on the Notes.

     FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF BOARD OF
DIRECTORS MAY ADVERSELY AFFECT OUR OPERATIONS AND YOUR INVESTMENT. Management
has established our investment policies and strategies, such as the limitation
on the amount of debt we may incur or the maximum investment in any single
mortgage loan or in mortgage loans to one borrower, as set forth in this
prospectus. These policies and strategies may be modified or waived by the Board
of Directors, without shareholder approval. The ultimate effect of these changes
may adversely affect our operations and our ability to make timely payment of
amounts due on the Notes.

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<PAGE>   8

RISK FACTORS ASSOCIATED WITH THE BUSINESS OF MORTGAGE LENDING AND MANAGING A
MORTGAGE LOAN PORTFOLIO

     WE FACE LOSS EXPOSURE DUE TO THE CREDIT RISKS OF MORTGAGE LENDING WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE TIMELY PAYMENTS ON THE NOTES.

     Default and foreclosure. At September 30, 2000, mortgage loans aggregating
to $2,100,000, 3.73% of our portfolio, were in foreclosure. In addition,
mortgage loans aggregating to $3,596,000, 6.4% of our portfolio, were in default
but not in foreclosure. In the event of a default on the underlying mortgage
loan, the ultimate extent of the loss, if any, may only be determined after a
foreclosure of the mortgage encumbering the property and, if the lender takes
title to the property, upon liquidation of the property. Factors such as the
title to the property or its physical condition (including environmental
considerations) may make a third party unwilling to purchase the property at a
foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related mortgage loan. Foreclosure laws may protract the
foreclosure process. In addition, the condition of a property may deteriorate
during the pendency of foreclosure proceedings. Some borrowers may become
subject to bankruptcy proceedings, in which case the amount and timing of
amounts due may be materially adversely affected. Even assuming that the
underlying real estate provides adequate security for the mortgage loan,
substantial delays could be encountered in connection with the liquidation of a
defaulted mortgage loan and a corresponding delay in the receipt and
reinvestment of principal and interest payments could occur.

     Real Estate Market Conditions. Many of the risks of holding mortgage loans
reflect the risks of investing directly in the real estate securing the mortgage
loans. This may be especially true in the case of a relatively small or less
diverse pool of mortgage loans. Our business may be adversely affected by
periods of economic slowdown or recession which may be accompanied by declining
real estate values. Any material decline in real estate values reduces the
ability of borrowers to use real estate equity to support borrowings and
increases the loan-to-value ratios of mortgage loans previously made, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of default. In addition, delinquencies, foreclosures and losses generally
increase during economic slowdowns and recessions.

     Land Loans and Construction Loans. There is no limit on the types of
mortgage loans we may acquire. As of September 30, 2000, 77% of our mortgage
loan portfolio consisted of land loans and 9% consisted of construction loans.
Land loans consisted of mortgage loans for residential raw land (34.9% of the
portfolio), residential land development (29.7% of the portfolio) and commercial
raw land (12.7% of the portfolio). With a mortgage loan on raw land, there is
generally no cash flow from the property to support periodic interest payments.
A mortgage loan made to an owner or developer to finance a property that is
being developed or under construction will generally involve greater risks than
a property that has been constructed. There can be no assurance that the
improvements to be constructed can be accomplished with available funds or in a
timely manner. Since market value cannot be accurately determined until a
property is sold in the marketplace, the appraised value of a proposed project
can be subject to change. As of September 30, 2000, eight loans aggregating to
$5,861,000, each either a land loan or a construction loan, were in default.

     Commercial Mortgage Loans. Commercial mortgage loans generally lack
standardized terms, which may complicate their structure. Commercial properties
themselves tend to be unique and are more difficult to value than residential
properties. In addition, commercial properties, particularly industrial and
warehouse properties, are generally subject to relatively greater environmental
risks than non-commercial properties and the corresponding burdens and costs of
compliance with environmental laws and regulations.

     Nonconforming Single-Family and Multifamily Residential Loans. Credit risks
associated with nonconforming mortgage loans may be greater than those
associated with conventional mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines. The combination of different underwriting criteria and
higher rates of interest may lead to higher delinquency rates and/or credit
losses for nonconforming as compared to conforming mortgage loans and could have
an adverse effect on our business to the extent that we invest in such mortgage
loans. Multifamily mortgage loans share many of the characteristics and

                                        5
<PAGE>   9

risks associated with commercial mortgage loans and are often categorized as
commercial loans rather than residential loans.

     Lack of Geographic or Industry Diversification. There are no limits on the
geographic concentration of the loans we may acquire and properties underlying
mortgage loans are located primarily in the State of Nevada. At September 30,
2000, 71% of our $56.5 million mortgage loan portfolio was invested in loans
secured by Nevada property, about 33% in the Reno area and about 37% in the Las
Vegas area. To the extent that properties underlying such mortgage loans are
located in the same geographical region, such mortgage loans may be subject to a
greater risk of delinquency or default in the event of adverse economic,
political or business developments and natural hazard risks that may affect such
region. If the region's real estate market should experience an overall decline
in property values, the rates of delinquency, foreclosure, bankruptcy and loss
on the mortgage loans may be expected to increase substantially, as compared to
such rates in a stable or improving real estate market. In addition, borrowers
might find it difficult, if not impossible, to sell or refinance property and
repay outstanding principal and accrued interest. To the extent that the end use
of commercial properties underlying mortgage loans tend to be concentrated in
the same or similar industries and such industries suffer adverse economic or
business developments, the ability of property owners to make principal and
interest payments on the underlying mortgages will be impaired.

     Lack of Borrower Diversification. We generally limit the amount of our
investment in any single mortgage loan or in mortgage loans to one borrower and
related parties to $5 million, although exceptions may be approved by the board.
At September 30, 2000, 57% of our $56.5 million mortgage loan portfolio was
invested in single loans of $3 million or more, or aggregate loans to one
borrower and related parties of $3 million or more. This represents 8 separate
borrowers. In addition, at December 31, 1998, $12.3 million, 42% of our
portfolio, was concentrated in multiple loans to three individual borrowers or
related borrower groups; at December 31, 1999, $16.4 million, 45% of our
portfolio, was concentrated in multiple loans to five individual borrowers or
related borrower groups; and at September 30, 2000, $25.7 million, 46% of our
portfolio, was concentrated in multiple loans to six individual borrowers or
related borrower groups. Multiple loans to one borrower or to related entities
generally contain cross default provisions. At December 31, 1999, there were
three instances where loans with cross default provisions exceeded 10% of the
portfolio in the aggregate amounts of $4,906,114, $5,000,000 and $5,356,000,
respectively. At September 30, 2000, there were no instances of loans with cross
default provisions in excess of 10% of the portfolio. This concentration of
credit risk in our portfolio could adversely affect results of operation in the
event of delinquency or default by one or more of these borrowers.

     Balloon Payments. Most of the loans in our portfolio require the borrower
to make a "balloon payment" on the principal amount upon maturity of the loan.
At September 30, 2000, less than 1% of the portfolio was fully amortizing. To
the extent that a borrower has an obligation to pay a mortgage loan in a large
lump sum payment, its ability to satisfy this obligation may be dependent upon
its ability to obtain suitable refinancing or otherwise raise a substantial cash
amount. An increase in interest rates over the mortgage rate applicable at the
time the loan was originated may have an adverse effect on the borrower's
ability to obtain refinancing or to pay the required monthly payments. As a
result, such loans may involve a higher risk of default than fully amortizing
loans.

     Environmental Liabilities. Some properties securing mortgage loans may be
contaminated by hazardous substances. As a result, the value of the real
property may be diminished. In the event that we are forced to foreclose on a
defaulted mortgage loan on that property, we may be subject to environmental
liabilities regardless of whether we were responsible for the contamination.
While we intend to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof, as
defined by state and federal laws and regulations, may be discovered on
properties during our ownership or after a sale thereof to a third party. If
such hazardous substances are discovered on a property, we may be required to
remove those substances or sources and clean up the property. We may also be
liable to tenants and other users of neighboring properties. In addition, we may
find it difficult or impossible to sell the property prior to or following any
such clean up. At this time, we have no properties acquired through foreclosure
but we

                                        6
<PAGE>   10

do have three foreclosures in process. We know of no environmental liabilities
or remediation with respect to the foreclosed properties.

     Limited Recourse Lending. Our mortgage loans may sometimes be nonrecourse
to borrowers. This means, absent fraud, our recourse in the event of default is
limited to the underlying collateral. Similarly, anti-deficiency laws may limit
our recourse on consumer residential loans. To date, we have made no nonrecourse
loans and only a small part, less than 10%, of our portfolio may be covered by
consumer protection anti-deficiency laws. On loans made to corporations or
limited liability companies without personal guaranties, recourse is effectively
limited to the underlying collateral if the borrowing entity has few or no other
assets. To the extent our recourse is limited to the underlying collateral,
there may be an increased risk of default. In the event of foreclosure, the
value of the collateral at that time may be less than the principal and unpaid
interest outstanding. This would have a negative impact on our earnings and our
ability to make timely payment of amounts due on the Notes.

     INTENSE COMPETITION IN THE MORTGAGE LOAN INDUSTRY MAY RESULT IN REDUCED NET
INCOME OR IN REVISED UNDERWRITING STANDARDS WHICH WOULD ADVERSELY AFFECT OUR
OPERATIONS AND YOUR INVESTMENT. We face competition, primarily from commercial
banks, savings and loans, other independent mortgage lenders other mortgage
REITs and investors in loans. If we expand into other geographic markets, we can
expect to face competition from lenders with established positions in these
locations. Competition can take place on various levels, including convenience
in obtaining a mortgage loan, service, marketing, origination channels and
pricing. Many of our competitors in the financial services business are
substantially larger and have more capital and other resources than we do. There
can be no assurance that we will be able to compete successfully in this market
environment and any failure in this regard could have a material adverse effect
on our results of operations and financial condition.

     GENERAL ECONOMIC AND FINANCIAL CONDITIONS IN MORTGAGE AND FINANCIAL MARKETS
MAY AFFECT OUR RESULTS OF OPERATIONS AND YOUR INVESTMENT. The performance of our
mortgage loan portfolio will depend on, among other things, the level of net
interest income generated by our mortgage loans, the market value of such
mortgage loans and the supply of and demand for such mortgage loans. Prepayment
rates, interest rates, borrowing costs and credit losses depend upon the nature
and terms of the mortgage loans, the geographic location of the properties
securing the mortgage loans, conditions in financial markets, the fiscal and
monetary policies of the United States government and the Board of Governors of
the Federal Reserve System, international economic and financial conditions,
competition and other factors, none of which can be predicted with any
certainty.

     WE FACE ADVERSE EFFECTS OF USING LEVERAGE TO FINANCE MORTGAGE LOAN
ORIGINATIONS.

     General. We employ a financing strategy to increase the size of our
mortgage loan portfolio by borrowing a portion of the market value of our
mortgage loans. We currently have lines of credit at three commercial banks in
the aggregate amount of $12.5 million. At September 30, 2000, the aggregate
amount outstanding under these lines was $3.04 million, leaving $9.46 million
available to be drawn. We intend to maintain and renew these bank lines as
sources of borrowings in addition to our note program. If the returns on the
mortgage loans originated or purchased with borrowed funds fail to cover the
cost of the borrowings, we will experience net interest losses and may
experience net losses. In addition, we may not be able to achieve the degree of
leverage we believe to be optimal, which may cause our business to be less
profitable than it might be otherwise. REIT income and asset tests may limit our
ability to effectively hedge our exposure to interest rate changes relative to
our assets and borrowings.

     Availability of Funding Sources. We finance from time to time some of the
mortgage loans which we hold through interim financing facilities such as bank
warehouse credit lines. We are dependent upon a few lenders to provide the
primary credit facilities for our mortgage loans. While there are no charter or
bylaw limitations on our use of leverage, we have a targeted ratio of
debt-to-equity of approximately 1:1. We currently have a policy and have agreed
with our primary bank lender not to exceed that target by permitting our debt,
whether under bank lines or our note program, to exceed our equity. This would
mean, for example, at September 30, 2000 our total debt under bank lines and our
note program could not exceed $46.2 million, the amount of our equity. Any
failure to renew or obtain adequate funding under

                                        7
<PAGE>   11

these financings, or any substantial reduction in the size of or pricing in the
market for our mortgage loans, could have a material adverse effect on our
operations. We face competition for financing sources, and the effect of the
existence of additional mortgage REITs may be to deny us access to sufficient
funds to carry out our business strategy and/or to increase the cost of funds to
us.

     Availability and Cost of Borrowings. Our borrowings are generally
collateralized borrowings the availability of which is based on the market value
of the mortgage loans pledged to secure the specific borrowings, availability of
financing in the market, circumstances then applicable in the lending market and
other factors. The cost of such borrowings vary depending upon the lender, the
nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors.

     Changes in Interest Rates. Long-term assets are financed with short-term
liabilities in that our mortgage assets generally have maturities of one to
three years and are funded with our equity and our borrowings under our note
program and our bank lines. Profitability may be directly affected by the levels
of and fluctuations in interest rates, which affect our ability to earn a spread
between interest received on our loans and the costs of borrowings. Our
profitability is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. For example, a substantial or sustained
increase in interest rates could adversely affect our ability to acquire
mortgage loans and would reduce the interest rate differential between the
average rate borne by our loans and our cost of borrowing and could result in
losses. A significant decline in interest rates could decrease the size of our
loan portfolio by increasing the level of loan prepayments. This may also reduce
the interest rate differential between the average rate borne by our
interest-bearing assets and our cost of borrowing, as prepayment proceeds are
invested at lower interest rates. There can be no assurance that our
profitability would not be adversely affected during any period of changes in
interest rates.

     Risk of an Increase in the Level of Delinquencies or a Decline in Market
Value of Mortgage Assets. An increase in the level of delinquencies in our
portfolio or a decline in the market value of our portfolio of mortgage loans
may limit our ability to borrow or result in lenders increasing the level of
collateral required upon renewal of maturing facilities, i.e., requiring a
pledge of cash or additional mortgage loans to satisfy the required ratio of the
amount of the borrowing to the value of the collateral. We could be required to
sell mortgage loans under adverse market conditions in order to maintain
liquidity. Such sales may be effected by management when deemed by it to be
necessary in order to preserve our capital base. If these sales were made at
prices lower than the amortized cost of the mortgage loans, we would experience
losses. A default by us under our collateralized borrowings could also result in
a liquidation of the collateral, including any cross-collateralized assets, and
a resulting loss of the difference between the value of the collateral and the
amount borrowed.

     NEW LAWS AND REGULATIONS, NEW ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OR
OUR FAILURE TO COMPLY WITH EXISTING FEDERAL, STATE, OR LOCAL LEGISLATION OR
REGULATION COULD ADVERSELY AFFECT OUR OPERATIONS AND YOUR INVESTMENT. To the
extent the manager makes residential mortgage loans, its business and, to a
lesser extent, our business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, rights of rescission for mortgage
loans, class action lawsuits and administrative enforcement actions. There can
be no assurance that Specialty Mortgage Trust and the manager will maintain
compliance with these requirements in the future without additional expenses, or
that more restrictive local, state or federal laws, rules and regulations will
not be adopted or that existing laws and regulations will not be interpreted in
a more restrictive manner, which would make compliance more difficult for
Specialty Mortgage Trust and the manager.

     OUR MORTGAGE PORTFOLIO HAS LIMITED LIQUIDITY WHICH COULD IMPACT OUR ABILITY
TO MAKE TIMELY PAYMENT ON THE NOTES. There is no limit on the percentage of our
assets that may be invested in illiquid mortgage loans. Our portfolio is
comprised of mortgage loans for which a secondary trading market is not well

                                        8
<PAGE>   12

developed. At any one time, particularly in periods of changing interest rates
or market conditions, all of our mortgage loans may prove to be illiquid. As a
result, if we desired or needed to sell some or all of our mortgage loans, there
may be only a very limited number of willing buyers for those loans. In
addition, during turbulent market conditions, the price received for mortgage
loans may be adversely impacted. If sales were made at prices lower than the
amortized cost of the mortgage loans, we would experience losses. This could
have a material adverse effect on our business and results of operation and on
our ability to make timely payment of amounts due on the Notes.

                                  THE COMPANY

     Specialty Mortgage Trust, Inc. ("Specialty Mortgage Trust") was
incorporated in the State of Maryland on October 21, 1997. Our founder was Nello
Gonfiantini III. He is a director and our sole executive officer. We began
operations on January 31, 1998. Beginning with our 1998 tax year, we elected to
be subject to tax as a REIT for federal income tax purposes. Assuming we
maintain our qualification as a REIT, we generally will be permitted to deduct
dividend distributions to stockholders, thereby effectively eliminating the
"double taxation" that generally results when a corporation earns income and
distributes that income to stockholders in the form of dividends. Our principal
executive offices are located at 6160 Plumas Street, Reno, Nevada 89509.

     Specialty Financial, as manager, originates and services our mortgage loans
and manages the day-to-day operations of Specialty Mortgage Trust, subject to
the supervision of our board of directors. Specialty Financial was incorporated
in the State of Nevada as Gonzo Financial on October 25, 1994 and has operated
as a private mortgage finance and real estate development business in Nevada
since January 1995. Mr. Gonfiantini is also an executive officer, director and
the sole stockholder of Specialty Financial. We have no separate employees from
the manager and we share its facilities.

                                USE OF PROCEEDS

     The net proceeds from the issuance of the Notes will be used to fund the
acquisition of mortgage loans, to retire borrowings incurred to acquire mortgage
loans and for general working capital and other corporate purposes. Pending use
of the proceeds for such purposes, the net proceeds will be invested in
short-term obligations, such as Treasury bills and money market funds. All or a
portion of the assets purchased with net proceeds may be included in the
collateral for the Notes. The maximum principal amount of Notes that can be
outstanding at any time may not exceed $50 million. There is no minimum amount
of Notes that may be sold.

                       DIVIDEND POLICY AND DISTRIBUTIONS

     We intend to distribute substantially all of our net income, as computed
for tax purposes, each year, to our stockholders so as to qualify for the tax
benefits accorded to a REIT under the Code. We intend to make dividend
distributions quarterly. The dividend policy is subject to revision at the
discretion of the board of directors. This dividend policy may reduce cash
available to cover amounts due noteholders in future periods.

                                        9
<PAGE>   13

                                    BUSINESS

     Our business objective is to build and hold a portfolio of mortgage loans
for investment that generates net income for distribution to stockholders. We
finance our acquisitions of mortgage loans with equity and secured borrowings.
We are structured as a real estate investment trust (REIT), thereby generally
eliminating federal taxes at the corporate level on income we distribute to
stockholders.

     Mortgage Loan Acquisition Strategy. Our business involves acquiring and
holding loans to borrowers primarily in the State of Nevada whose borrowing
needs are generally not being served by traditional financial institutions. We
acquire loans originated by our manager. We generally limit the amount of our
investment in any single mortgage loan or in mortgage loans to one borrower to
$5 million, although exceptions may be approved by the board on a case-by-case
basis. Most loans will have terms of one to three years. At September 30, 2000,
less than 1% of our loan portfolio consisted of loans with original maturities
of more than three years. We expect that approximately 90% of our mortgage loan
balances will at any one time be secured by first deeds of trust on the
underlying real property, with the remaining mortgage loan balances secured by
second deeds of trust. Our mortgage loans may be secured by mortgages on
unimproved as well as improved real property and non-income producing as well as
income-producing real property. Our loans generally produce higher yields than
are obtained on traditional single-family residential mortgage loans, but are
subject to higher risks of default and loss.

     All loans provide for monthly payments of interest. Currently all of our
loans are at fixed rates of interest. Most of the loans we acquire and hold
require the borrower to make a "balloon payment" on the principal amount upon
maturity of the loan. At September 30, 2000, less than 1% of our loan portfolio
consisted of fully amortizing mortgage loans. To the extent that a borrower has
an obligation to pay a mortgage loan in a large lump sum payment, its ability to
satisfy this obligation may be dependent upon its ability to obtain suitable
refinancing, sell the underlying property or otherwise raise a substantial cash
amount.

     We generally hold our mortgage loans to maturity. From time to time,
however, management may decide to sell mortgage loans.

     Types of Mortgage Loans. The principal types of mortgage loans we acquire
are described below. At September 30, 2000, 71% of our $56.5 million mortgage
loan portfolio was invested in loans secured by Nevada property, about 33% in
the Reno area and about 37% in the Las Vegas area. Our investment in any
mortgage loan may be for the entire loan or a percentage participation interest
in the loan.

     - Land Loans. Land loans are made against (a) underdeveloped or "raw" land
       zoned for either commercial or residential use and (b) land prepared for
       commercial or residential development, typically with entitlements
       obtained and basic infrastructure such as streets and utilities in place.
       While land loans are generally made at low loan-to-value ratios, usually
       less than 50%, there is generally no cash flow from the property and the
       borrower's other sources of income must be relied upon to support the
       periodic interest payments due under the loans. At September 30, 2000,
       77% of our mortgage loan portfolio consisted of land loans.

     - Construction Mortgage Loans. Construction loans are loans made for the
       renovation of developed property, and for the construction of new
       structures on undeveloped property. Construction loans acquired and held
       by us will generally be secured by first deeds of trust on commercial or
       residential real property. Most of our construction loans are to
       developers building the property for sale. Such loans are typically for
       terms of from six months to two years. At September 30, 2000, 9% of our
       portfolio consisted of construction loans.

     - Commercial Building Loans. Commercial building loans have distinct risk
       characteristics depending on the type of structure on the property.
       Commercial building loans generally lack standardized terms, which may
       complicate their structure. Commercial buildings themselves tend to be
       unique and are more difficult to value than residential properties. If
       underlying commercial buildings do not generate sufficient income to meet
       operating expenses, debt service, capital expenditures and

                                       10
<PAGE>   14

       tenant improvements, borrowers under commercial building loans may be
       unable to make payments of principal and interest in a timely fashion.

     - Nonconforming Single-Family and Small Multifamily Residential Mortgage
       Loans. The nonconforming single-family residential mortgage loans are
       conventional mortgage loans that vary in one or more respects from the
       requirements for participation in Fannie Mae or Freddie Mac programs.
       Credit risks associated with nonconforming mortgage loans may be greater
       than those associated with mortgage loans that conform to Fannie Mae and
       Freddie Mac guidelines. Small multifamily mortgage loans are generally
       secured by a first lien on a 5-unit to 20-unit residential property.
       Multifamily mortgage loans share many of the characteristics and risks
       associated with commercial mortgage loans and are often categorized as
       commercial loans rather than residential loans. We also include loans on
       mobile home parks in this residential category.

     - Junior Mortgage Loans. Second, third and wraparound mortgage loans are
       secured by deeds of trust on single-family residences which are already
       subject to prior mortgage indebtedness.

     Table 1 in the "Business" section of this prospectus contains is a summary
of our mortgage loan portfolio as of September 30, 2000. The table contains
information on each mortgage loan, identifying the type, the interest rate, the
principal amount, the portfolio amount, the maturity date, the current loan-to-
value ratio and the lien position.

     Leverage Strategies and Policies. We employ a debt financing strategy to
increase our investment in mortgage loans. By using our mortgage loans as
collateral to borrow funds, we are able to invest in mortgage loans with greater
value than our equity. We have a targeted ratio of debt-to-equity of
approximately 1 to 1. While there are no charter or bylaw limitations on our use
of leverage, we currently have a policy and have agreed with our primary bank
lenders not to exceed that target by permitting our debt, whether under bank
lines or our note program, to exceed our equity.

     We intend to finance our mortgage loan acquisitions through the Notes and
bank warehouse credit lines. At September 30, 2000, the amount of such credit
lines was $12.5 million, of which $3.04 million was outstanding bearing interest
at 9.5%. The section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains a
description of the terms of the credit lines. In October 1998, we began to offer
to accredited investors on a monthly basis our Class A Collateralized Mortgage
Notes secured by our mortgage loans for terms that may range from one month to
twelve months. The maximum principal amount that could be outstanding at any
time was limited by the board of directors to $20 million. As of September 30,
2000, $7,643,888 of these Class A Notes were outstanding, bearing interest at
rates of 7.00% to 8.75%. No additional Class A Notes were issued after August
21, 2000.

     Our goal is to strike a balance between the under-utilization of leverage,
which reduces potential returns to stockholders, and the over-utilization of
leverage, which could reduce our ability to meet our obligations during adverse
market conditions.

                                  THE MANAGER

     Specialty Financial, formerly Gonzo Financial, serves as our manager and is
responsible for loan originations, loan servicing and our day-to-day operations.
Mr. Gonfiantini, a director and our sole executive officer, is also an executive
officer, director and the sole stockholder of Specialty Financial. We have no
separate employees from the manager and we share its facilities. We have no
ownership interest in the manager. Specialty Financial has significant operating
discretion as to the implementation of our business strategy and policies. The
manager operates from office space located at 6160 Plumas Street, Reno, Nevada
89509, telephone (775) 826-0809.

                                       11
<PAGE>   15

     Management Fees. Pursuant to a management agreement entered into with
Specialty Mortgage Trust, Specialty Financial receives management fees. A
description of the management fees and a breakdown of the management fees
actually paid in 1998 and 1999 and estimates of the fees that might be paid in
2000 and 2001 is set forth in this prospectus in the section entitled "The
Manager."

     Expenses. The operating expenses required to be borne by the manager
include compensation and other employment costs, the cost of office space and
equipment and all other administrative incurred in our day-to-day operations.
Those expenses do not include debt service or taxes. While most costs are paid
through the manager from fees earned by the manager, we do pay directly certain
REIT-related expenses such as directors' fees and legal and accounting fees.

     Term and Termination. The management agreement had an initial term of three
years beginning January 30, 1998 and is renewed automatically for successive one
year periods unless we timely deliver a notice of nonrenewal. Upon nonrenewal of
the management agreement without cause, a termination fee will be payable to the
manager in an amount equal to the greater of (i) the fair value of the
management agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Mortgage Trust. At September 30, 2000,
4% of our mortgage loan portfolio would be approximately $2.3 million. In
addition, we have the right to terminate the management agreement at any time
for cause. A majority of our unaffiliated directors (currently 5 of 6 directors
are unaffiliated) may determine that the manager has violated the management
agreement in a material respect and, after notice and an opportunity to cure,
terminate the agreement. Upon such a termination for cause, no termination fee
will be payable to the manager.

     Potential Conflicts of Interest and Limits of Responsibility. Certain
provisions of the management agreement raise potential conflicts of interest or
limit the manager's responsibilities. These were previously described in the
summary risk factors and are subsequently described in "Risk Factors" and "The
Manager."

                       RATIO OF EARNINGS TO FIXED CHARGES

     The following table shows our ratio of earnings to fixed charges for the
periods indicated:

<TABLE>
<CAPTION>
                                      ELEVEN MONTHS                              NINE MONTHS
                                          ENDED             YEAR ENDED              ENDED
                                    DECEMBER 31, 1998    DECEMBER 31, 1999    SEPTEMBER 30, 2000
                                    -----------------    -----------------    ------------------
<S>                                 <C>                  <C>                  <C>
Fixed Charges:
  Interest Expense................     $   76,877           $  263,633            $  365,197
  Capitalized Expenses Related to
     Indebtedness.................         10,189               56,398                35,755
     Total Adjusted Fixed
       Charges....................         87,066              320,031               400,952
Earnings:
  Net Earnings....................      2,025,870            3,809,424             3,154,943
  Fixed Charges...................         87,066              320,031               400,952
                                       ----------           ----------            ----------
     Total Adjusted Earnings......     $2,112,936           $4,129,455            $3,555,895
                                       ==========           ==========            ==========
Ratio of Earnings to Fixed
  Charges.........................          24.27%               12.90%                 8.87%
</TABLE>

                                       12
<PAGE>   16

                                  RISK FACTORS

     An investment in our Notes involves a high degree of risk. The following is
a discussion of the risk factors that we believe are material at this time. You
should consider carefully these risk factors, together with all of the other
information included in this prospectus and the applicable prospectus supplement
before you decide to purchase any of the securities.

RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN COLLATERALIZED INVESTMENT NOTES

     THE NOTES ARE NOT INSURED OR GUARANTEED AND YOUR RECOURSE FOR PAYMENT IS
     LIMITED TO OUR ASSETS.

     The Notes represent obligations solely of Specialty Mortgage Trust and are
not insured or guaranteed by any governmental agency or instrumentality or any
other person or entity.

     THE NOTES HAVE LIMITED LIQUIDITY AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES
     FOR CASH.

     There is no secondary trading market for the Notes and one is unlikely to
develop. As a result, the ability of a noteholder to transfer the Note to
another party for cash, or to pledge a Note as collateral, is expected to be
very limited.

     THE VOLATILITY OF THE MARKET VALUE OF THE PLEDGED MORTGAGE LOANS MAY RESULT
     IN A DEFICIENCY UPON LIQUIDATION AND IN LOSSES TO NOTEHOLDERS.

     There is no well-developed secondary trading market for a substantial
portion, if not all, of our portfolio. Many of our mortgage loans are
construction or development loans whose value depends not only on favorable
economic conditions but also the continued financial viability of the developer.
Accordingly, the market value of the pledged mortgage loans, and of our mortgage
loans generally, may fluctuate significantly. In addition, our mortgage loans,
including those that are pledged, may prove to be illiquid. Consequently, such
mortgage loans may need to be liquidated at a discount, in which case the
proceeds of liquidation might be less than the outstanding principal amount of,
and interest payable on, the Notes.

     THE INDENTURE GOVERNING THE SECURITIES CONTAINS LIMITED EVENTS OF DEFAULT
     WHICH MEANS THERE WILL BE LIMITED OPPORTUNITIES FOR A TRUSTEE TO FORECLOSE
     ON BEHALF OF NOTEHOLDERS ON THE PLEDGED MORTGAGE LOANS.

     The securities offered in this prospectus are governed by a trust indenture
which is an agreement between us and the trustee about the terms of the
securities. The indenture governing the securities contains only limited events
of default other than our failure to pay principal or interest on time.

     AT THE TIME OF YOUR INVESTMENT, WE MAY NOT HAVE IDENTIFIED THE MORTGAGE
     LOANS THAT WE WILL INVEST IN WITH THE PROCEEDS OF THE OFFERING AND THERE IS
     NO ASSURANCE THAT OUR MANAGER WILL IDENTIFY AND FUND MORTGAGE LOANS AT
     FAVORABLE SPREADS.

     We rely on our manager to identify mortgage loans to be originated by it
and acquired by us. We generally have not identified the mortgage loans we will
purchase with the proceeds of the Notes except to the extent mortgages have been
funded with bank lines or other borrowings. Our earnings, and our ability to
make payments on the Notes, depend on our ability to acquire mortgage loans at
favorable rates compared to our borrowing costs. At the time of your investment
in the Notes, we may not have identified the mortgage loans that we will invest
in with the proceeds of the offering. There is no assurance that the favorable
spreads we require can be attained.

     In addition, prior to your investment, you will be unable to evaluate the
manner in which proceeds are to be invested and the economic merit of the
particular mortgage loan. There may be a substantial period of time before the
proceeds of the offering are invested and therefore a delay in receiving the
maximum return on the money we have available to invest. For example, on
September 30, 2000, the balance outstanding on bank lines of credit was $3.04
million. If we had closed a sale of notes on the 20th of that month, proceeds
would be used first to pay down those bank lines and then fund "pipeline" loans
which might close thereafter.

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<PAGE>   17

     AT THE TIME OF YOUR INVESTMENT, YOU MAY NOT HAVE SUFFICIENT INFORMATION TO
     MAKE AN INFORMED INVESTMENT DECISION BECAUSE OF OUR LIMITED OPERATING
     HISTORY.

     We began operations on January 31, 1998 after the initial closing of our
private placement. Because we have not developed an extensive earnings history
nor experienced a wide variety of interest rate or market conditions, our
historical operating performance may not predict our future performance. Our
limited operating history makes it difficult to make an informed investment
decision. In addition, our manager, Specialty Financial, commenced operations as
Gonzo Financial in 1995, primarily originating and servicing mortgage loans, and
had no experience in the day-to-day management of a mortgage REIT until we began
our operations. This lack of experience could adversely affect our operating
performance, particularly if we are called upon to respond to changing market
conditions.

     OUR NOTES ARE UNRATED AND YOUR INVESTMENT DECISION MUST BE MADE WITHOUT
     RATING AGENCY INPUT.

     No rating agency or other third party has reviewed this transaction for the
purpose of assessing the likelihood of our repaying the Notes.

     TIMELY PAYMENT TO NOTEHOLDERS OF AMOUNTS DUE ON THE NOTES COULD BE
     ADVERSELY AFFECTED BY BANKRUPTCY LAWS.

     In the event of the bankruptcy or insolvency of Specialty Mortgage Trust,
the trustee on behalf of noteholders will have a perfected security interest in
the pledged assets. Nonetheless, a bankruptcy court could defer timely payment
of amounts due on the Notes. In addition, although the amount of interest due on
the Notes would continue to accrue during any such delay, the collateral
securing the Notes would not be increased.

RISK FACTORS ASSOCIATED WITH THE OVERALL ENTERPRISE OF SPECIALTY MORTGAGE TRUST,
INC.

     WE DEPEND HEAVILY ON OUR MANAGER AND ANY CHANGE IN MANAGERS COULD ADVERSELY
     AFFECT OUR OPERATIONS.

     Our operations depend heavily on the contributions of Mr. Gonfiantini and
our manager Specialty Financial. Mr. Gonfiantini, a director and our sole
executive officer, is also an executive officer, director and the sole
stockholder of Specialty Financial. We have no separate employees from the
manager and we share its facilities. We have no ownership interest in the
manager. Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies. We rely on Specialty
Financial for day-to-day management and mortgage origination and servicing.
Accordingly, our success depends in significant part on Mr. Gonfiantini and our
manager, who would be difficult to replace. This dependence, if misplaced, and
any change in the manager could adversely affect our operations and our ability
to make timely payments of amounts due on the Notes.

     WE HAVE POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGER THAT ARISE UNDER
     THE MANAGEMENT AGREEMENT.

     Origination Fee. The first 2.5% (2 1/2 points) of any origination fees
(points) collected from the borrower is paid to the manager as part of the
management fee. The size of the mortgage origination fees are market driven but
may vary through negotiation with the borrower. To the extent higher origination
fees are paid, the interest rate on the loan may be reduced. This would reduce
the interest income we would receive from the loan.

     Loan Servicing Fee. As part of the management fee, one-half of one percent
of the total mortgage loan portfolio is retained by the manager as a loan
servicing fee. Payment of this fee, in effect, lowers the yield on our mortgage
loans. An undue emphasis on increasing the size of the mortgage loan portfolio,
thereby increasing the manager's compensation, could result in the acquisition
of riskier or more speculative loans.

     Incentive Fee. We also pay our manager an incentive fee equal to 50% of our
quarterly taxable income in excess of an annualized return of 12% on our net
worth for that quarter. If the marketplace works as expected, i.e., higher risk,
higher reward, the incentive fee structure to the extent it encourages an

                                       14
<PAGE>   18

undue short-term emphasis on the acquisition of higher yielding loans could
result in the acquisition of riskier or more speculative loans. The return on
net worth does not include interest accrued on loans once they are determined to
be impaired; however, if the return produced by the performing loans in the
portfolio causes the total return to exceed the threshold, the incentive fee
will still be paid.

     Services to Others. The management agreement does not limit or restrict the
right of the manager to engage in any business or render services of any kind to
any other person, including the purchase of, or rendering advice to others
purchasing, mortgages that meet our policies and criteria. The management
agreement does say that the manager and its officers may not provide services to
another mortgage REIT unless a majority of our unaffiliated directors (currently
5 of 6 directors are unaffiliated) confirm that the other mortgage REIT has
operating policies and strategies different from ours. Neither Mr. Gonfiantini
nor Specialty Financial provide or intend to provide services to any mortgage
REIT that is competitive to us or invests in mortgages which we might invest in,
but there is nothing in the management agreement that strictly precludes it.

     No Minimum Time Commitment. The management agreement does not impose a
minimum time commitment that the manager and its personnel must devote to
providing services to us. The ability of the manager to engage in other business
activities could reduce the time and effect spend by the manager on our
management.

     Limits of Manager Responsibility. The manager assumes no responsibility
other than to render the services called for under the management agreement in
good faith and shall not be responsible for any action of the board of directors
in following or declining to follow any advice or recommendations of the
manager. The manager, its directors, officers, stockholders and employees will
not be liable to us, any subsidiary of ours, our subsidiary's stockholders or
the unaffiliated directors for any acts or omissions by the manager, its
directors, officers, stockholders or employees under or in connection with the
management agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the management agreement.

     Indemnification. We have agreed to indemnify the manager, its directors,
officers, stockholders and employees with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from any acts or
omissions of the manager made in good faith in the performance of its duties
under the management agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties.

     IF WE TERMINATE OUR MANAGER WITHOUT CAUSE, THE TERMINATION FEE PAYABLE TO
     THE MANAGER WOULD REDUCE CASH AVAILABLE FOR OPERATIONS AND THE REPAYMENT OF
     NOTES.

     Upon nonrenewal by us of the management agreement without cause, a
termination fee will be payable to the manager in an amount equal to the greater
of the fair value of the management agreement as established by an independent
appraiser or 4% of our mortgage loan portfolio. Since the fair market value of
the management agreement would be determined by an independent appraiser at a
future date based upon then applicable facts and circumstances, no such
termination fee can be estimated with any reasonable degree of certainty. On the
other hand, 4% of our mortgage loan portfolio at September 30, 2000 would be
approximately $2.3 million. The termination fee, if paid, would adversely affect
the cash available for our operations and the repayment of the Notes.

     FAILURE TO REFINANCE OUTSTANDING BORROWINGS MAY MATERIALLY ADVERSELY IMPACT
     OUR OPERATIONS AND SOLVENCY AND OUR ABILITY TO REPAY THE NOTES.

     We have a targeted debt-to-equity ratio of 1:1. Our ability to achieve our
investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms from investors in our Notes but also
on our ability to renew or replace on a continuous basis our maturing short-term
bank borrowings, known as warehouse facilities. We currently have lines of
credit at three commercial banks in the aggregate amount of $12.5 million. If we
are unable to obtain additional lending facilities on terms similar to the
existing facilities, it may negatively impact our ability to continue to fund
our operations and,

                                       15
<PAGE>   19

as a result, our ability to repay indebtedness, including principal and interest
due on the securities offered in this prospectus. In the event we are not able
to renew or replace maturing borrowings, we could be required to sell mortgage
loans under adverse market conditions and could incur losses as a result. An
event or development such as a sharp rise in interest rates or increasing market
concern about the value or liquidity of a type or types of mortgage loans in
which our portfolio is concentrated will reduce the market value of the mortgage
loans, which would likely cause lenders to require additional collateral. A
number of such factors in combination may cause us difficulties, including a
possible liquidation of a major portion of our mortgage loan portfolio at
disadvantageous prices with consequent losses, which could have a material
adverse effect on Specialty Mortgage Trust and its solvency.

     SHOULD WE FAIL TO MAINTAIN REIT STATUS, WE WOULD BE SUBJECT TO TAX AS A
     REGULAR CORPORATION WHICH COULD REDUCE OUR EARNINGS AND OUR ABILITY TO MAKE
     TIMELY PAYMENTS ON THE NOTES.

     We intend, at all times, to operate so as to qualify as a REIT for federal
income tax purposes. In order to maintain our qualification as a REIT, we must
satisfy tests with respect to the sources of our income, the nature and
diversification of our assets, the amount of our distributions to stockholders
and the ownership of our stock. If we fail to qualify as a REIT in any taxable
year and specific relief provisions of the Code do not apply, we would be
subject to federal income tax as a regular, domestic corporation. As a result,
we could be subject to income tax liability, thereby significantly reducing or
eliminating the amount of cash available to make payments on the Notes. Further,
we could also be disqualified from re-electing REIT status for the four taxable
years following the year during which we became disqualified.

     REIT qualification requirements with respect to (i) our source of income,
the nature of assets and the requirement to distribute earnings may limit
operational and financial opportunities otherwise available to us and (ii)
shareholder diversification may limit our access to some equity investors.

     No assurance can be given that future legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to our qualification as a REIT or the federal income
tax consequences of such qualification, which changes may reduce or eliminate
our competitive advantage over non-REIT competitors.

     FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF BOARD OF
     DIRECTORS MAY ADVERSELY AFFECT OUR OPERATIONS AND YOUR INVESTMENT.

     Management has established our investment policies and strategies, such as
the limitation on the amount of debt we may incur or the maximum investment in
any single mortgage loan or in mortgage loans to one borrower, as set forth in
this prospectus. These policies and strategies may be modified or waived by the
Board of Directors, without shareholder approval. The ultimate effect of these
changes may adversely affect our operations and our ability to make timely
payment of amounts due on the Notes.

     IF WE SHOULD CEASE TO QUALIFY FOR AN INVESTMENT COMPANY ACT EXEMPTION, OUR
     ABILITY TO USE LEVERAGE AND TO CONDUCT OUR BUSINESS WOULD BE MATERIALLY
     ADVERSELY AFFECTED AS WOULD OUR ABILITY TO MAKE TIMELY PAYMENTS ON THE
     NOTES.

     We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, we do not expect to be subject to the restrictive provisions of the
Investment Company Act. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate." We are presently
covered by this exemption but if we should cease to qualify for this or another
exemption in the future, our ability to use leverage would be substantially
reduced and we would be unable to conduct our business as described herein. Any
such failure to continue to qualify for exemption could have a material adverse
effect on our business.

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<PAGE>   20

RISK FACTORS ASSOCIATED WITH THE BUSINESS OF MORTGAGE LENDING AND MANAGING A
MORTGAGE LOAN PORTFOLIO

     WE FACE LOSS EXPOSURE DUE TO THE CREDIT RISKS OF MORTGAGE LENDING WHICH
     COULD ADVERSELY AFFECT OUR ABILITY TO MAKE TIMELY PAYMENTS ON THE NOTES.

     Default and foreclosure. At September 30, 2000, mortgage loans aggregating
to $2,100,000, 3.73% of our portfolio, were in foreclosure. In addition,
mortgage loans aggregating to $3,596,000, 6.4% of our portfolio, were in default
but not in foreclosure. In the event of a default on the underlying mortgage
loan, the ultimate extent of the loss, if any, may only be determined after a
foreclosure of the mortgage encumbering the property and, if the lender takes
title to the property, upon liquidation of the property. Factors such as the
title to the property or its physical condition (including environmental
considerations) may make a third party unwilling to purchase the property at a
foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related mortgage loan. Foreclosure laws may protract the
foreclosure process. In addition, the condition of a property may deteriorate
during the pendency of foreclosure proceedings. Some borrowers may become
subject to bankruptcy proceedings, in which case the amount and timing of
amounts due may be materially adversely affected. Even assuming that the
underlying real estate provides adequate security for the mortgage loan,
substantial delays could be encountered in connection with the liquidation of a
defaulted mortgage loan and a corresponding delay in the receipt and
reinvestment of principal and interest payments could occur.

     Real Estate Market Conditions. Many of the risks of holding mortgage loans
reflect the risks of investing directly in the real estate securing the mortgage
loans. This may be especially true in the case of a relatively small or less
diverse pool of mortgage loans. Our business may be adversely affected by
periods of economic slowdown or recession which may be accompanied by declining
real estate values. Any material decline in real estate values reduces the
ability of borrowers to use real estate equity to support borrowings and
increases the loan-to-value ratios of mortgage loans previously made, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of default. In addition, delinquencies, foreclosures and losses generally
increase during economic slowdowns and recessions.

     Land Loans and Construction Loans. There is no limit on the types of
mortgage loans we may acquire. As of September 30, 2000, 77% of our mortgage
loan portfolio consisted of land loans and 9% consisted of construction loans.
Land loans consisted of mortgage loans for residential raw land (34.9% of the
portfolio), residential land development (29.7% of the portfolio) and commercial
raw land (12.7% of the portfolio). With a mortgage loan on raw land, there is
generally no cash flow from the property to support periodic interest payments.
A mortgage loan made to an owner or developer to finance a property that is
being developed or under construction will generally involve greater risks than
a property that has been constructed. There can be no assurance that the
improvements to be constructed can be accomplished with available funds or in a
timely manner. Although a project is usually refined upon completion, sale of
the completed project sometimes provides the funds for repayment of the mortgage
loan. Since market value cannot be accurately determined until a property is
sold in the marketplace, the appraised value of a proposed project can be
subject to change. As of September 30, 2000, eight loans aggregating to
$5,861,000, each either a land loan or a construction loan, were in default.

     Commercial Mortgage Loans. Commercial mortgage loans generally lack
standardized terms, which may complicate their structure. Commercial properties
themselves tend to be unique and are more difficult to value than residential
properties. In addition, commercial properties, particularly industrial and
warehouse properties, are generally subject to relatively greater environmental
risks than non-commercial properties and the corresponding burdens and costs of
compliance with environmental laws and regulations.

     Commercial mortgage loans are also subject to the effects of: (i) local and
other economic conditions on real estate values, (ii) the ability of tenants to
make lease payments, (iii) the ability of a property to attract and retain
tenants, which may in turn be affected by local conditions such as oversupply of
space or a reduction in demand for rental space in the area, the attractiveness
of properties to tenants, competition from other available space, the ability of
the owner to pay leasing commissions, provide adequate maintenance and
insurance, pay tenant improvements costs and to make other tenant concessions,
and

                                       17
<PAGE>   21

(iv) increased operating costs, including energy costs and real estate taxes.
While owners of real property generally will carry comprehensive liability and
casualty coverage, such coverage may not provide full protection for the value
of the underlying property and may not protect against all casualty losses. If
underlying commercial properties do not generate sufficient income to meet
operating expenses, debt service, capital expenditures and tenant improvements,
borrowers under commercial mortgage loans may be unable to make payments of
principal and interest in a timely fashion. Income from and values of commercial
properties are also affected by such factors as applicable laws, including tax
laws, interest rate levels, the availability of financing for owners and
tenants, and the impact of and costs of compliance with environmental controls
and regulations. In the event of foreclosure on a commercial mortgage loan,
there may be costs and delays involved in enforcing rights of a property owner
against tenants in default under the terms of leases with respect to commercial
properties and such tenants may seek the protection of the bankruptcy laws which
can result in termination of lease contracts.

     Nonconforming Single-Family and Multifamily Residential Loans. Credit risks
associated with nonconforming mortgage loans may be greater than those
associated with conventional mortgage loans that conform to Fannie Mae and
Freddie Mac guidelines. The principal difference between nonconforming mortgage
loans and conforming mortgage loans include the applicable loan-to-value ratios,
the credit and income histories of the mortgagors, the documentation required
for approval of the mortgagors, the types of properties securing the mortgage
loans, loan sizes and the mortgagors' occupancy status with respect to the
mortgaged property. As a result of these and other factors, the interest rates
charged on nonconforming mortgage loans are often higher than those charged for
conforming mortgage loans. The combination of different underwriting criteria
and higher rates of interest may lead to higher delinquency rates and/or credit
losses for nonconforming as compared to conforming mortgage loans and could have
an adverse effect on our business to the extent that we invest in such mortgage
loans. Multifamily mortgage loans share many of the characteristics and risks
associated with commercial mortgage loans and are often categorized as
commercial loans rather than residential loans. Commercial mortgage loans have
distinct risk characteristics.

     Lack of Geographic or Industry Diversification. There are no limits on the
geographic concentration of the loans we may acquire and properties underlying
mortgage loans are located primarily in the State of Nevada. At September 30,
2000, 71% of our $56.5 million mortgage loan portfolio was invested in loans
secured by Nevada property, about 33% in the Reno area and about 37% in the Las
Vegas area. Although Nevada has experienced growth in its economy, population
and real estate values in recent years, such trends may not continue during the
period the Notes are outstanding. Historically, the Nevada economy, particularly
Reno and Las Vegas, is dependent on tourism, gaming and general economic
prosperity. To the extent that properties underlying such mortgage loans are
located in the same geographical region, such mortgage loans may be subject to a
greater risk of delinquency or default in the event of adverse economic,
political or business developments and natural hazard risks that may affect such
region. If the region's real estate market should experience an overall decline
in property values, the rates of delinquency, foreclosure, bankruptcy and loss
on the mortgage loans may be expected to increase substantially, as compared to
such rates in a stable or improving real estate market. In addition, borrowers
might find it difficult, if not impossible, to sell or refinance property and
repay outstanding principal and accrued interest. To the extent that the end use
of commercial properties underlying mortgage loans tend to be concentrated in
the same or similar industries and such industries suffer adverse economic or
business developments, the ability of property owners to make principal and
interest payments on the underlying mortgages will be impaired.

     Lack of Borrower Diversification. We generally limit the amount of our
investment in any single mortgage loan or in mortgage loans to one borrower and
related parties to $5 million, although exceptions may be approved by the board.
At September 30, 2000, 57% of our $56.5 million mortgage loan portfolio was
invested in single loans of $3 million or more or aggregate loans to one
borrower and related parties of $3 million or more. This represents 8 separate
borrowers. In addition, at December 31, 1998, $12.3 million, 42% of our
portfolio, was concentrated in multiple loans to three individual borrowers or
related borrower groups; at December 31, 1999, $16.4 million, 45% of our
portfolio, was concentrated in multiple loans to

                                       18
<PAGE>   22

five individual borrowers or related borrower groups; and at September 30, 2000,
$25.7 million, 46% of our portfolio, was concentrated in multiple loans to six
individual borrowers or related borrower groups. Multiple loans to one borrower
or to related entities generally contain cross default provisions. At December
31, 1999, there were three instances where loans with cross default provisions
exceeded 10% of the portfolio in the aggregate amounts of $4,906,114, $5,000,000
and $5,356,000, respectively. At September 30, 2000, there were no instances of
loans with cross default provisions in excess of 10% of the portfolio. This
concentration of credit risk in our portfolio could adversely affect results of
operation in the event of delinquency or default by one or more of these
borrowers.

     Balloon Payments. Most of the loans in our portfolio require the borrower
to make a "balloon payment" on the principal amount upon maturity of the loan.
Less than 1% are fully amortized. To the extent that a borrower has an
obligation to pay a mortgage loan in a large lump sum payment, its ability to
satisfy this obligation may be dependent upon its ability to obtain suitable
refinancing or otherwise raise a substantial cash amount. An increase in
interest rates over the mortgage rate applicable at the time the loan was
originated may have an adverse effect on the borrower's ability to obtain
refinancing or to pay the required monthly payments. As a result, such loans may
involve a higher risk of default than fully amortizing loans.

     Environmental Liabilities. Some properties securing mortgage loans may be
contaminated by hazardous substances. As a result, the value of the real
property may be diminished. In the event that we are forced to foreclose on a
defaulted mortgage loan on that property, we may be subject to environmental
liabilities regardless of whether we were responsible for the contamination.
While we intend to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof, as
defined by state and federal laws and regulations, may be discovered on
properties during our ownership or after a sale thereof to a third party. If
such hazardous substances are discovered on a property, we may be required to
remove those substances or sources and clean up the property. We may also be
liable to tenants and other users of neighboring properties. In addition, we may
find it difficult or impossible to sell the property prior to or following any
such clean up. At this time, we have no properties acquired through foreclosure
but we do have three foreclosures in process. We know of no environmental
liabilities or remediation with respect to the foreclosed properties.

     Limited Recourse Lending. Our mortgage loans may sometimes be nonrecourse
to borrowers. This means, absent fraud, our recourse in the event of default is
limited to the underlying collateral. Similarly, anti-deficiency laws may limit
our recourse on consumer residential loans. To date, we have made no nonrecourse
loans and only a small part, less than 10%, of our portfolio may be covered by
consumer protection anti-deficiency laws. On loans made to corporations or
limited liability companies without personal guaranties, recourse is effectively
limited to the underlying collateral if the borrowing entity has few or no other
assets. To the extent our recourse is limited to the underlying collateral,
there may be an increased risk of default. In the event of foreclosure, the
value of the collateral at that time may be less than the principal and unpaid
interest outstanding. This would have a negative impact on our earnings and our
ability to make timely payment of amounts due on the Notes.

     INTENSE COMPETITION IN THE MORTGAGE LOAN INDUSTRY MAY RESULT IN REDUCED NET
     INCOME OR IN REVISED UNDERWRITING STANDARDS WHICH WOULD ADVERSELY AFFECT
     OUR OPERATIONS AND YOUR INVESTMENT.

     We face competition, primarily from commercial banks, savings and loans,
other independent mortgage lenders, other mortgage REITs and investors in loans.
If we expand into other geographic markets, we can expect to face competition
from lenders with established positions in these locations. Competition can take
place on various levels, including convenience in obtaining a mortgage loan,
service, marketing, origination channels and pricing. Many of our competitors in
the financial services business are substantially larger and have more capital
and other resources than we do. There can be no assurance that we will be able
to compete successfully in this market environment and any failure in this
regard could have a material adverse effect on our results of operations and
financial condition.

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<PAGE>   23

     GENERAL ECONOMIC AND FINANCIAL CONDITIONS IN MORTGAGE AND FINANCIAL MARKETS
     MAY AFFECT OUR RESULTS OF OPERATIONS AND YOUR INVESTMENT.

     The performance of our mortgage loan portfolio will depend on, among other
things, the level of net interest income generated by our mortgage loans, the
market value of such mortgage loans and the supply of and demand for such
mortgage loans. Prepayment rates, interest rates, borrowing costs and credit
losses depend upon the nature and terms of the mortgage loans, the geographic
location of the properties securing the mortgage loans, conditions in financial
markets, the fiscal and monetary policies of the United States government and
the Board of Governors of the Federal Reserve System, international economic and
financial conditions, competition and other factors, none of which can be
predicted with any certainty.

     WE FACE ADVERSE EFFECTS OF USING LEVERAGE TO FINANCE MORTGAGE LOAN
     ORIGINATIONS.

     General. We employ a financing strategy to increase the size of our
mortgage loan portfolio by borrowing a portion of the market value of our
mortgage loans. We currently have lines of credit at three commercial banks in
the aggregate amount of $12.5 million. At September 30, 2000, we had an
outstanding balance of $3.04 million under these lines, bearing interest at 9.5%
per annum, leaving $9.46 million available to be drawn. We intend to maintain
and renew these bank lines as sources of borrowings in addition to our note
program. If the returns on the mortgage loans originated or purchased with
borrowed funds fail to cover the cost of the borrowings, we will experience net
interest losses and may experience net losses. In addition, we may not be able
to achieve the degree of leverage we believe to be optimal, which may cause our
business to be less profitable than it might be otherwise. REIT income and asset
tests may limit our ability to effectively hedge our exposure to interest rate
changes relative to our assets and borrowings.

     Availability of Funding Sources. We finance from time to time some of the
mortgage loans which we hold through interim financing facilities such as bank
warehouse credit lines. We are dependent upon a few lenders to provide the
primary credit facilities for our mortgage loans. While there are no charter or
bylaw limitations on our use of leverage, we have a targeted ratio of
debt-to-equity of approximately 1:1. We currently have a policy and have agreed
with our primary bank lender not to exceed that target by permitting our debt,
whether under bank lines or our note program, to exceed our equity. This would
mean, for example, at September 30, 2000 our total debt under bank lines and our
note program could not exceed $46.2 million, the amount of our equity. Any
failure to renew or obtain adequate funding under these financings, or any
substantial reduction in the size of or pricing in the market for our mortgage
loans, could have a material adverse effect on our operations. We face
competition for financing sources, and the effect of the existence of additional
mortgage REITs may be to deny us access to sufficient funds to carry out our
business strategy and/or to increase the cost of funds to us.

     Availability and Cost of Borrowings. Our borrowings are generally
collateralized borrowings the availability of which is based on the market value
of the mortgage loans pledged to secure the specific borrowings, availability of
financing in the market, circumstances then applicable in the lending market and
other factors. The cost of such borrowings vary depending upon the lender, the
nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors.

     Changes in Interest Rates. Long-term assets are financed with short-term
liabilities in that our mortgage assets generally have maturities of one to
three years and are funded with our equity and our borrowings under our note
program and our bank lines. Profitability may be directly affected by the levels
of and fluctuations in interest rates, which affect our ability to earn a spread
between interest received on our loans and the costs of borrowings. Our
profitability is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. For example, a substantial or sustained
increase in interest rates could adversely affect our ability to acquire
mortgage loans and would reduce the interest rate differential between the
average rate borne by our loans and our cost of borrowing. A significant decline
in interest rates could decrease the size of our loan portfolio by increasing
the level of loan prepayments. This may also reduce the interest rate
differential between the average rate borne by our interest-bearing assets

                                       20
<PAGE>   24

and our cost of borrowing, as prepayment proceeds are invested at lower interest
rates. There can be no assurance that our profitability would not be adversely
affected during any period of changes in interest rates.

     Risk of an Increase in the Levels of Delinquencies or a Decline in Market
Value of Mortgage Assets. An increase in the level of delinquencies in our
portfolio or a decline in the market value of our portfolio of mortgage loans
may limit our ability to borrow or result in lenders increasing the level of
collateral required upon renewal of maturing facilities, i.e., requiring a
pledge of cash or additional mortgage loans to satisfy the required ratio of the
amount of the borrowing to the value of the collateral. We could be required to
sell mortgage loans under adverse market conditions in order to maintain
liquidity. Such sales may be effected by management when deemed by it to be
necessary in order to preserve our capital base. If these sales were made at
prices lower than the amortized cost of the mortgage loans, we would experience
losses. A default by us under our collateralized borrowings could also result in
a liquidation of the collateral, including any cross-collateralized assets, and
a resulting loss of the difference between the value of the collateral and the
amount borrowed.

     NEW LAWS AND REGULATIONS, NEW ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OR
     OUR FAILURE TO COMPLY WITH EXISTING FEDERAL, STATE, OR LOCAL LEGISLATION OR
     REGULATION COULD ADVERSELY AFFECT OUR OPERATIONS AND YOUR INVESTMENT.

     To the extent the manager makes residential mortgage loans, its business
and, to a lesser extent, our business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations.
Regulated matters include, without limitation, mortgage loan origination
marketing efforts, credit application and underwriting activities, maximum
finance and other charges, disclosure to customers, rights of rescission on
mortgage loans, closing and servicing mortgage loans, collection and foreclosure
procedures, qualification and licensing requirements for doing business in
various jurisdictions and other trade practices. Mortgage loan origination
activities are subject to the laws and regulations in each of the states in
which those activities are conducted. Activities as a lender are also subject to
various federal laws. The Truth in Lending Act or TILA and Regulation Z
promulgated thereunder, as both are amended from time to time, contain
disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel specific credit
transactions. TILA also imposes disclosure, underwriting and documentation
requirements on mortgage loans, known as "Section 32 loans," with (i) total
points and fees upon origination in excess of eight percent of the mortgage loan
amount or (ii) an annual percentage rate of more than ten percentage points
higher than comparably maturing U.S. treasury securities. The manager will also
be required to comply with the Equal Credit Opportunity Act of 1974, as amended
or ECOA, which prohibits creditors from discriminating against applicants on the
basis of race, color, sex, age or marital status. Regulation B promulgated under
ECOA restricts creditors from obtaining specified types of information from loan
applicants. It also requires specified disclosures by the lender regarding
consumer rights and requires lenders to advise applicants of the reasons for any
credit denial. In instances where the applicant is denied credit or the rate or
charge for a loan increases as a result of information obtained from a consumer
credit agency, the Fair Credit Reporting Act of 1970, as amended, requires the
lender to supply the applicant with a name and address of the reporting agency.
The manager will also be subject to the Real Estate Settlement Procedures Act or
RESPA and the Debt Collection Practices Act and will be required to file an
annual report with the Department of Housing and Urban Development pursuant to
the Home Mortgage Disclosure Act or HMDA. The manager will also be subject to
the rules and regulations of, and examinations by, state regulatory authorities
with respect to originating, processing, underwriting, selling and servicing
loans. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, rights
of rescission for mortgage loans, class action lawsuits and administrative
enforcement actions. There can be no assurance that Specialty Mortgage Trust and
the manager will maintain compliance with these requirements in the future
without additional expenses, or that more restrictive local, state or federal
laws, rules and regulations

                                       21
<PAGE>   25

will not be adopted or that existing laws and regulations will not be
interpreted in a more restrictive manner, which would make compliance more
difficult for Specialty Mortgage Trust and the manager.

     The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and some of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which Specialty Mortgage Trust or the
manager is subject may lead to regulatory investigations or enforcement actions
and private causes of action, such as class action lawsuits, with respect to
Specialty Mortgage Trust's or the manager's compliance with the applicable laws
and regulations. Specialty Mortgage Trust or the manager may also be subject to
regulatory enforcement actions and private causes of action from time to time
with respect to its compliance with applicable laws and regulations.

     OUR MORTGAGE PORTFOLIO HAS LIMITED LIQUIDITY WHICH COULD IMPACT OUR ABILITY
     TO MAKE TIMELY PAYMENT ON THE NOTES.

     There is no limit on the percentage of our assets that may be invested in
illiquid mortgage loans. Our portfolio is comprised of mortgage loans for which
a secondary trading market is not well developed. At any one time, particularly
in periods of changing interest rates or market conditions, all of our mortgage
loans may prove to be illiquid. As a result, if we desired or needed to sell
some or all of our mortgage loans, there may be only a very limited number of
willing buyers for those loans. In addition, during turbulent market conditions,
the price received for mortgage loans may be adversely impacted. If sales were
made at prices lower than the amortized cost of the mortgage loans, we would
experience losses. This could have a material adverse effect on our business and
results of operation and on our ability to make timely payment of amounts due on
the Notes.

                                       22
<PAGE>   26

                                  THE COMPANY

     Specialty Mortgage Trust, Inc. ("Specialty Mortgage Trust") was
incorporated in the State of Maryland on October 21, 1997. Our initial 300,000
shares of common stock were issued to and continue to be owned by Mr.
Gonfiantini. We began operations on January 31, 1998 following the initial
closing of our private placement. On March 31, 1998, we completed our initial
private placement of 2,169,588 shares of Class A Convertible Preferred Stock,
par value $0.01 per share, for approximately $21.7 million. On April 1, 1999, we
completed a private placement of 1,084,794 shares for approximately $10.8
million and, on July 1, 1999, 520,690 shares for approximately $5.2 million. On
July 1, 2000 we completed a private placement of 689,320 shares for
approximately $6.9 million. Beginning with our 1998 tax year, we elected to be
subject to tax as a REIT for federal income tax purposes. Assuming we maintain
our qualification as a REIT, we generally will be permitted to deduct dividend
distributions to stockholders, thereby effectively eliminating the "double
taxation" that generally results when a corporation earns income and distributes
that income to stockholders in the form of dividends. Our principal executive
offices are located at 6160 Plumas Street, Reno, Nevada 89509.

     Specialty Financial, formerly Gonzo Financial, as manager, originates and
services our mortgage loans and manages the day-to-day operations of Specialty
Mortgage Trust, subject to the supervision of our board of directors. The
management team of Specialty Financial has considerable expertise in the
origination of mortgage loans and the management of a portfolio of mortgage
loans.

                                       23
<PAGE>   27

                                USE OF PROCEEDS

     The net proceeds from the issuance of the Notes, estimated to be
$249,749,000 (assuming the maximum amount of Notes are sold), will be used to
fund the acquisition of mortgage loans, to retire borrowings incurred to acquire
mortgage loans and for general working capital and other corporate purposes.
Pending use of the proceeds for such purposes, the net proceeds will be invested
in short-term obligations, such as Treasury bills and money market funds. All or
a portion of the assets purchased with net proceeds may be included in the
collateral for the Notes. The maximum principal amount of Notes that can be
outstanding at any time may not exceed $50 million. There is no minimum amount
of Notes that may be sold.

     The following table sets forth certain information concerning the estimated
use of the proceeds from the issuance of the Notes, based on the maximum amount
that can be outstanding at any time and the aggregate maximum amount that are
sold.

<TABLE>
<CAPTION>
                                            MAXIMUM AT ANY TIME               AGGREGATE MAXIMUM
                                        ----------------------------    -----------------------------
                                                       PERCENTAGE OF                    PERCENTAGE OF
                                          AMOUNT        TOTAL FUNDS        AMOUNT        TOTAL FUNDS
                                        -----------    -------------    ------------    -------------
<S>                                     <C>            <C>              <C>             <C>
SOURCE OF FUNDS:
  Gross Offering Proceeds(1)..........  $50,000,000        100.0%       $250,000,000         100%
                                        ===========        =====        ============        ====
USE OF FUNDS:
  Offering Expenses:
     Selling Commissions(2)...........            0            0%                  0           0%
     Offering Expenses(3).............      251,000          0.5%            251,000         0.1%
  Retirement of Borrowings(4).........   10,683,888         21.4%         10,683,888         4.3%
  Working Capital and Other Corporate
     Purposes.........................      750,000          1.5%            750,000         0.3%
  Funding of Acquisitions of Mortgage
     Loans............................   38,315,112         76.6%        238,315,112        95.3%
</TABLE>

-------------------------
(1) These amounts assume issuance of the full amounts of Notes permitted under
    the indenture, without giving effect to potential limitations resulting from
    our targeted debt-to-equity ratio of 1 to 1.

(2) Unless otherwise described in the prospectus supplement, only employees of
    the manager will be involved in selling the Notes and no selling commissions
    will be deducted from the proceeds received by us from the issuance of the
    Notes.

(3) This amount consists of estimated retail marketing, legal, printing and
    other expenses of the offering. No organizational expenses will be paid from
    proceeds.

(4) We maintain three lines of credit with commercial banks aggregating to $12.5
    million. At September 30, 2000, we had an outstanding balance of $3.04
    million under these lines bearing interest at 9.5% per annum and payable on
    demand. We also had $7.64 million outstanding under our Class A
    Collateralized Mortgage Notes bearing interest at rates from 7.0% to 8.5%
    per annum and maturing between October 20, 2000 and August 20, 2001. The
    proceeds of all borrowings were used to fund the acquisition of mortgage
    loans. The amounts shown assume retirement of amounts outstanding under the
    bank lines and repayment of the Class A notes as they mature, from proceeds
    of the offering. No assumptions are made with respect to the prepayment or
    repayment of mortgage loans.

                                       24
<PAGE>   28

                       DIVIDEND POLICY AND DISTRIBUTIONS

     We intend to distribute substantially all of our net income, as computed
for tax purposes, each year, to our stockholders so as to qualify for the tax
benefits accorded to a REIT under the Code. We intend to make dividend
distributions quarterly. Any taxable income remaining after distribution of the
final regular quarterly dividend each year is distributed together with the
first regular quarterly dividend payments of the following taxable year or in a
special dividend distributed prior thereto. The dividend policy is subject to
revision at the discretion of the board of directors. During 1999, we declared
dividends of $230,519 for the period from January 1 to January 31 ($.10625 per
share), $620,694 for the period from January 31 to March 31 ($.2000 per share),
$976,315 for the second quarter ($.3000 per share) and $1,132,520 for the third
quarter ($.3000 per share) and $1,079,875 for the fourth quarter ($.2842 per
share). We declared dividends of $1,149,048 for the first quarter 2000 ($.30 per
share). On July 17, 2000 we declared dividends of $1,158,922 for the second
quarter ($.30 per share).

     We have a dividend reinvestment plan for shareholders who choose to
reinvest all or part of their distributions in additional shares of preferred
stock instead of receiving cash payments. The reinvestment price is the fair
market value as determined by our Board of Directors. Any future discount to the
then current market price, if there is a public market for our stock, cannot
exceed 5% of the fair market value of the stock to comply with REIT
qualification requirements. In October 1999, January, April and July 2000,
proceeds from reinvested dividends amounted to approximately $246,000, $305,000,
$329,000 and $333,000, respectively. We use the proceeds for mortgage loans,
working capital and general corporate purposes.

                                       25
<PAGE>   29

                                 CAPITALIZATION

     The following table sets forth the capitalization of Specialty Mortgage
Trust at September 30, 2000, as adjusted at that date to give effect to the
issuance of the maximum amount of the Notes offered hereby that can be
outstanding at any time.

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30, 2000
                                                            --------------------------
                                                            HISTORICAL     AS ADJUSTED
                                                            -----------    -----------
<S>                                                         <C>            <C>
BORROWINGS:
Lines of Credit...........................................  $ 3,040,000    $        --
Collateralized Investment Notes(1)........................           --     46,237,354
Class A Collateralized Mortgage Notes.....................    7,643,888             --
                                                            -----------    -----------
     Total Borrowings.....................................  $10,683,888    $46,237,354
                                                            ===========    ===========
STOCKHOLDERS' EQUITY:
Capital stock, $0.01 par value, 50,000,000 shares
  authorized:
  Preferred stock -- 4,585,695 shares issued and
     outstanding..........................................  $    45,857    $    45,857
  Common stock -- 333,200 shares issued and
     outstanding(2).......................................        3,332          3,332
Additional paid-in capital................................   45,677,605     45,677,605
Accumulated other comprehensive loss......................      (20,641)       (20,641)
Undistributed income......................................      531,201        531,201
                                                            -----------    -----------
     Total stockholders' equity...........................  $46,237,354    $46,237,354
                                                            -----------    -----------
Total stockholders' equity and borrowings.................  $56,921,242    $92,474,708
                                                            ===========    ===========
</TABLE>

-------------------------
(1) Under the indenture, the maximum principal amount outstanding at any time is
    $50 million. However, since our targeted debt-to-equity ratio is 1 to 1, the
    maximum amount of Notes that could be outstanding as of September 30, 2000
    was $46,237,354.

(2) Specialty Mortgage Trust's founder has purchased an aggregate of 300,000
    shares of common stock at $.01 per share. This does not include shares
    reserved for issuance upon exercise of options granted to non-employee
    directors of Specialty Mortgage Trust and certain key employees of Specialty
    Financial.

                                       26
<PAGE>   30

                       SELECTED FINANCIAL AND OTHER DATA

     The information in this table should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and with the financial statements and the notes thereto included
elsewhere in this prospectus. Operating results for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.

<TABLE>
<CAPTION>
                                                                               FOR THE NINE MONTHS
                                     FOR THE ELEVEN      FOR THE TWELVE        ENDED SEPTEMBER 30,
                                      MONTHS ENDED        MONTHS ENDED      -------------------------
                                    DECEMBER, 31 1998   DECEMBER 31, 1999      1999          2000
                                    -----------------   -----------------   -----------   -----------
<S>                                 <C>                 <C>                 <C>           <C>
Interest and Dividend Income......     $ 2,279,052         $ 4,450,193      $ 3,248,071   $ 3,888,692
Interest Expense..................          76,877             263,633          184,114       365,197
Net Revenues......................       2,102,175           3,936,560        2,888,957     3,248,495
Net Earnings......................       2,025,870           3,809,424        2,791,432     3,154,943
Basic Earnings Per Share..........            (.28)               (.73)            3.09          2.62
Diluted Earnings Per Share........            (.28)               (.73)             .76           .71
Preferred Stock Dividends.........       2,111,145           4,039,923        1,827,526     2,307,968
Mortgage Loans....................      29,500,401          35,755,670       39,386,552    55,898,660
Allowance for Mortgage Loan
  Losses..........................         100,000             350,000          275,000       625,000
Total Assets......................      29,835,306          44,132,700       42,573,406    56,968,660
Short-Term Borrowings.............       8,212,000           5,217,467        4,015,052    10,683,888
Long-Term Borrowings..............              --                  --               --            --
Number of Preferred Shares
  Outstanding.....................       2,169,588           3,799,700        3,775,072     4,585,695
Number of Common Shares
  Outstanding.....................         300,000             320,200          320,200       333,200
</TABLE>

                                       27
<PAGE>   31

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

OVERVIEW

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

     Specialty Mortgage Trust operates as a real estate investment trust
("REIT"). In general, our REIT status allows us to avoid corporate income taxes
since we are permitted to deduct dividend distributions to our shareholders so
long as we distribute to our shareholders an amount equal to at least 95% of
taxable income, or 90% for tax years beginning after December 31, 2000, and
otherwise continue to meet the REIT qualification requirements.

FINANCIAL CONDITION

     Our balance sheet presents our mortgage finance assets and liabilities. As
of September 30, 2000 our assets totaled $56,968,660. This compares to total
assets of $44,132,700 on December 31, 1999 and $29,835,306 as of December 31,
1998. This increase from $29,835,306 on December 31, 1998 to $56,968,660 on
September 30, 2000 is due primarily to the increase in stockholder's equity and
short-term borrowings. Shareholder equity was $21,536,529 on December 1998 and
increased to $46,237,354 on September 30, 2000. This increase was due to two
private placement offerings during the period. Total liabilities were $8,298,777
on December 31, 1998. Liabilities decreased to $6,564,296 on December 31, 1999
and then increased to $10,731,306 on September 30, 2000.

ASSETS

     Cash and Cash Equivalents. At September 30, 2000, cash and cash equivalents
were $70,115. This compares to $7,998,709 on December 31, 1999 and $17,317 on
December 31, 1998. The fluctuation in cash at anytime is a function of the
company's ability to fund new loans. As loans payoff, the proceeds are placed in
a cash account and used to fund new loans or the cash is used to pay down bank
lines of credit. The amount of cash held by the company is determined by future
loan fundings. It is our goal to keep cash invested in loans and therefore keep
cash balances low.

     Investments. On September 30, 2000 total investments were $228,833, which
compares to zero in previous periods. This investment of preferred REIT stock
was an opportunity for the company to invest in a qualifying REIT investment
where the yield and risk parameters were met. Since our main focus is on
mortgage loans, we do not expect significant changes in this line item.

     Mortgage Loans. Mortgage loans held for investment net of allowance for
loan losses have been increasing from $29,500,401 on December 31, 1998 to
$35,755,670 on December 31, 1999 and $55,898,660 on September 30, 2000. This
increase in mortgage loans is due to our efforts to acquire loans for our
portfolio with the available capital.

LIABILITIES

     Dividends Payable. At year-end 1999 we had a dividend payable of
$1,079,875. This represents a carry over dividend from December 1999 to be paid
in January 2000. Due to our REIT status, the Board of Directors must declare
dividends for the fourth quarter in December of the earnings year. Therefore
this dividend carries over the fiscal year and is due in January. Dividends
payable in December 1998 and September 30, 2000 were zero.

     Deposits. Deposits were zero on December 31, 1998, $225,000 on December 31,
1999 and zero on September 30, 2000. These funds represent deposits made by
investors to purchase Specialty Mortgage Trust stock at the first of the next
month.

                                       28
<PAGE>   32

     Lines of Credit. Lines of credit totaled $6,518,000 on December 31, 1998,
zero on December 31, 1999 and $3,040,000 on September 30, 2000. This line item
representing short-term borrowings from banks will fluctuate over time due to
loan funding needs and loan prepayments. Additionally, when we issue stock
through private placements, the net proceeds have been used to first pay down
bank lines of credit. These lines of credit are secured by mortgage loans
pledged by Specialty Mortgage Trust.

     Collateralized Notes. This represents the private placement of
mortgage-backed notes issued with maturities ranging from 1 to 12 months. These
notes are secured by mortgage loans held in Specialty Mortgage Trust's
portfolio. At December 31, 1998 total collateralized notes were $1,694,000 and
on December 31, 1999 the balance was $5,217,467. On September 30, 2000 the total
was $7,643,888. The collateralized notes increased between year end 1998 and
1999 and increased between year end 1999 and September 30, 2000.

     Stockholders' Equity. Total stockholders' equity has increased from
$21,536,529 in December 31, 1998 to $37,568,404 on December 31, 1999 and to
$46,237,354 on September 30, 2000. The increase was primarily due to the
issuance of additional shares of preferred stock through private placements.

RESULTS OF OPERATIONS

     The rate volume analysis set forth in the following table analyzes changes
in net interest income for the last two years and the nine months ended
September 30, 2000 by their rate and volume components.

<TABLE>
<CAPTION>
                                             YEAR ENDED                       NINE MONTHS ENDED
                                          DECEMBER 31, 1999                  SEPTEMBER 30, 2000
                                             OVER/UNDER                          OVER/UNDER
                                          DECEMBER 31, 1998                  SEPTEMBER 30, 1999
                                 -----------------------------------   -------------------------------
                                    NET                                  NET
                                   CHANGE       RATE        VOLUME      CHANGE      RATE       VOLUME
                                 ----------   ---------   ----------   --------   ---------   --------
<S>                              <C>          <C>         <C>          <C>        <C>         <C>
INTEREST INCOME:
  Mortgage Loans...............  $2,243,827   $ 106,941   $2,136,886   $543,970   $(295,700)  $839,670
  Cash Accounts................     (80,428)   (100,355)      19,927     63,459      64,444       (985)
                                 ----------   ---------   ----------   --------   ---------   --------
          Total................  $2,163,399   $   6,586   $2,156,813   $607,429   $(231,256)  $838,685
                                 ==========   =========   ==========   ========   =========   ========
INTEREST EXPENSE:
  Line of Credit...............  $   (6,780)  $  (1,916)  $   (4,864)  $ (3,769)  $  (9,829)  $(13,598)
                                 ----------   ---------   ----------   --------   ---------   --------
  Collateralized Notes.........     193,536          --      193,536    184,852     (18,751)   203,603
                                 ----------   ---------   ----------   --------   ---------   --------
          Total................  $  186,756   $  (1,916)  $  188,672   $181,083   $  (8,922)  $190,005
                                 ----------   ---------   ----------   --------   ---------   --------
  Changes in net interest
     income....................  $1,976,643   $   8,502   $1,968,141   $426,346   $(222,334)  $648,680
                                 ==========   =========   ==========   ========   =========   ========
</TABLE>

     Our operating results include all of the reported income of our mortgage
finance operation. The comparison of year ending 1999 to the eleven months
ending 1998 as well as September 30, 1999 and September 30, 1998 are as follows:

Interest Income.

     Year-End and Eleven-Month Comparison. Net interest income was $4,169,912
for December 31, 1999, compared to $2,193,269 for December 31, 1998, an increase
of $1,976,643, or 90.1%. This increase in net interest income was primarily due
to the net $1,975,730 increase related to volume, partial increase related to
interest rates of $913. Total interest income increased $2,163,399, primarily
the result of higher volumes of mortgage loans and cash accounts, in part
increased by the higher mortgage loan rates and offset by the lower yields
earned on cash accounts during the year ended December 31, 1999. Interest income
on mortgage loans grew 108.5% and cash accounts interest income decreased 39.8%.
The increase in interest income is mainly due to additional funds invested in
mortgage loans as a result of increased

                                       29
<PAGE>   33

cash available from private placement of new stock and to a lesser degree the
use of short-term borrowings.

     September 30 Comparison. Net interest income was $3,477,350 for September
30, 2000, compared to $3,051,004 for September 30, 1999, an increase of
$426,346, or 14%. This increase in net interest income was due to the net
$635,794 increase related to volume, offset by a decrease related to interest
rates of $209,448. Total interest income increased $607,429, as the result of
higher volumes of mortgage loans, offset by the decrease in mortgage loan rates
and increased by the higher yields earned on cash accounts during the nine
months ended September 30, 2000. Interest income on mortgage loans and cash
accounts grew 17.1% and 106.9%, respectively. The increase in interest income is
mainly due to additional funds invested in mortgage loans as a result of
increased cash available from private placement of new stock and the use of
short-term borrowings.

Total Interest Expense.

     Year-End and Eleven-Month Comparison. Total interest expense grew $186,756
during the year ended December 31, 1999 or 242.9%, compared to the eleven months
ended December 31, 1998. This increase is the result of increases in use of
collateralized notes, in part offset by a decrease in use of lines of credit.

     September 30 Comparison. Total interest expense grew $181,083 during the
nine months ended September 30, 2000 or 98.4%, compared to the nine months ended
September 30, 1999. This increase is the result of increases in use of
collateralized notes, in part offset by a decrease in use of lines of credit.
This increase is also offset by lower rates of interest paid on collateralized
notes during the nine months ended September 30, 2000.

Provision for Loan Losses.

     Year-End and Eleven-Month Comparison. The provision for loan losses at
December 31, 1998 was $100,000 and increased to $250,000 at December 31, 1999.

     September 30 Comparison. The provision for loan losses increased from
$175,000 on September 30, 1999 to $275,000 on September 30, 2000.

Net Revenue.

     Year-End and Eleven-Month Comparison. Net revenues for December 31, 1998,
were $2,102,175 compared to $3,936,560 at December 1999. This increase was due
to an increasing portfolio of mortgage loans funded primarily with new preferred
stock issuance.

     September 30 Comparison. At September 30, 1999 net revenues were $2,888,957
and increased to $3,248,495 at September 30, 2000. This increase was due to the
increase in mortgage loans funded through new stock issuance and the use of
short-term borrowings.

Total Expenses.

     Year-End and Eleven-Month Comparison. Total expenses including General and
Administrative as well as Management and Director's fees increased from $76,305
in December 31, 1998 to $124,144 on December 31, 1999. This increase was due to
an increasing loan portfolio. Total expenses are a small portion of our net
revenues since the Manager pays for most expenses directly.

     September 30 Comparison. Total expenses decreased slightly between
September 30, 1999 to September 30, 2000. The total expenses at September 30,
1999 were $94,525 and the total expenses at September 30, 2000 were $93,552.

                                       30
<PAGE>   34

Net Earnings.

     Year-End and Eleven-Month Comparison. Net earnings increased from
$2,025,870 on December 31, 1998 to $3,809,424 on December 31, 1999. This
increase results from an increased earning mortgage loan portfolio, increased
number of preferred stock outstanding and the use of short-term borrowings.

     September 30 Comparison. At September 30, 1999 net earnings were $2,791,432
and increased to $3,154,943 at September 30, 2000. This increase results from an
increased earning mortgage loan portfolio, increased number of preferred stock
outstanding and the use of short-term borrowings.

Preferred Stock Dividend.

     Year-End and Eleven-Month Comparison. The preferred stock dividend
increased from $2,111,145 on December 31, 1998 to $4,039,923 on December 31,
1999. This increase is the result of two factors. First, we completed our
initial private placement of 2,169,588 shares of Class A Convertible Preferred
stock on March 31, 1998. Therefore, 1998 preferred dividend results are for nine
months of operation. Secondly, we issued additional shares of preferred stock in
1999 thereby having more funds to invest and resulting in an increase in the
dividend.

     September 30 Comparison. The nine-month comparison of preferred stock
dividends shows an increase from $1,827,526 on September 30, 1999 to $2,307,968
on September 30, 2000. This increase resulted from an increase in stockholder
equity due to additional placement of preferred stock on April 1, 1999 and July
1, 1999. On a per share basis, we issued dividend as follows:

     We declared dividends of $230,519 for the period of January 1, 1999 to
January 31, 1999 ($.10625 per share), $620,694 for the period from January 31,
1999 to March 31, 1999 ($.2000 per share), $976,315 for the second quarter
($.3000 per share) and $1,132,520 for the third quarter ($.3000 per share). We
declared dividends of $1,149,048 for the first quarter 2000 ($.30 per share). On
July 17, 2000 we declared dividends of $1,158,922 for the second quarter ($.30
per share). On October 23, 2000 we declared dividends of $1,375,709 for the
third quarter ($.30 per share).

Net (Loss) Earnings.

     Year-End and Eleven-Month Comparison. Net loss at December 31, 1998 were
($85,275) compared to ($230,499) at December 31, 1999. This increase in our loss
is primarily due to the difference between GAAP earnings and tax earnings. As a
REIT, we intend to distribute substantially all of our taxable income each year
to our stockholders so as to qualify for the tax benefits accorded to a REIT
under the Code. The losses shown above represent those differences between tax
and GAAP earnings.

     September 30 Comparison. Net earnings at September 30, 1999 was $963,906
and decreased on September 30, 2000 to $846,975. This decrease is primarily due
to the difference in net earnings compared to the preferred stock dividend.
While net earnings increased from $2,791,432 at September 30, 1999 to $3,154,943
at September 30, 2000, a net increase of $363,511, dividends increased from
$1,827,526 at September 30, 1999 to $2,307,968 at September 30, 2000, a net
increase of $480,442. Therefore, the comparative earnings increased by $363,511
but the comparative dividend increased by $480,442. This difference accounts for
the majority of change in the net earnings figure.

RECENT DEVELOPMENTS

     On July 1, 2000 we completed a private placement of 689,320 preferred
shares at $10 per share for total cash proceeds of approximately $6.9 million.

INTEREST RATE/MARKET/CREDIT RISK

     We seek to manage the interest rate, credit and market risk of our
portfolio. By originating short-term loans (generally less than three years), we
can significantly reduce the risk of changing interest rates. Additionally, we
continue to stress the quality of our borrowers through our underwriting
guidelines and

                                       31
<PAGE>   35

loss mitigation through our servicing procedures. In this way we seek to control
credit risk. Since the majority of our loans are in the state of Nevada, we are
beginning to acquire loans in California, Arizona and Colorado. This will help
diversify the portfolio and reduce the risk of investing in one market. See
"Business -- Operating Strategies and Policies."

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

<TABLE>
<CAPTION>
                             ELEVEN                   NINE MONTHS
                             MONTHS      YEAR            ENDED
                             ENDED      ENDED      ------------------
                            12/31/98   12/31/99    9/30/99    9/30/00
                            --------   --------    -------    -------
<S>                         <C>        <C>         <C>        <C>       <C>
INTEREST INCOME:
  Mortgage Loans..........    11.51%     12.08%     12.07%     11.01%
  Cash Accounts...........     6.02%      3.27%      2.56%      5.38%

INTEREST EXPENSE:
  Line of Credit..........     8.44%      8.17%      8.17%      9.50%
  Collateralized Notes....     5.76%      7.55%      8.48%      7.39%

          Net Interest
            Spread........     2.93%      3.58%      2.91%      3.00%
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     We manage our short-term liquidity (that is, our funding needs to cover
commitments and anticipated uses coming due over the next 12 months) in a number
of ways. First, the scheduled payments on our mortgage portfolio produce
generally monthly cash flow which can be used to originate new loans or to pay
dividends to shareholders. This source produces approximately $5.0 million on an
annual basis. We generally have the ability to apply this cash flow as needed.

     Secondly, the payoff and prepayment of loans provides additional liquidity
to our portfolio. Historically, we have experienced annual loan payoffs and
prepayments of approximately 25% to 30% of our outstanding portfolio. Since our
loan terms are usually one to three years, the rate of principal payoffs is
significant. With a current portfolio of over $56 million we would anticipate
annual cash flows from principal pay downs in the range of $12.5 million to
$15.0 million. As we issue Collateralized Investment Notes, our portfolio will
increase and so will the cash flow from principal pay downs. Again, normally
these funds are used to originate new mortgage loans, but can be used otherwise.

     Lastly, we have three lines of credit with commercial banks to provide
another level of liquidity for Specialty Mortgage Trust. We can borrow up to $5
million on two of the lines to provide funding for new loans and $2.5 million on
the third, for an aggregate of $12.5 million. The two $5 million lines extend
through July 1, 2001 and October 1, 2001, respectively, and the $2.5 million
line extends through July 1, 2001. All of the lines are collateralized by
mortgage loans and borrowings under the lines bear interest at the applicable
bank's prime or reference rate. We are required to comply with various operating
and financial covenants in the lines. Such covenants include restrictions on (i)
any change in business activities from those we are presently engaged in, and
(ii) any change in executive and management personnel that would result in
reduced qualifications and experience compared to present personnel. Such
covenants also contain requirements for (i) minimum tangible net worth, (ii)
minimum liquidity (cash and available borrowings), (iii) minimum quarterly net
earnings, and (iv) maximum debt-to-equity ratio. We leave at least $2.5 million
of the lines unused for liquidity needs. At September 30, 2000, we had an
outstanding balance of $3.04 million under these lines, bearing interest at 9.5%
per annum leaving $9.46 million available to be drawn.

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

                                       32
<PAGE>   36

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

     Loans provide for either monthly payments of interest only and a payment of
principal in full at the end of the loan term, principal and interest payments
with a balloon payment at the end of the loan term, or interest only with
principal payments upon lot releases and principal in full at the end of the
loan term. Because of the high yield of our loans, we do not believe that a 10%
increase or decrease in general interest rates (from those prevailing at
September 30, 2000) would have a significant impact on the fair value of our
fixed rate loan portfolio. A significant increase in interest rates could,
however, make it more difficult for our borrowers to sell or refinance their
respective properties. This could have a material adverse effect on us, either
through loan defaults or the need to grant extensions of the maturity dates,
thereby delaying repayment. Additionally, a real estate market decline in Nevada
could have a material adverse impact on us. If real estate values were to
decline, borrowers might find it difficult, if not impossible, to repay some or
all of the principal and accrued interest in connection with a sale or
refinancing of the underlying properties. A number of factors could lead to a
real estate market decline including, but not limited to, a slowdown in the
growth of the economy, increasing commercial interest rates and supply and
demand factors. It is not possible for us to quantify the potential loss in
earnings or cash flows that might result from a real estate market decline.

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

                                       33
<PAGE>   37

                                    BUSINESS

     Our business objective is to build and hold a portfolio of mortgage loans
for investment that generates net income for distribution to stockholders. We
finance our acquisitions of mortgage loans with equity and secured borrowings.
We are structured as a real estate investment trust (REIT), thereby generally
eliminating federal taxes at the corporate level on income we distribute to
stockholders. Because we are not structured as a traditional lender which
accepts deposits, we are subject to substantially less regulatory oversight and
incur lower compliance expenses compared to banks, thrifts and many other
holders of mortgage loans.

     Specialty Financial, formerly Gonzo Financial, serves as our manager and is
responsible for loan originations, loan servicing and our day-to-day operations,
subject to the supervision of our board of directors.

     Our business strategies and policies are described below.

INVESTMENT STRATEGIES AND POLICIES

     Mortgage Loan Acquisition Strategy. Our business involves acquiring and
holding loans to borrowers primarily in the State of Nevada whose borrowing
needs are generally not being served by traditional financial institutions. Our
strategy is to focus on land loans, construction loans, commercial building
loans and nonconforming single-family and small multifamily residential loans.
We generally limit the amount of our investment in any single mortgage loan or
in mortgage loans to one borrower to $5 million, although exceptions may be
approved by the board. Most loans will have terms of two to three years. At
September 30, 2000, less than 1% of our loan portfolio consisted of loans with
original maturities of more than three years. We expect that approximately 90%
of our mortgage loan balances will at any one time be secured by first deeds of
trust on the underlying real property, with the remaining mortgage loan balances
secured by second deeds of trust. Our mortgage loans may be secured by mortgages
on unimproved as well as improved real property and non-income producing as well
as income-producing real property. Some mortgage loans may be secured by the
borrower's leasehold interest in real property. Our loans generally produce
higher yields than are obtained on traditional single-family residential
mortgage loans, but are subject to higher risks of default and loss.

     We acquire loans originated by our manager. The manager targets as
potential customers borrowers with relatively significant equity value in their
property, but who either:

     - require a small commercial loan;

     - own real property which is difficult to evaluate under standard
       underwriting guidelines or unlikely to support a mortgage saleable in the
       secondary market;

     - are self-employed, tend to experience some volatility in their income or
       have difficult-to-document sources of income; or

     - are otherwise unable to qualify for traditional mortgage loans.

     All loans provide for monthly payments of interest. As part of the
acquisition or refinance of a particular mortgage loan, we may acquire an
equity-like interest in the real property securing the loan in the form of a
shared appreciation interest or other equity-like participation.

     Most of the loans we acquire and hold require the borrower to make a
"balloon payment" on the principal amount upon maturity of the loan. At
September 30, 2000, less than 1% of our loan portfolio consisted of fully
amortizing mortgage loans. To the extent that a borrower has an obligation to
pay a mortgage loan in a large lump sum payment, its ability to satisfy this
obligation may be dependent upon its ability to obtain suitable refinancing,
sell the underlying property or otherwise raise a substantial cash amount. An
increase in interest rates over the mortgage rate applicable at the time the
loan was originated may have an adverse effect on the borrower's ability to
obtain refinancing or to pay the required monthly payments. As a result, such
loans may involve a higher risk of default than fully amortizing loans.

                                       34
<PAGE>   38

     We generally hold our mortgage loans to maturity. In addition, the REIT
provisions of the Code limit in some respects our ability to sell mortgage
loans. From time to time, however, management may decide to sell mortgage loans.
This could occur for any number of reasons, for example, to dispose of a
mortgage loan as to which credit risk concerns have arisen, to reduce interest
rate risk, or generally to re-structure the balance sheet when management deems
such action advisable. Management will select any mortgage loans to be sold
according to the particular purpose such sale will serve. The board of directors
has not adopted a policy that would restrict management's authority to determine
the timing of sales or the selection of mortgage loans to be sold.

     Types of Mortgage Loans. The principal types of mortgage loans we acquire
are described below. At September 30, 2000, 71% of our $56.5 million mortgage
loan portfolio was invested in loans secured by Nevada property, about 33% in
the Reno area and about 37% in the Las Vegas area. Our investment in any
mortgage loan may be for the entire loan or a percentage participation interest
in the loan.

     - Land Loans. Land loans are made against (a) underdeveloped or "raw" land
       zoned for either commercial or residential use and (b) land prepared for
       commercial or residential development, typically with entitlements
       obtained and basic infrastructure such as streets and utilities in place.
       An example of a residential land development loan would be a loan secured
       by a residential subdivision with residential lots ready for building.
       While land loans are generally made at low loan-to-value ratios, usually
       less than 50%, there is generally no cash flow from the property and the
       borrower's other sources of income must be relied upon to support the
       periodic interest payments due under the loans.

     - Construction Mortgage Loans. Construction loans are loans made for the
       renovation of developed property, and for the construction of new
       structures on undeveloped property. Construction loans acquired and held
       by us will generally be secured by first deeds of trust on commercial or
       residential real property. Most of our construction loans are to
       developers building the property for sale. Such loans are typically for
       terms of from six months to two years. Generally we do not disburse funds
       with respect to a particular construction loan until work in the previous
       phase of the project on which the loan is being made has been completed,
       and until an independent inspector has verified the quality of
       construction and adherence to the construction plans and has reviewed the
       estimated cost of completing the project. In addition, we require the
       submission of signed labor and material lien releases by the borrower in
       connection with each completed phase of the project prior to making any
       periodic disbursements of proceeds of the loan to the borrower.

     - Commercial Building Loans. Commercial building loans have distinct risk
       characteristics depending on the type of structure on the property.
       Commercial building loans generally lack standardized terms, which may
       complicate their structure. Commercial buildings themselves tend to be
       unique and are more difficult to value than residential properties. In
       addition, commercial buildings, particularly industrial and warehouse
       properties, are generally subject to relatively greater environmental
       risks than non-commercial properties and the corresponding burdens and
       costs of compliance with environmental laws and regulations.

      Commercial building loans are also subject to the effects of:

        -- local and other economic conditions on real estate values;

        -- the ability of tenants to make lease payments;

        -- the ability of a building to attract and retain tenants, which may in
           turn be affected by local conditions such as oversupply of space or a
           reduction in demand for rental space in the area, the attractiveness
           of properties to tenants, competition from other available space, the
           ability of the owner to pay leasing commissions, provide adequate
           maintenance and insurance, pay tenant improvements costs and to make
           other tenant concessions; and

        -- increased operating costs, including energy costs and real estate
           taxes.

                                       35
<PAGE>   39

     While owners of commercial buildings generally will carry comprehensive
     liability and casualty coverage, such coverage may not provide full
     protection for the value of the underlying property and may not protect
     against all casualty losses. If underlying commercial buildings do not
     generate sufficient income to meet operating expenses, debt service,
     capital expenditures and tenant improvements, borrowers under commercial
     building loans may be unable to make payments of principal and interest in
     a timely fashion. Income from and values of commercial buildings are also
     affected by such factors as applicable laws, including tax laws, interest
     rate levels, the availability of financing for owners and tenants, and the
     impact of and costs of compliance with environmental controls and
     regulations. In the event of foreclosure on a commercial building loan,
     there may be costs and delays involved in enforcing rights of a property
     owner against tenants in default under the terms of leases with respect to
     commercial properties and such tenants may seek the protection of the
     bankruptcy laws which can result in termination of lease contracts.

     - Nonconforming Single-Family and Small Multifamily Residential Mortgage
       Loans. The nonconforming single-family residential mortgage loans are
       conventional mortgage loans that vary in one or more respects from the
       requirements for participation in Fannie Mae or Freddie Mac programs.
       Credit risks associated with nonconforming mortgage loans may be greater
       than those associated with mortgage loans that conform to Fannie Mae and
       Freddie Mac guidelines. The principal differences between nonconforming
       mortgage loans and conforming mortgage loans include the applicable
       loan-to-value ratios, the credit and income histories of the mortgagors,
       the documentation required for approval of the mortgagors, the types of
       properties securing the mortgage loans, loan sizes and the mortgagors'
       occupancy status with respect to the mortgaged property. Nonconforming
       loans may include loans secured by timeshare vacation property. As a
       result of these and other factors which cause these nonconforming
       mortgage loans to higher risk of credit default and loss, the interest
       rates charged on these loans are often higher than those charged for
       conforming mortgage loans.

       Small multifamily mortgage loans are generally secured by a first lien on
       a 5-unit to 20-unit residential property. Multifamily mortgage loans
       share many of the characteristics and risks associated with commercial
       mortgage loans and are often categorized as commercial loans rather than
       residential loans. We also include loans on mobile home parks in this
       residential category.

     - Junior Mortgage Loans. Second, third and wraparound mortgage loans are
       secured by deeds of trust on single-family residences which are already
       subject to prior mortgage indebtedness. A wraparound loan is a junior
       mortgage loan having a principal amount equal to the outstanding balance
       under the existing mortgage loans plus the amount actually to be advanced
       under the wraparound mortgage loan. Under a wraparound loan, we generally
       make principal and interest payments on behalf of the borrower to the
       holders of the prior mortgage loans. Junior mortgage loans generally have
       lower qualifying loan-to-value ratios.

                                       36
<PAGE>   40

                          THE MORTGAGE LOAN PORTFOLIO

     Table 1 is a summary of our mortgage loan portfolio as of September 30,
2000:

                        TABLE 1: MORTGAGE LOAN PORTFOLIO
                               SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
LOAN     FOOT                                       INTEREST     PRINCIPAL      PORTFOLIO     MATURITY             LIEN
 NO.    NOTES          DESCRIPTION OF LOAN            RATE        AMOUNT         AMOUNT         DATE      LTV    POSITION
----    ------         -------------------          --------    -----------    -----------    --------    ---    ---------
<S>     <C>       <C>                               <C>         <C>            <C>            <C>         <C>    <C>
                                                        LAND LOANS
98106                    Residential Lot             12.00%     $    93,000    $    93,000      9/1/01    47%       1st
99169                  Residential Raw Land          12.50%     $   170,000    $   170,000     12/1/00    63%       1st
99175                  Residential Raw Land          12.50%     $   400,000    $   400,000      4/1/02    21%       1st
99164    (4)           Residential Raw Land          12.50%     $ 3,260,000    $   515,000      1/1/02    36%       1st
99216    (3)           Residential Raw Land          13.00%     $ 2,900,000    $ 1,000,000      5/1/02    29%       1st
99137    (8)           Residential Raw Land          12.00%     $ 2,260,200    $ 1,700,000      8/1/00    62%       1st
99223    (5)           Residential Raw Land          12.50%     $ 5,700,000    $ 2,461,000     12/1/01    75%       1st
99238                  Residential Raw Land          12.50%     $ 2,800,000    $ 2,800,000     10/1/03    46%       1st
99141    (3)           Residential Raw Land          12.50%     $ 3,500,000    $ 3,000,000      6/1/01    26%       1st
99152                  Residential Raw Land          13.00%     $ 5,625,000    $ 3,125,000      1/1/01    50%       1st
99151    (4)           Residential Raw Land          12.50%     $ 7,000,000    $ 4,485,000      9/1/01    50%       1st
                                                                -----------    -----------
                          RESIDENTIAL RAW LAND TOTAL            $33,708,200    $19,749,000
                                                                ===========    ===========

98096    (1)       Residential Land Development      12.00%     $ 2,338,000    $    13,135      7/1/01    41%       1st
99172    (3)       Residential Land Development      12.50%     $   117,000    $    35,750      2/1/01    75%       1st
97081    (1)       Residential Land Development      12.00%     $   250,000    $   250,000      1/1/01    41%       1st
97053    (1)       Residential Land Development      12.00%     $ 2,052,375    $   536,891      2/1/01    41%       1st
98093    (1)       Residential Land Development      12.00%     $ 1,100,000    $ 1,100,000      6/1/01    41%       1st
97067    (1)       Residential Land Development      12.50%     $ 2,060,000    $ 1,286,689      7/1/02    41%       1st
99235              Residential Land Development      13.00%     $ 1,400,000    $ 1,400,000     10/1/02    38%       1st
96045    (1)       Residential Land Development      12.00%     $ 2,464,000    $ 1,625,704      6/1/02    41%       1st
99227              Residential Land Development      12.25%     $ 1,950,000    $ 1,950,000      7/1/01    15%       1st
99232              Residential Land Development      12.75%     $ 2,500,000    $ 2,500,000      1/1/02    48%       1st
97080   (2)(7)     Residential Land Development      12.00%     $ 2,726,000    $ 2,726,000     11/1/99    89%       1st
99221              Residential Land Development      12.25%     $ 3,388,000    $ 3,388,000      7/1/03    56%       1st
                                                                -----------    -----------
                      RESIDENTIAL LAND DEVELOPMENT TOTAL        $22,345,375    $16,812,169
                                                                ===========    ===========

98121    (8)           Commercial Raw Land           18.50%     $ 1,300,000    $   400,000      2/1/00    56%       1st
99138   (2)(7)         Commercial Raw Land           12.00%     $ 1,000,000    $   870,000      6/1/00    89%       1st
99203                  Commercial Raw Land           12.25%     $ 1,000,000    $ 1,000,000      6/1/03    56%       1st
98109    (5)           Commercial Raw Land           12.25%     $ 2,217,629    $ 1,267,745    12/23/00    51%       1st
99167    (6)           Commercial Raw Land           12.50%     $ 1,500,000    $ 1,500,000     12/1/00    65%       1st
99239                  Commercial Raw Land           13.00%     $ 2,125,000    $ 2,125,000      9/1/02    50%       1st
                                                                -----------    -----------
                          COMMERCIAL RAW LAND TOTAL             $ 9,142,629    $ 7,162,745
                                                                ===========    ===========

                                                    CONSTRUCTION LOANS
99147    (2)             SFR Construction            12.00%     $    41,141    $    41,141      7/1/00    80%       1st
99148    (2)             SFR Construction            12.00%     $    41,141    $    41,141      7/1/00    80%       1st
99149    (2)             SFR Construction            12.00%     $    41,141    $    41,141      7/1/00    80%       1st
99150    (2)             SFR Construction            12.00%     $    41,141    $    41,141      7/1/00    80%       1st
99153                    SFR Construction            12.25%     $   821,473    $   821,473     11/1/00    59%       1st
                                                                -----------    -----------
                            SFR CONSTRUCTION TOTAL              $   986,037    $   986,037
                                                                ===========    ===========

99197    (2)           Office/Construction           12.00%     $   408,000    $   408,000      4/1/02    80%       1st
99200    (2)           Office/Construction           12.00%     $   625,000    $   625,000      4/1/02    81%       1st
99174                  Office/Construction           12.50%     $   950,000    $   950,000      3/1/01    63%       1st
99218                   Commercial/Retail            12.75%     $ 2,000,000    $ 2,000,000      6/1/01    65%       1st
                                                                -----------    -----------
                        COMMERCIAL CONSTRUCTION TOTAL           $ 3,983,000    $ 3,983,000
                                                                ===========    ===========
</TABLE>

                                       37
<PAGE>   41

<TABLE>
<CAPTION>
LOAN     FOOT                                       INTEREST     PRINCIPAL      PORTFOLIO     MATURITY             LIEN
 NO.    NOTES          DESCRIPTION OF LOAN            RATE        AMOUNT         AMOUNT         DATE      LTV    POSITION
----    ------         -------------------          --------    -----------    -----------    --------    ---    ---------
<S>     <C>       <C>                               <C>         <C>            <C>            <C>         <C>    <C>
                                                COMMERCIAL BUILDING LOANS
97078                    Retail Building             12.00%     $   875,000    $    75,000     10/1/02    47%       1st
99163               Historical Mansion/Museum        13.50%     $   125,000    $   125,000     11/1/01    40%       2nd
99196             Commercial/Industrial Building     12.50%     $   155,000    $   155,000      3/1/05    34%       1st
96043                    Retail Building              8.75%     $   200,929    $   200,929      3/1/01    73%       1st
95011                      Motel/Hotel               12.25%     $   375,000    $   375,000      4/1/02    47%       1st
98089                      Motel/Hotel               12.00%     $ 1,570,000    $ 1,570,000      4/1/03    60%       1st
99226    (6)             Medical Building            12.25%     $ 1,890,000    $ 1,890,000      6/1/01    70%       1st
                                                                -----------    -----------
                          COMMERCIAL BUILDINGS TOTAL            $ 5,190,929    $ 4,390,929
                                                                ===========    ===========

                                 NONCONFORMING SINGLE-FAMILY AND SMALL MULTIFAMILY LOANS
96050                Single-Family Residence         13.00%     $    15,373    $    15,373     12/1/06    73%       2nd
99157                Single Family Residence         12.25%     $    22,000    $    22,000     10/1/02    36%       2nd
99140                Single Family Residence         12.50%     $    74,000    $    74,000      5/1/01    67%       1st
99211                Single Family Residence         12.00%     $   126,500    $   126,500      7/1/01    78%       1st
99213                Single Family Residence         12.50%     $   150,000    $   150,000      6/1/02    67%       2nd
99165                Single Family Residence         12.00%     $   180,000    $   180,000     12/1/02    38%       1st
99230                Single Family Residence         13.00%     $   233,909    $   233,909      9/1/09    81%       1st
99142                Single Family Residence         12.50%     $   365,000    $   365,000      8/1/00    50%    1st & 3rd
99237                Single Family Residence         13.00%     $   773,000    $   773,000      9/1/01    59%       1st
99128                Single Family Residence         12.00%     $ 2,000,000    $ 1,000,000      3/1/01    51%       1st
                                                                -----------    -----------
                        SINGLE FAMILY RESIDENCE TOTAL           $ 3,939,782    $ 2,939,782
                                                                ===========    ===========

98094                    Mobile Home Park            12.00%     $   500,000    $   500,000      5/1/03    61%       2nd
                                                                -----------    -----------
                            MOBIL HOME PARK TOTALS              $   500,000    $   500,000
                                                                ===========    ===========

                                    TOTALS                      $79,795,952    $56,523,662
                                                                ===========    ===========
</TABLE>

-------------------------
(1) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $4,812,419.

(2) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $4,793,564.

(3) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $4,035,750.

(4) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $5,000,000.

(5) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $3,728,745.

(6) Loans to same borrower or related parties secured by different parcels of
    real property aggregating to $3,390,000.

(7) Loans 90 days delinquent, defaulted and foreclosure may be necessary-no
    estimate of when proceeds will be received or in what amount.

(8) Loans defaulted and in foreclosure, interest accruing at default rate.

                                       38
<PAGE>   42

     Table 2 is a summary of our mortgage loan portfolio by the type of property
securing the loans as of September 30, 2000.

                   TABLE 2: MORTGAGE LOAN BY TYPE OF PROPERTY
                               SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
                                                                 CARRYING                       AMOUNT
                             INTEREST       PRINCIPAL AMOUNT      AMOUNT        MATURITY      SUBJECT TO
     TYPE OF LOANS             RATES          OF MORTGAGES     OF MORTGAGES       DATES       DELINQUENCY
     -------------        ---------------   ----------------   ------------   -------------   -----------
<S>                       <C>               <C>                <C>            <C>             <C>
Land....................  12.0 % - 19.5 %     $65,196,204      $43,723,914    02/00 - 10/03           --
Construction............  12.0 % - 12.75%       4,969,037        4,969,037    07/00 - 04/02   $5,696,000
Commercial Building.....   8.75% - 13.5 %       5,190,929        4,390,929    03/01 - 03/05      165,000
Nonconforming Single-
  Family and Small
  Multifamily...........  12.0 % - 13.0 %       4,439,782        3,439,782    08/00 - 09/09           --
                                              -----------      -----------                    ----------
          Totals........                      $79,795,952      $56,523,662                    $5,851,000
                                              ===========      ===========                    ==========
</TABLE>

     Other Investments. We may purchase our own common or preferred stock or the
debt or the common or preferred stock of other mortgage REITs or other companies
when we believe that such purchases will yield attractive returns on capital
employed. Any such purchase would be for investment purposes and not for
short-term trading (turnover) gain. REIT or other debt or equity securities may
be undervalued at points in the economic cycle. When the stock market valuation
of companies are low in relation to the market value of other assets, stock
purchases can be a way for us to acquire indirectly a beneficial interest in a
pool of mortgage assets or other types of assets at an attractive price. Also,
REITs and other companies may have attractive mortgage finance or other
businesses in which we may want to become a partial owner. We do not, however,
presently intend to invest in the securities of other issuers for the purpose of
exercising control or to underwrite securities of other issuers. We do not limit
the amount of securities of other issuers we may acquire, although we do not
expect that such holdings will comprise a substantial portion of our assets. At
September 30, 2000, we owned $228,833 of such securities.

LEVERAGE STRATEGIES AND POLICIES

     We employ a debt financing strategy to increase our investment in mortgage
loans. By using our mortgage loans as collateral to borrow funds, we are able to
invest in mortgage loans with greater value than our equity. We have a targeted
ratio of debt-to-equity of approximately 1 to 1. While there are no charter or
bylaw limitations on our use of leverage, we currently have a policy and have
agreed with our primary bank lenders not to exceed that target by permitting our
debt, whether under bank lines or our Note program, to exceed our equity. Our
financing strategy is designed to maintain a cushion of equity sufficient to
respond to short-term liquidity needs. We expect that all of our borrowing
arrangements will require us to pledge cash or additional mortgage loans in the
event the market or discounted value of existing collateral declines. To the
extent that cash reserves are insufficient to cover such deficiencies in
collateral, we may be required to sell mortgage loans to reduce the borrowings.

     We intend to finance our mortgage loan acquisitions through the Notes and
bank warehouse credit lines. At September 30, 2000, the amount of such credit
lines was $12.5 million. The section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains a description of the terms of such credit lines. In October 1998, we
began to offer to accredited investors on a monthly basis our Class A
Collateralized Mortgage Notes secured by our mortgage loans for terms that may
range from one month to twelve months. The maximum principal amount that could
be outstanding at any time was limited by the board of directors to $20 million.
As of September 30, 2000, $7,643,888 million of these Class A Notes were
outstanding, bearing interest at rates of 7.00% to 8.5%. No additional Class A
Notes were issued after August 21, 2000.

                                       39
<PAGE>   43

     Our goal is to strike a balance between the under-utilization of leverage,
which reduces potential returns to stockholders, and the over-utilization of
leverage, which could reduce our ability to meet our obligations during adverse
market conditions.

OPERATING STRATEGIES AND POLICIES

     Origination and Underwriting. Specialty Financial continuously evaluates
prospective mortgage loans to be acquired by Specialty Mortgage Trust. The
manager generates mortgage loan originations from referrals from real estate and
mortgage loan brokers, referrals from existing customers, new loans made to or
refinancing of loans to existing customers and personal solicitations of new
borrowers.

     All potential mortgage loans are evaluated to determine if the mortgage
loan is of a type eligible for acquisition by Specialty Mortgage Trust. Our
policy generally limits the amount of loans to one borrower or affiliated
borrowers to $5 million and the loan-to-value ratio for any loan to a maximum of
80%, although in each case exceptions may be approved by the board. As the notes
to "Table 1: Mortgage Loan Portfolio" indicate, at September 30, 2000 there were
six instances of loans to the same borrower or related parties secured by
different parcels of real property. Each of these represented less than 10% of
the portfolio. We generally seek personal guarantees from affiliates of the
borrower when possible. We do not have specific requirements with respect to
credit scores or payment histories. For income producing properties, the net
annual estimated cash flow after vacancy, operating expense and mortgage debt
service deductions must equal or exceed the annual payments required on the
mortgage loan. The manager requires full documentation of all loan
application/requests, including complete organizational documents of the
borrowing entity, if applicable, credit reports on guarantors and borrowers,
current (within 60 days) financial statements, and a minimum of two year's tax
returns. A flood zone determination must be provided. A preliminary title report
is obtained and reviewed by the underwriter and closer. ALTA surveys, Phase I
Environmental reports and geotechnical reports are required on most loans but
can be waived on a case-by-case basis upon physical inspection and determination
by the President. Liability insurance is required on all loans and hazard
insurance is required on any structures. If the loan is to finance a purchase, a
copy of the purchase contract must be submitted. If the loan is for refinance, a
copy of the closing statement when purchased is reviewed. If a loan is for
construction, a copy of plans, specifications and cost breakdown must be
reviewed and a construction control company is retained. Our underwriting
guidelines are intended to evaluate the capacity and willingness of the borrower
to repay the loan and the adequacy of the collateral securing the loan. On a
case-by-case basis, exceptions to the underwriting guidelines may be made by the
president where there are compensating factors, for example, low loan-to-value
ratios or guarantees from parties with strong financial resources or pledges of
additional collateral.

     Collateral valuation receives special attention in the manager's
underwriting of our mortgage loans. The manager places great emphasis on the
ability of our collateral to protect against losses in the event of default by
borrowers. In determining the adequacy of the mortgaged property as collateral,
the manager obtains independent, on-site appraisals for each mortgage property
and the property is inspected by an officer or employee of the manager. All
independent appraisers must be licensed or qualified as independent fee
appraisers and certified by the state in which the property being appraised is
located. The appraiser is required to inspect the property and verify that it is
in good condition and that construction, if new, has been completed. The
appraisal is based on the market value of comparable properties, the estimated
rental income, if applicable, and the cost of replacement. The appraised value
of the property being financed, must be such that it currently supports, and is
anticipated to support in the event of default, the outstanding mortgage loan
balance. The manager generally relies on its own independent analysis and not
exclusively on such appraisals in determining whether or not to arrange a
particular mortgage loan.

     Servicing. The manager has established its own servicing operation in order
to service the mortgage loans. Servicing includes collecting and remitting loan
payments, making required advances, accounting for principal and interest,
holding escrow or impound funds for payment of taxes and insurance, making
required inspections of the property, contacting delinquent borrowers and
supervising foreclosures and

                                       40
<PAGE>   44

property disposition in the event of unremedied defaults in accordance with the
Company's guidelines. The focus of the manager's servicing operation is on
managing credit risk in order to protect our investment in the mortgage loans.
The manager intends to use early intervention, aggressive collection and loss
mitigation techniques in the servicing process.

     Credit and Market Risk Management. We believe that proper underwriting and
efficient servicing of our mortgage loans are the most effective methods of
managing our credit risk. The manager's focus as a servicer of mortgage loans it
has originated is more on effective credit risk management than on cost control.
The manager does not intend to be a low cost servicer, but instead puts the
proper resources to work to mitigate losses on the mortgage loans it services.

     Set forth below is a table setting forth our recent delinquency,
foreclosure and loss experience:

             TABLE 3: DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                         DECEMBER 31, 1998               DECEMBER 31, 1999              SEPTEMBER 30, 2000
                                   -----------------------------   -----------------------------   -----------------------------
                                   PRINCIPAL AMOUNT   PERCENT OF   PRINCIPAL AMOUNT   PERCENT OF   PRINCIPAL AMOUNT   PERCENT OF
                                       OF LOANS       PORTFOLIO        OF LOANS       PORTFOLIO        OF LOANS       PORTFOLIO
                                   ----------------   ----------   ----------------   ----------   ----------------   ----------
<S>                                <C>                <C>          <C>                <C>          <C>                <C>
Total Portfolio..................    $29,600,401        100.0%       $36,105,670        100.0%       $56,523,662        100.0%
                                     ===========        =====        ===========        =====        ===========        =====
Period of Delinquency (excluding
  foreclosures)
  30 - 59 days...................        150,300          .51               None                         365,000         0.65
  60 - 89 days...................           None                            None                            None
  90 days or more................           None                            None                       3,596,000         6.36
                                     -----------                     -----------        -----        -----------        -----
    Total Delinquencies
      (excluding foreclosures)...    $   150,300          .51%       $      None                     $ 3,961,000         7.01%
                                     ===========        =====        ===========        =====        ===========        =====
Foreclosures Pending.............           None                     $ 1,106,000         3.06%       $ 2,100,000         3.72%
Real Estate Owned (REO)..........           None                            None                            None
Losses Sustained for Period
  Ending on Such Date............           None                            None                            None
</TABLE>

     Specialty Mortgage generally institutes foreclosure proceedings on
defaulted loans when that action is determined by management to be in the best
interests of shareholders. Foreclosure may be appropriate where the project
planned for the property has encountered slower than expected development or
sales results or where the developer/borrower's financial condition has
deteriorated such that completion of the project has been jeopardized. A loan
that is nearing maturity or has defaulted may be a candidate for refinancing
rather than foreclosure when management determines that the project planned
remains viable and the value of the property and other sources of repayment such
as personal guarantees are sufficient to support a new loan. In such cases,
management often works with marketing and other real estate professionals to
assist the developer in modifying the original project to enhance its likelihood
of success. The table below shows the status as of December 31, 2000 of mortgage
loans in the portfolio at September 30, 2000 that became past due at maturity on
or before January 1, 2001.

               TABLE 4: DISPOSITION OF LOANS PAST DUE AT MATURITY
                     (LOAN STATUS AS OF DECEMBER 31, 2000)

<TABLE>
<CAPTION>
                                                               PRINCIPAL AMOUNT
                                                                   OF LOANS
                                                              SEPTEMBER 30, 2000
                                                              ------------------
<S>                                                           <C>
Foreclosures pending........................................      $4,160,564
Loans refinanced............................................       4,182,849
Loans paid off..............................................         365,000
                                                                  ----------
  Total loans past due at maturity..........................      $8,708,413
                                                                  ==========
</TABLE>

                                       41
<PAGE>   45

     There are no limits on the geographic concentration of the loans we may
acquire and properties underlying mortgage loans are located primarily in the
State of Nevada. In order to reduce our market risk exposure from investing in
mortgage loans to borrowers located primarily in the State of Nevada, we have
begun to acquire loans secured by properties in the States of California,
Arizona and Colorado. At September 30, 2000, 71% of our $56.5 million mortgage
loan portfolio was invested in loans secured by Nevada property, about 33% in
the Reno area and about 37% in the Las Vegas area.

     Interest Rate Risk Management. We seek to limit our exposure to changes in
interest rates in several ways. We generally acquire short-term loans with fixed
interest rates and maturities of less than three years. While our loan terms
exceed the terms for interest rate adjustments on our borrowings, the resulting
interest rate exposure is mitigated by our leverage policy limits. Under our
targeted debt-to-equity ratio of approximately 1 to 1, at least 50% of our
earning assets will at all times be funded with equity. The income from these
assets will be available to cover increases in interest expense on our
borrowings, to the extent not covered by the assets funded with such borrowings.
In addition, the higher yielding-higher risk nature of our loans provides a
greater net interest cushion that can withstand more interest rate increases on
borrowings than lower yielding-lower risk loans.

     We do not hedge our interest rate risk by purchasing interest rate caps,
floors or other derivative instruments. We believe that the cost of such hedging
instruments would outweigh the potential benefits to be gained by us.

     Prepayment Risk Management. The manager seeks to minimize the effects of
faster or slower than anticipated prepayment rates in our portfolio, in part by
originating mortgage loans with prepayment penalties. The manager also utilizes
the production of new mortgage loans as a hedge against prepayment risk. Through
its servicing function, the manager pre-selects borrowers that have an incentive
to refinance and recaptures those mortgage loans by soliciting the borrowers
directly rather than losing them to another mortgage lender.

OTHER COMPANY POLICIES

     At the present time, we do not intend to invest directly in real property
or interests in real property. From time to time, however, we may hold "real
estate owned" (REO) as a result of foreclosure of defaulted mortgage loans.
Further, we do not intend to invest in mortgage securities or to issue mortgage
securities. We do not expect to issue senior securities or to offer our
securities in exchange for property.

     Our Board of Directors has established the investment policies and
strategies summarized in this prospectus. The Board of Directors has the power
to modify or waive such policies and strategies without the consent of the
stockholders to the extent that the Board of Directors determines that such
modification or waiver is in the best interest of stockholders. Among other
factors, developments in the market which affect the policies and strategies
mentioned in this prospectus or which change our assessment of the market may
cause the Board of Directors to revise our policies and strategies.

LEGAL PROCEEDINGS

     There are no material pending legal proceedings to which Specialty Mortgage
Trust or the manager is a party or, except for foreclosure proceedings in the
ordinary course of business, to which any property of Specialty Mortgage Trust
or the manager is subject.

                                       42
<PAGE>   46

                                  THE MANAGER

     Specialty Financial, formerly Gonzo Financial, serves as our manager and is
responsible for loan originations, loan servicing and our day-to-day operations.
Mr. Gonfiantini, a director and our sole executive officer, is also an executive
officer, director and the sole stockholder of Specialty Financial. We have no
separate employees from the manager and we share its facilities. We have no
ownership interest in the manager. Specialty Financial has significant operating
discretion as to the implementation of our business strategy and policies.

     Specialty Financial is regulated as a mortgage company by the State of
Nevada Financial Institutions Division, Department of Business and Industry, has
filed annual reports with that agency and has been profitable each year since
commencing operations in 1995. The manager operates from office space located at
6160 Plumas Street, Reno, Nevada 89509, telephone (775) 826-0809, and licenses
the use of a servicing software system.

MANAGEMENT FEES

     Pursuant to a management agreement entered into with Specialty Mortgage
Trust, Specialty Financial receives a management fee payable monthly in arrears
consisting of:

          (i) The mortgage loan origination fees or points, usually charged to a
     borrower for and upon the origination, extension or refinancing of a
     mortgage loan, up to 2.5% of the loan balance (i.e., 2.5 points) with any
     additional fees or points paid to the benefit of Specialty Mortgage Trust.
     The amount of this fee is determined by competitive conditions, may vary
     and may have a direct effect on the interest rate a borrower is willing to
     pay Specialty Mortgage Trust.

          (ii) A fee for loan servicing, equal to one-half of one percent of the
     total mortgage loan portfolio held by Specialty Mortgage Trust. Retention
     of this fee by the manager, in effect, lowers the yield retained by
     Specialty Mortgage Trust on its loans.

          (iii) All late payment charges from payments made by borrowers.

     We also pay to Specialty Financial as incentive compensation for each
fiscal quarter, an amount equal to 50% of the net income of Specialty Mortgage
Trust, before deduction of such incentive compensation, in excess of the
annualized return to Specialty Mortgage Trust equal to 12%. The incentive
compensation calculation and payment will be made quarterly in arrears. The term
"return to Specialty Mortgage Trust" is calculated for the quarter by dividing
our taxable income for the quarter by the net worth for the quarter. For such
calculations, the "taxable income" of Specialty Mortgage Trust means the taxable
income of Specialty Mortgage Trust before the manager's incentive compensation,
the deduction for dividends paid and net operating loss deductions arising from
losses in prior periods. A deduction for Specialty Mortgage Trust's interest
expenses for borrowed money is taken when calculating taxable income. "Net
worth" for any period means the sum of the gross proceeds from all prior
offerings of its equity securities by Specialty Mortgage Trust, after deducting
expenses and costs relating to the offering (or for any period in which new
equity securities are issued, the arithmetic weighted average on the prior
offering proceeds and the new proceeds for the period), plus Specialty Mortgage
Trust's beginning retained earnings (without taking into account any losses
incurred in prior periods and excluding amounts reflecting taxable income to be
distributed as dividends and amounts reflecting valuation allowance
adjustments). The definition "return to Specialty Mortgage Trust" is used only
for purposes of calculating the incentive compensation payable, and is not
related to the actual distributions received by stockholders. The incentive
compensation payments to Specialty Financial are made before any income
distributions are made to our stockholders.

     The manager's base fee is calculated by the manager and delivered to us
within 15 days after the end of each month. We are obligated to pay the amount
of the final base fee in excess of the amount paid to manager at the beginning
of the month pursuant to the manager's good faith estimate within 30 days after
the end of each month. We pay the incentive fee with respect to each fiscal
quarter within 15 days following the delivery to us of the manager's written
statement setting forth the computation of the

                                       43
<PAGE>   47

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

     Although no management fees will be payable to the manager solely as a
result of issuance of the Notes, to the extent that proceeds of the offering are
invested in mortgage loans, the size of the Specialty Mortgage Trust mortgage
portfolio will be increased with a corresponding effect on the manager's base
fee.

     Set forth below is a breakdown of the management fees actually paid in 1998
and 1999 and estimates of the fees that might be paid in 2000 and 2001.

                          ANNUAL MANAGER COMPENSATION

<TABLE>
<CAPTION>
                                           BASE FEE
                          -------------------------------------------
                          ORIGINATION        LOAN        LATE PAYMENT   TOTAL BASE    INCENTIVE        TOTAL
                             FEES       SERVICING FEES     CHARGES         FEE       COMPENSATION   COMPENSATION
                          -----------   --------------   ------------   ----------   ------------   ------------
<S>                       <C>           <C>              <C>            <C>          <C>            <C>
1998(1).................   $375,943        $ 73,251        $   660      $  449,854     $ 22,468      $  472,322
1999....................    662,651         148,252         12,539         823,442       18,480         841,922
2000(2).................    557,329         211,860         35,596         804,785           --         804,785
2001(3).................    706,200         353,760         38,610       1,098,570      100,000       1,198,570
</TABLE>

-------------------------
(1) Eleven months.

(2) Annualized based on amounts through September 30, 2000.

(3) For illustrative purposes only -- a breakdown of management fees that might
    be paid to the manager for 2001, under hypothetical circumstances. For
    purposes of this illustration, the following assumptions have been made: (a)
    the use of net proceeds from issuance of the Notes results in an increase in
    the Specialty Mortgage Trust mortgage portfolio to an average balance of
    $70.752 million; origination fees assume $3.3 million of new loan closings
    per month; late payment charges are increased over 2000 amounts based on the
    increase in the loan portfolio; and the Specialty Mortgage Trust net income
    exceeds the annualized return to Specialty Mortgage Trust of 12% (calculated
    as described above) by $200,000.

     We emphasize that the foregoing information for 2001 is provided for
illustrative purposes only. There will be differences between our actual net
income and the compensation paid to the manager for 2001, on the one hand, and
the net income and compensation figures for 2001 set forth above, on the other,
and those differences may be material. There are significant variables in the
determination of actual compensation paid to the manager, including our actual
net income, which will be affected by our ability to execute our investment and
leveraging strategies.

ADMINISTRATIVE SERVICES PROVIDED BY THE MANAGER

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

          (i) representing Specialty Mortgage Trust in connection with the
     origination or purchase of mortgage loans;

          (ii) in accordance with the directions of the board of directors,
     investing or reinvesting any money of Specialty Mortgage Trust;

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

                                       44
<PAGE>   48

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

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

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

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

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

          (ix) conducting a legal document review of each mortgage loan acquired
     to verify the accuracy and completeness of the information contained in the
     mortgage loans, security instruments and other pertinent documents in the
     mortgage file;

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

          (xi) providing all actions necessary for compliance by Specialty
     Mortgage Trust with all federal, state and local regulatory requirements
     applicable to Specialty Mortgage Trust in respect of its business
     activities, including preparing or causing to be prepared all financial
     statements required under applicable regulations and contractual
     undertakings;

          (xii) providing all actions necessary to enable Specialty Mortgage
     Trust to make required federal, state and local tax filings and reports and
     generally enable Specialty Mortgage Trust to maintain its status as a REIT,
     including soliciting stockholders for required information to the extent
     required by the REIT Provisions of the Code;

          (xiii) communicating on behalf of Specialty Mortgage Trust with the
     stockholders of Specialty Mortgage Trust as required to satisfy any
     reporting requirements and to maintain effective relations with such
     stockholders; and

          (xiv) performing such other services as may be required from time to
     time for management and other activities relating to the assets of
     Specialty Mortgage Trust as the board of directors shall reasonably request
     or the manager shall deem appropriate under the particular circumstances.

     The manager may enter into subcontracts with other parties to provide us
any such services.

EXPENSES

     The operating expenses required to be borne by the manager include
compensation and other employment costs, the cost of office space and equipment
and all other administrative incurred in our day-to-day operations. Those
expenses do not include debt service or taxes. While most costs are paid through
the manager from fees earned by the manager, we do pay directly certain
REIT-related expenses such as directors' fees and legal and accounting fees.
There are no caps or ceilings on any category of fees, compensation or other
expenses payable by us except for compensation payable to the manager and
expenses to be borne by the manager as described above.

TERM AND TERMINATION

     The management agreement had an initial term of three years beginning
January 30, 1998 and is renewed automatically for successive one year periods
unless we timely deliver a notice of nonrenewal. Upon nonrenewal of the
management agreement without cause, a termination fee will be payable to the
manager in an amount equal to the greater of (i) the fair value of the
management agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Mortgage

                                       45
<PAGE>   49

Trust. At September 30, 2000, 4% of our mortgage loan portfolio would be
approximately $2.3 million. In addition, we have the right to terminate the
management agreement at any time for cause. A majority of our unaffiliated
directors (currently 5 of 6 directors are unaffiliated) may determine that the
manager has violated the management agreement in a material respect and, after
notice and an opportunity to cure, terminate the agreement. Upon such a
termination for cause, no termination fee will be payable to the manager.

POTENTIAL CONFLICTS OF INTEREST AND LIMITS OF RESPONSIBILITY

     Certain provisions of the management agreement raise potential conflicts of
interest or limit the manager's responsibilities.

     Origination Fee. The first 2.5% (2 1/2 points) of any origination fees
(points) collected from the borrower is paid to the manager as part of the
management fee. The size of the mortgage origination fees are market driven but
may vary and may have a direct impact upon the interest rate the borrower is
willing to pay and, therefore, on the interest income we would receive from the
loan.

     Loan Servicing Fee. As part of the management fee, one-half of one percent
of the total mortgage loan portfolio is paid to the manager as a loan servicing
fee. Payment of this fee, in effect, lowers the yield on our mortgage loans. An
undue emphasis on increasing the size of the mortgage loan portfolio, thereby
increasing the manager's compensation, could result in the acquisition of
riskier or more speculative loans.

     Incentive Fee. We also pay our manager an incentive fee equal to 50% of our
quarterly taxable income in excess of an annualized return of 12% on our net
worth for that quarter. If the marketplace works as expected, i.e., higher risk,
higher reward, the incentive fee structure to the extent it encourages an undue
short-term emphasis on the acquisition of higher yielding loans could result in
the acquisition of riskier or more speculative loans.

     Services to Others. The management agreement does not limit or restrict the
right of the manager to engage in any business or render services of any kind to
any other person, including the purchase of, or rendering advice to others
purchasing, mortgages that meet our policies and criteria. The management
agreement does say that the manager and its officers may not provide services to
another mortgage REIT unless a majority of our unaffiliated directors (currently
5 of 6 directors are unaffiliated) confirm that the other mortgage REIT has
operating policies and strategies different from ours. Neither Mr. Gonfiantini
nor Specialty Financial provide or intend to provide services to any mortgage
REIT that is competitive to us or invests in mortgages which we might invest in,
but there is nothing in the management agreement that strictly precludes it.

     No Minimum Time Commitment. The management agreement does not impose a
minimum time commitment that the manager and its personnel must devote to
providing services to us. The ability of the manager to engage in other business
activities could reduce the time and effect spend by the manager on our
management.

     Limits of Manager Responsibility. The manager assumes no responsibility
other than to render the services called for under the management agreement in
good faith and shall not be responsible for any action of the board of directors
in following or declining to follow any advice or recommendations of the
manager. The manager, its directors, officers, stockholders and employees will
not be liable to us, any subsidiary of ours, our subsidiary's stockholders or
the unaffiliated directors for any acts or omissions by the manager, its
directors, officers, stockholders or employees under or in connection with the
management agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the management agreement.

     Indemnification. We have agreed to indemnify the manager, its directors,
officers, stockholders and employees with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from any acts or
omissions of the manager made in good faith in the performance of its duties
under the management agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties.

                                       46
<PAGE>   50

                                   MANAGEMENT

DIRECTORS AND OFFICERS

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

<TABLE>
<CAPTION>
             NAME                                         POSITION
             ----                                         --------
<S>                             <C>
Nello Gonfiantini III(1)......  Chairman of the board of directors, President, Secretary and
                                Chief Financial Officer of Specialty Mortgage Trust.
George E. Bull(2)(3)..........  Director
Roger M. Peltyn(2)(4).........  Director
Stephen V. Novacek(2)(4)......  Director
Ernest Martinelli(2)(3).......  Director
Harvey C. Fennell(2)..........  Director
</TABLE>

-------------------------
(1) Founder and promoter of Specialty Mortgage Trust.

(2) Independent Director.

(3) Member of the Audit Committee.

(4) Member of the Manager Oversight Committee.

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

     NELLO GONFIANTINI III, age 46, was the sole founder and promoter of
Specialty Mortgage Trust and serves as its Chairman of the Board, President,
Secretary and Chief Financial Officer. Mr. Gonfiantini has owned and managed
Specialty Financial, formerly Gonzo Financial, a private mortgage finance and
real estate development business in Reno, Nevada, since 1994. From 1986 until
1994, Mr. Gonfiantini was the Chairman, CEO and President of Home Federal
Savings Bank of Nevada, where he oversaw the commercial and residential real
estate lending operations. Prior to taking that position in 1986, Mr.
Gonfiantini was the Executive Vice President of Home Mortgage Company, a
mortgage banking firm and predecessor to Home Federal Savings Bank of Nevada.
Since June 1994, Mr. Gonfiantini has served as a director of Redwood Trust,
Inc., a publicly-traded REIT with mortgage assets currently in excess of $2
billion. Mr. Gonfiantini has a BA and an MBA from the University of Denver.

     GEORGE E. BULL, age 51, is Chairman of the Board and Chief Executive
Officer and a founder in 1994 of Redwood Trust, Inc., Mill Valley, California, a
mortgage REIT. Mr. Bull was the President of GB Capital until March 1997, and
had served in that capacity since he founded the predecessor of GB Capital in
1983. GB Capital assisted banks, insurance companies and savings and loans in
managing portfolios of securitized and unsecuritized mortgage loans, in
arranging collateralized borrowings, in hedging balance sheet risks and with
other types of capital markets transactions. In addition, GB Capital managed and
advised troubled commercial real estate and corporate investments. In 1991 and
1992, Mr. Bull served as Acting Chief Investment Officer of First Capital Life
Insurance Company, managing its $4 billion securities portfolio and over $200
million in commercial real estate loans. He also worked during this period in
various aspects of fixed income portfolio management with Wood Island
Associates, Inc. From 1991 through 1993, Mr. Bull oversaw the management of the
$350 million portfolio of commercial real estate investments and the $8 billion
securities portfolio of Executive Life Insurance Company (in Rehabilitation) on
behalf of the California Department of Insurance. Mr. Bull formerly served as a
director of EurekaBank in San Francisco and as a director of Home Federal
Savings Bank in Nevada.

     ROGER M. PELTYN, age 58, has been President of the structural engineering
firm, Martin & Peltyn, Inc., Las Vegas, since 1981. Mr. Peltyn is a director of
Southern Nevada Seismic Safety Counsel; a director of Martin & Peltyn, Inc.,
Civil Engineers; and a member of the American Society of Civil Engineers,
American Institute of Steel Construction, and the National Society of
Professional Engineers, Las Vegas.

                                       47
<PAGE>   51

He is a member of the board of trustees of the Nevada Development Authority,
President of the Alliance for the Arts, and a director of the Clark County
Public Education Foundation.

     STEPHEN V. NOVACEK, age 55, has been a shareholder in the law firm, Hale,
Lane, Peek, Dennison, Howard and Anderson, located in Reno, Las Vegas and Carson
City, Nevada, since 1978. Mr. Novacek specializes in real estate law and finance
representing various institutional lenders in residential and commercial
transactions. He is a member of the State Bar of Nevada and the American Bar
Association.

     ERNEST MARTINELLI, age 72, retired as Vice Chairman of Bank of America
Nevada in 1993 after a career in the banking business in Nevada. He is Vice
Chair of the board of directors of St. Mary's Healthcare Network and President
of Martinelli Properties, Inc., a commercial real estate development and
investment company.

     HARVEY C. FENNELL, age 53, is the President of Dickson Realty, Inc., Reno,
and has been a realtor since 1987. Mr. Fennell specializes in land and
commercial real estate sales. He is a member of the Reno/ Sparks Association of
Realtors and has served on its board of directors. He is a member of the Nevada
Real Estate Commission, a state regulatory agency. Prior to 1987, Fennell was a
partner in the accounting firm: Peat, Marwick, Main & Company. Mr. Fennell is
the past President of the Sierra Nevada Chapter of the American Red Cross and
served as Treasurer of the Reno Performing Arts Center and the Nevada Festival
Ballet. He formerly served as a director of Home Federal Bank in Reno.

TERMS OF DIRECTORS AND OFFICERS

     Specialty Mortgage Trust's board of directors consists of such number of
persons as shall be fixed by the board of directors from time to time by
resolution to be divided into three classes, designated Class I, Class II and
Class III, with each class to be as nearly equal in number of directors as
possible. Currently there are six directors. Messrs. Gonfiantini and Novacek are
Class I directors, Messrs. Bull and Martinelli are Class II directors and Mr.
Peltyn and Mr. Fennell are Class III directors. Class I, Class II and Class III
directors will stand for reelection at the annual meetings of stockholders held
in 2002, 2003 and 2001, respectively. At each annual meeting, the successors to
the class of directors whose term expires at that time are to be elected to hold
office for a term of three years, and until their respective successors are
elected and qualified, so that the term of one class of directors expires at
each such annual meeting.

     In the case of any vacancy on the board of directors, including a vacancy
created by an increase in the number of directors, the vacancy may be filled by
election of the board of directors or the stockholders, with the director so
elected to serve until the next annual meeting of stockholders, if elected by
the board of directors, or for the remainder of the term of the director being
replaced, if elected by the stockholders; any newly-created directorships or
decreases in directorships are to be assigned by the board of directors so as to
make all classes as nearly equal in number as possible. Directors may be removed
only for cause and then only by vote of a majority of the combined voting power
of stockholders entitled to vote in the election for directors. Subject to the
voting rights of the holders of the preferred stock, the Charter may be amended
by the vote of a majority of the combined voting power of stockholders, provided
that amendments to the Article dealing with directors may only be amended if it
is advised by at least two-thirds of the board of directors and approved by vote
of at least two-thirds of the combined voting power of stockholders. The effect
of the foregoing as well as other provisions of Specialty Mortgage Trust's
Charter and Bylaws may discourage takeover attempts and make more difficult
attempts by stockholders to change management. Prospective investors are
encouraged to review the Charter and Bylaws in their entirety.

     Officers are elected annually and serve at the discretion of the board of
directors. There are no family relationships between the executive officers or
directors.

COMMITTEES OF THE BOARD

     Audit Committee. The Audit Committee is composed of Messrs. Bull and
Martinelli. The Audit Committee makes recommendations concerning the engagement
of independent public accountants,

                                       48
<PAGE>   52

reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of Specialty Mortgage Trust's internal accounting controls.

     Manager Oversight Committee. The Manager Oversight Committee is composed of
Messrs. Peltyn and Novacek. The Committee reviews periodically the Management
Agreement and the manager's performance under that Agreement.

     Other Committees. The board of directors may establish other committees as
deemed necessary or appropriate from time to time, including, but not limited
to, an Executive Committee of the board of directors.

     In 1999, the board of directors met 4 times, each time with full
attendance. There has not yet been separate committee meetings.

COMPENSATION COMMITTEE INTERLOCKS

     No interlocking relationship exists between our board of directors or
officers responsible for compensation decisions and the board of directors or
compensation committee of any other company.

COMPENSATION OF DIRECTORS

     None of our directors has received any separate compensation for service on
the board of directors or on any committee thereof. We pay directors who are not
employed by Specialty Mortgage Trust, independent directors, $500 for each
meeting attended in person. In addition, each Independent Director is granted
options to purchase 10,000 shares of common stock at the fair market value of
the common stock upon becoming a director. We refer you to "-- Executive
Compensation -- Stock Option Plan -- Automatic Grants to Non-Employee Directors"
in this prospectus for more detail All directors receive reimbursement of
reasonable out-of-pocket expenses incurred in connection with meetings of the
board of directors. No director who is an employee of Specialty Mortgage Trust
or the manager will receive separate compensation for services rendered as a
director.

EXECUTIVE COMPENSATION

     Employee salaries and bonuses are paid through the manager, Specialty
Financial, as part of and not in addition to the management fee. For the years
ended December 31, 1999 and 1998, Specialty Financial earned $148,252 and
$73,251, respectively, in fees for loan servicing. Specialty Financial also
received an incentive compensation bonus of $18,480 and $22,468 for the years
ended December 31, 1999 and 1998, respectively.

STOCK OPTION PLAN

     General. Specialty Mortgage Trust's 1997 Stock Option Plan provides for the
grant of qualified incentive stock options, which meet the requirements of
Section 422 of the Internal Revenue Code, stock options not so qualified,
deferred stock, restricted stock, performance shares, stock appreciation and
limited stock awards, and dividend equivalent rights.

     Purpose. The stock option plan is intended to provide a means of
performance-based compensation in order to attract and retain qualified
personnel at the manager or Specialty Mortgage Trust and to afford additional
incentive to others to increase their efforts in providing significant services
to Specialty Mortgage Trust.

     Administration. The stock option plan will be administered by the
Compensation Committee, which shall at all times be composed solely of
"disinterested persons" as required by Rule 16b-3 under the Exchange Act.
Members of the Compensation Committee are eligible to receive only nonqualified
stock options pursuant to automatic grants of stock options discussed below.

                                       49
<PAGE>   53

     Options and Awards. Options granted under the stock option plan will become
exercisable in accordance with the terms of grant made by the Committee. Awards
will be subject to the terms and restrictions of the awards made by the
Committee. Option and award recipients shall enter into a written stock option
agreement with Specialty Mortgage Trust. The Committee has discretionary
authority to select participants from among eligible persons and to determine at
the time an option or award is granted when and in what increments shares
covered by the option or award may be purchased or will vest and, in the case of
options, whether it is intended to be a qualified incentive stock option or a
stock option not so qualified provided, however, that certain restrictions
applicable to qualified incentive stock options are mandatory, including a
requirement that qualified incentive stock options not be issued for less than
100% of the then fair market value of the common stock, 110% in the case of a
grantee who holds more than 10% of the outstanding common stock, and a maximum
term of ten years, five years in the case of a grantee who holds more than 10%
of the outstanding common stock. Fair market value means as of any given date,
with respect to any option or award granted, at the discretion of the board of
directors or the Compensation Committee, (i) the closing sale price of the
common stock on such date as reported in the Western Edition of the Wall Street
Journal or (ii) the average of the closing price of the common stock on each day
of which it was traded over a period of up to twenty trading days immediately
prior to such date, or (iii) if the common stock is not publicly traded, e.g.,
prior to the initial public offering, the fair market value of the common stock
as otherwise determined by the board of directors or the Compensation Committee
in the good faith exercise of its discretion.

     Eligible Persons. Officers and directors and employees of Specialty
Mortgage Trust and other persons (particularly key employees of the manager)
expected to provide significant services to Specialty Mortgage Trust are
eligible to participate in the stock option plan. Qualified incentive stock
options may be granted only to officers and key employees of Specialty Mortgage
Trust. Stock options not so qualified and awards may be granted to the
directors, officers, key employees, agents and consultants of Specialty Mortgage
Trust or any of its subsidiaries.

     Under current law, qualified incentive stock options may not be granted to
any director of Specialty Mortgage Trust who is not also an employee, or to
directors, officers and other employees of entities unrelated to Specialty
Mortgage Trust, such as the manager. No options or awards may be granted under
the stock option plan to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 25% of the outstanding
shares of equity stock of Specialty Mortgage Trust.

     Shares Subject to the Plan. The stock option plan authorizes the grant of
options to purchase, and awards of, an aggregate of up to 300,000 shares of
Specialty Mortgage Trust's common stock. The maximum number of shares covered by
the stock option plan will increase to 10% of Specialty Mortgage Trust's total
outstanding shares at any time, provided that no more than 300,000 shares of
common stock shall be cumulatively available for grant as incentive stock
options. If an option granted under the stock option plan expires or terminates,
or an award is forfeited, the shares subject to any unexercised portion of such
option or award will again become available for the issuance of further options
or awards under the stock option plan. In connection with any reorganization,
merger, consolidation, recapitalization, stock split or similar transaction, the
Compensation Committee shall appropriately adjust the number of shares of common
stock subject to outstanding options, awards and dividend equivalent rights and
the total number of shares for which options, awards or dividend equivalent
rights may be granted under the plan.

     Term of the Plan. Unless previously terminated by the board of directors,
the stock option plan will terminate on October 22, 2007, and no options or
awards may be granted under the stock option plan thereafter, but existing
options or awards remain in effect until the options are exercised or the
options or awards are terminated by their terms.

     Term of Options. Each option must terminate no more than ten years from the
date it is granted, or five years in the case of qualified incentive stock
options granted to an employee who is deemed to own an excess of 10% of the
combined voting power of Specialty Mortgage Trust's outstanding equity stock.
Options may be granted on terms providing for exercise either in whole or in
part at any time or times

                                       50
<PAGE>   54

during their restrictive terms, or only in specified percentages at stated time
periods or intervals during the term of the option.

     Dividend Equivalent Rights. The plan provides for granting of dividend
equivalent rights in tandem with any options granted under the plan; however,
Specialty Mortgage Trust does not expect that dividend equivalent rights will
generally be granted. Such dividend equivalent rights accrue for the account of
the optionee shares of common stock upon the payment of dividends on outstanding
shares of common stock. The number of shares accrued is determined by a formula
and such shares may be made transferable to the optionee either upon exercise of
the related option or on a "current-pay" basis so that payments would be made to
the optionee at the same time as dividends are paid to holders of outstanding
common stock. Holders of dividend equivalent rights may be made eligible to
participate not only in cash distributions but also in distributions of stock or
other property made to holders of outstanding common stock. shares of common
stock accrued for the account of the optionee are eligible to receive dividends
and distributions. Dividend equivalent rights may also be made "performance
based" by conditioning the right of the holder of the dividend equivalent right
to receive any dividend equivalent payment or accrual upon the satisfaction of
specified performance objectives.

     Option Exercise. The exercise price of any option granted under the stock
option plan is payable in full in cash, or its equivalent as determined by the
Committee. Specialty Mortgage Trust may make recourse loans available to option
holders to fund the exercise of options, which loans will be evidenced by a
promissory note executed by the option holder and secured by a pledge of common
stock with fair value at least equal to the principal of the promissory note
unless otherwise determined by the Committee.

     Automatic Grants to Non-Employee Directors. Each non-employee director of
Specialty Mortgage Trust is automatically granted stock options not so qualified
to purchase 10,000 shares of common stock upon becoming a director of Specialty
Mortgage Trust. Such automatic grants of stock options vest 25% on the
anniversary date in the year following the date of the grant and 25% on each
anniversary date thereafter. The exercise price for such automatic grants of
stock options is the fair market value of the common stock on the date of grant.

     Amendment and Termination of Stock Option Plan. The board of directors may,
without affecting any outstanding options or awards, from time to time revise or
amend the stock option plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may, without stockholder approval,
increase the number of shares subject to the stock option plan, modify the class
of participants eligible to receive options or awards granted under the stock
option plan or extend the maximum option term under the stock option plan.

     Outstanding Options. Options to acquire 161,000 shares of common stock have
been granted under Specialty Mortgage Trust's stock option plan. Of these
options, 10,000 have been granted to each of the five independent directors and
an additional 111,000 have been granted to six current employees, excluding the
founder, of Specialty Financial, formerly Gonzo Financial. The options were
granted without dividend equivalent rights and become exercisable in annual
increments over a four-year period. The options were granted at prices ranging
from $0.01 to $5.00 per share. No options have been granted to Mr. Gonfiantini.

                                       51
<PAGE>   55

                           PRINCIPAL SECURITYHOLDERS

BENEFICIAL OWNERSHIP OF CAPITAL STOCK BY LARGE SECURITYHOLDERS

     The following table sets forth certain information known to Specialty
Mortgage Trust with respect to beneficial ownership of Specialty Mortgage
Trust's capital stock as of November 30, 2000 by each person other than members
of management known to Specialty Mortgage Trust to beneficially own more than
five percent (5%) of Specialty Mortgage Trust's capital stock. Unless otherwise
indicated in the footnotes to the table, the beneficial owners named have, to
the knowledge of Specialty Mortgage Trust, sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws
where applicable.

<TABLE>
<CAPTION>
                                                              BENEFICIAL OWNERSHIP
                                                               OF PREFERRED STOCK
                                                              --------------------
                  NAME OF BENEFICIAL OWNER                     SHARES     PERCENT
                  ------------------------                    --------    --------
<S>                                                           <C>         <C>
Angelo Petrini(1)(4)........................................  334,714       7.24%
Raymond J. Poncia, Jr.(2)(4)................................  300,000       6.49%
Nello Gonfiantini, Jr.(3)(4)................................  299,263       6.47%
</TABLE>

-------------------------
(1) Consists of 302,714 shares of preferred stock held by the 1987 Petrini
    Family Trust of which Mr. Petrini is co-trustee with his wife and 32,000
    shares of preferred stock held by Delta Saloon Profit Sharing Plan of which
    Mr. Petrini is trustee.

(2) Consists of 150,000 shares of preferred stock held by the Raymond J. Poncia,
    Jr. Family Trust of which Mr. Poncia, Jr. is trustee and 150,000 shares of
    preferred stock held by the Hotel & Casino Management Inc. of which Mr.
    Poncia, Jr. is President.

(3) Consists of 159,500 shares of preferred stock held by the Gonfiantini Family
    Trust of which Mr. Gonfiantini, Jr. is trustee, 77,263 shares of preferred
    stock held by Mr. Gonfiantini, Jr. individually, 25,000 shares held by Gonzo
    Properties of which Mr. Gonfiantini, Jr. is a partner and 37,500 shares
    which represents the Gonfiantini Family Trust's 25% interest, as a tenant in
    common, in 150,000 shares of preferred stock.

(4) Mailing address: 6160 Plumas Street, Reno, Nevada 89509

BENEFICIAL OWNERSHIP OF CAPITAL STOCK BY DIRECTORS AND MANAGEMENT

     The following tables sets forth certain information known to Specialty
Mortgage Trust with respect to beneficial ownership of Specialty Mortgage
Trust's capital stock as of November 30, 2000, by each director and by all
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the tables, the beneficial owners named have, to the knowledge of
Specialty Mortgage Trust, sole voting and investment power with respect to the
shares beneficially owned, subject to community property laws where applicable.

A. COMMON STOCK

<TABLE>
<CAPTION>
                                                              BENEFICIAL OWNERSHIP
                                                                OF COMMON STOCK
                                                              --------------------
                  NAME OF BENEFICIAL OWNER                     NUMBER     PERCENT
                  ------------------------                    --------    --------
<S>                                                           <C>         <C>
Nello Gonfiantini III(1)....................................  300,000      90.04%
Ernest Martinelli(2)........................................    5,000       1.50%
George E. Bull III(2).......................................    5,000       1.50%
Roger M. Peltyn(2)..........................................    5,000       1.50%
Stephen V. Novacek(2).......................................    5,000       1.50%
All Directors and Executive Officers as a Group (5
  persons)..................................................  320,000      96.04%
</TABLE>

                                       52
<PAGE>   56

-------------------------
(1) Founders shares.

(2) Consists of 5,000 shares issued upon the exercise of stock options, but does
    not include 5,000 shares issuable upon the exercise of granted but unvested
    stock options.

B. PREFERRED STOCK

<TABLE>
<CAPTION>
                                                              BENEFICIAL OWNERSHIP
                                                               OF PREFERRED STOCK
                                                              --------------------
                  NAME OF BENEFICIAL OWNER                     NUMBER     PERCENT
                  ------------------------                    --------    --------
<S>                                                           <C>         <C>
Nello Gonfiantini III(1)....................................  165,758       3.58%
Ernest Martinelli(2)........................................  150,000       3.24%
George E. Bull III(3).......................................   52,500       1.14%
Harvey C. Fennell(4)........................................   25,465          *
Roger M. Peltyn(5)..........................................   10,300          *
Stephen V. Novacek(6).......................................    4,341          *
All Directors and Executive Officers as a Group (6
  persons)..................................................  408,364       8.82%
</TABLE>

-------------------------
 *  Less than one percent.

(1) Consists of 103,258 shares of preferred stock held in the Nello Gonfiantini
    III 1981 Trust of which Nello Gonfiantini III is trustee, and 25,000 shares
    of preferred stock held by Gonzo Properties of which Nello Gonfiantini III
    is a partner, and 37,500 shares which represents the Nello Gonfiantini III
    1981 Trust's 25% interest, as a tenant in common, in 150,000 shares of
    preferred stock, but does not include 481,944 shares of preferred stock
    beneficially owned by persons related by blood or marriage to Nello
    Gonfiantini III with respect to which he has neither voting nor investment
    power.

(2) Consists of 110,000 shares of preferred stock held in the Ernest Martinelli
    Family Trust of which Mr. Martinelli is Trustee, and 40,000 shares of
    preferred stock held by The Martinelli Family Partnership of which Mr.
    Martinelli is general partner.

(3) Consists of 52,500 shares of preferred stock held in the Bull Trust of which
    Mr. Bull is trustee.

(4) Consists of 25,465 shares of preferred stock held by Dickson Realty Profit
    Sharing Plan of which Mr. Fennell is co-trustee.

(5) Consists of 10,300 shares of preferred stock held by the Peltyn Family Trust
    of which Mr. Peltyn is a trustee.

(6) Consists of 4,341 shares of preferred stock.

                                       53
<PAGE>   57

                            DESCRIPTION OF THE NOTES

GENERAL

     Specialty Mortgage Trust's Collateralized Investment Notes are issued under
an indenture dated as of January 1, 2001 between Specialty Mortgage Trust and
Bankers Trust Company of California, N.A., as trustee. We have filed a copy of
the indenture as an exhibit to the registration statement of which this
prospectus is a part. The following statements are brief summaries of material
provisions of the indenture. You should refer to the indenture for a complete
statement of those provisions. Copies of the indenture will also be available
for inspection during normal business hours at our principal executive offices
located at 6160 Plumas Street, Reno, Nevada 89509.

     We have the right to modify the indenture as described below. Additionally,
we reserve the right to terminate this offering, or modify the terms of the
offering or the securities offered in this prospectus, at any time, by an
appropriate amendment or supplement to this prospectus. No modification will
affect the rights of the holders of then outstanding securities.

     The Notes are limited to $50,000,000 aggregate principal amount at any time
outstanding and will be direct obligations of Specialty Mortgage Trust secured
by collateral pledged to the trustee from time to time, the "pledged assets". We
refer you to "Collateral" below for more detail. The Notes are issued on the
20th day of the month or the first business day thereafter. The Notes mature a
minimum of one month and a maximum of twelve months from the date of issuance,
the "stated maturity", and bear interest upon the unpaid principal amount
thereof from the date of issuance of the Notes, at the rate per annum fixed on
the date of issuance. From time to time, we will fix the interest rates payable
on newly issued and rollover Notes based on market conditions and our financial
requirements. Investors may select the term and corresponding interest rate
offered in a supplement to this prospectus. In no event will the interest rate
be less than the applicable federal rate that is periodically set by the IRS as
the minimum for short-term borrowings. Once determined, the rate of interest
payable on a Note will remain fixed until the Note matures. Interest is payable
to the persons in whose names the Notes are registered at the election of the
noteholder either (a) monthly in arrears on the 20th day of each month, each an
"interest payment date", or (b) compounding monthly, at stated maturity. Accrued
interest is to be computed on the basis of a 360-day year consisting of twelve
30-day months.

     The Notes are issued in minimum denominations of $25,000. The Notes will be
uncertificated and evidenced by a confirmation of book entry and a statement
issued by us to each holder. These confirmations and statements issued by us are
not negotiable instruments. Holders cannot transfer rights of ownership by mere
endorsement and delivery of a confirmation or statement. We maintain a register
to record the owner(s) of each outstanding Note and shall treat the person(s)
whose name(s) is (are) so recorded as the owner(s) of the Note for all purposes.
Holders may transfer ownership of a Note on our register only by written notice
to us signed by the owner(s), or the owner's authorized representative, on a
form to be supplied by us. Holders may not pledge, assign or hypothecate the
Notes as collateral for a loan or otherwise.

     Principal and interest on the securities offered in this prospectus will be
payable at our office, or at such other place as we may designate for that
purpose. However, we may make payments at our option by check mailed to the
person entitled to the payments at his or her address appearing in the register.

     We will send notice to investors whose Notes are coming due approximately
two weeks prior to the maturity date. We will automatically rollover a maturing
Note by issuing a new Note with a term equal to the maturing Note's original
term and at the current interest rate being offered by us on Notes of the same
term and duration as the maturing Note unless (a) we receive notice from the
Noteholder at least one business day before the maturity date of the Note to pay
the maturing Note in cash or (b) we gave the holder notice at least five
business days before the Note's maturity that the Note will be paid in cash. A
Noteholder whose Note is rolled-over will be paid the interest due at maturity
in cash; only the principal amount will be rolled-over.

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<PAGE>   58

     We will withhold 31% of any interest paid to any investor who has not
provided us with a fully executed Form W-9 or satisfactory equivalent or where
the Internal Revenue Service has notified us that back-up withholding is
otherwise required. Any tax or other amounts withheld from interest payments
pursuant to the requirements of a taxing authority will be considered as having
been paid by Specialty Mortgage Trust to the Noteholder.

     The Indenture limits the ratio of (a) the total indebtedness of Specialty
Mortgage Trust, both secured and unsecured, to (b) the total shareholders'
equity, to no more than 5:1. The Indenture also requires that at each payment
date the Company has and shall maintain sufficient cash and unused credit
facilities to pay all interest due and all Notes maturing on the subsequent
payment date. On each payment date we will deliver to the trustee a certificate
setting forth the calculations of our compliance with these covenants.

     We reserve the right to decline any investment in our sole discretion.

COLLATERAL

     The pledged assets securing the Notes will be held by the trustee and will
consist of some of our mortgage loans, short-term money market instruments
and/or cash.

     Mortgage Loans. Mortgage loans are evidenced by mortgage notes, each of
which is secured by a valid lien on real property located in Nevada or other
states including, but not limited to, property of which any portion thereof may
be characterized as commercial real estate, raw land or multi-family and
nonconforming single-family residential property. Each such lien is duly
recorded in the office of the proper recording officer of the county in which
the real property described in each such mortgage or deed of trust is located to
reflect of record that we are the mortgagee or the beneficiary of the deed of
trust, or the assignee of either thereof, and is insured by a lender's title
insurance policy of the kind described in the indenture. Participation interests
in eligible mortgage loans may also be included in the pledged assets and
references herein to mortgage loans shall include participation interests.

     Each mortgage loan included in the pledged assets shall bear a fixed or
variable rate of interest and shall, as of the date it is first pledged as
collateral under the indenture, among other things:

     - have an unpaid principal balance of not less than $25,000;

     - have had a loan to value ratio at the most recent appraisal date of not
       more than 85%; and

     - not be delinquent and have not been delinquent more than once during the
       preceding 12-month period.

     Each pledged mortgage loan or participated portion of a mortgage loan shall
be owned by Specialty Mortgage Company. We expect that substantially all of the
mortgage loans to be included in the pledged assets shall be serviced by the
manager.

     Each mortgage note pledged with the trustee is endorsed without recourse in
blank or to the trustee and is delivered to the trustee together with a copy of
the deed of trust and an original assignment thereof in recordable form and,
among other things, a copy of the ALTA lender's title insurance policy (or, if
not yet available, a preliminary title report for a period of 60 days) stating
that the mortgage constitutes a valid lien on the underlying real property. The
assignments of the mortgage loans will not be recorded prior to the occurrence
of an event of default. During the period prior to recordation of the
assignments, it might be possible for us to discharge mortgage notes or transfer
mortgage notes to bona fide purchasers for value without notice, notwithstanding
the trustee's lien. However, as a general matter we would not be able under the
terms of the indenture to deliver the original documents evidencing the mortgage
notes or mortgage loans, because such documents are to be retained in the
possession of the trustee. Generally, a subsequent transferee who failed to
obtain delivery of the original evidence of indebtedness would not, in the
absence of special facts, be able to defeat the trustee's interest in a mortgage
note so long as such evidence of indebtedness remains in the possession of the
trustee.

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<PAGE>   59

     The characteristics of the mortgage notes pledged to secure the Notes may
in some circumstances inhibit the liquidity and marketability of such
instruments. Such mortgage notes generally have greater principal balances on a
loan-by-loan basis, and generally present a higher degree of risk compared with
conforming single-family residential loans due, among other things, to the
susceptibility of the value of property securing the mortgage loan to changes in
the economic conditions that affect business profitability in general. Further,
commercial and multi-family residential properties may be subject to increased
risk from laws relating to environmental hazards or damages. For these reasons,
a review of the commercial or multi-family residential properties underlying the
mortgage notes and other relevant information may be required in connection with
any sale or liquidation of such properties which would delay any such sale or
liquidation; any such sale or liquidation carried out under a time frame which
does not permit such a review may result in reduced proceeds from such sale or
liquidation. We refer you to "-- Events of Default" in this prospectus for more
detail.

     Short-Term Money Market Instruments. "Short-term money market instruments"
consist of any of the following instruments, provided that, on the date when
such instruments are first pledged as collateral under the indenture, they have
remaining terms to maturity of 90 days or less and, provided further, that the
obligor of any of such instruments has short-term commercial paper or other
unsecured short-term rating in the highest rating category of a recognized
rating agency and a long-term debt obligation rating in one of the two highest
rating categories: (i) time deposits of, demand deposits in, certificates of
deposit of, bankers' acceptances issued by, or next-day federal funds sold by
any FDIC-insured depository institution; (ii) repurchase agreements with respect
to Government Securities or GNMA, FNMA or FHLMC Certificates entered into with a
depository institution (acting as principal); or (iii) commercial paper.

     Cash. "Cash" is coin or currency of the United States of America as at the
time shall be legal tender for payment of public and private debts.

CALCULATION OF THE VALUE OF THE COLLATERAL

     The Notes are collateralized by pledged assets consisting of (a) our
mortgage loans in an aggregate principal amount at least equal to one and
one-half (1 1/2) times the aggregate principal amount outstanding on the Notes,
(b) short-term money market instruments and cash at least equal to the aggregate
principal amount outstanding on the Notes or (c) a combination of the foregoing.
We are required under the terms of the indenture to calculate, on the 20th day
of each month (each a "valuation date"), the value of collateral then pledged to
secure the Notes. In that calculation, we determine a "basic maintenance amount"
which is an amount equal to the aggregate unpaid principal amount of the Notes
outstanding after giving effect to any Notes to be retired or issued on such
valuation date. We also determine the "discounted value" of the pledged assets
which must at least equal the basic maintenance amount.

     "Discounted value" as of any date means that amount determined with respect
to specific collateral included in the pledged assets in the manner set forth
below:

          (a) as to mortgage loans that meet the eligibility criteria the
     aggregate unpaid principal balance under the related mortgage note (as
     determined by Specialty Mortgage Trust) divided by one and one-half
     (1 1/2);

          (b) as to short-term money market instruments, the outstanding
     aggregate principal amount evidenced by each such instrument (as determined
     by Specialty Mortgage Trust by any reasonable method which Specialty
     Mortgage Trust believes reliable, which may include amounts based upon the
     most recent report related to each such instrument received by Specialty
     Mortgage Trust); and

          (c) as to cash, the face value thereof.

     The calculation of the discounted value of the pledged assets in the manner
described above is designed to ensure that at all times the pledged assets have
an aggregate market value in excess of the amount necessary to repay the
outstanding Notes. Continual reductions in the principal amounts of any category
of collateral may cause the aggregate discounted value of the pledged assets on
future valuation

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<PAGE>   60

dates to be a lower percentage of the then outstanding principal amount of the
Notes than the percentage as of preceding valuation dates.

     The indenture requires that we calculate on each valuation date the basic
maintenance amount and the discounted value of the pledged assets within the
last five business days and deliver to the trustee on such valuation date a
certificate setting forth such calculations. In the event that the discounted
value of the pledged assets as calculated by us is less than the basic
maintenance amount on any valuation date which any Notes are outstanding, we are
obligated not later than the month-end following such valuation date to (i)
deliver to the trustee additional eligible collateral and/or (ii) purchase
outstanding Notes, such that after taking such actions into account the
discounted value of the pledged assets is at least equal to the basic
maintenance amount as of such valuation date.

WITHDRAWALS AND SUBSTITUTIONS OF COLLATERAL

     We may, subject to specific requirements set forth more fully in the
indenture, at any time and from time to time, upon request to the trustee,
withdraw or substitute pledged assets; provided, that the aggregate discounted
value of eligible collateral, based upon the most recent valuation date,
remaining in the pledged assets following the proposed withdrawal or
substitution would at least equal the basic maintenance amount as of such
valuation date.

PAYMENTS ON PLEDGED ASSETS

     Unless an event of default has occurred and is continuing with respect to
the Notes, we shall be entitled to collect all payments, including, without
limitation, payments upon maturity, prepayments, distributions and payments as a
result of default, on or in respect of any mortgage notes securing the Notes,
and the trustee shall pay over to us any such payments which may be collected or
received by the trustee. Upon the occurrence of such an event of default and
while it shall be continuing, if we shall receive any payments, including,
without limitation, payments upon maturity, prepayments, distributions and
payments as a result of default, on or in respect of such mortgage notes, we
shall hold such payments in trust for the benefit of the trustee and the holders
of the Notes, shall segregate such payments from the other property of Specialty
Mortgage Trust, and shall promptly after receipt of such payments deliver them
in the form received to the trustee. The trustee shall thereafter release and
transfer to us, upon our request, any requested amount of such payments only so
long as (i) the aggregate discounted value of the pledged assets, after giving
effect to such release and transfer, would be at least equal to the basic
maintenance amount and (ii) no event of default shall be continuing.

PURCHASE AND RESALE OF NOTES

     We and our affiliates may at any time and from time to time purchase
outstanding Notes on the open market, if any, or by private sale. Notes held by
us or an affiliate shall not be deemed to be outstanding for purposes of
determining the basic maintenance amount, unless such Notes have been pledged to
a party other than us or any of our affiliates. The indenture provides that we
shall not, and we shall not permit any affiliate to, sell or pledge any Notes
acquired by us or any affiliate unless the discounted value of the pledged
assets would not be less than the basic maintenance amount after giving effect
to such sale or pledge. During the continuance of any event of default, we will
not and to the extent of our authority, will not permit any of our affiliates
to, sell or pledge any Notes owned by us or any affiliate without the prior
written consent of the trustee.

REDEMPTION

     The Notes are not subject to redemption at our option. Although holders
have no contractual right to redeem a Note before maturity, we, in our sole
discretion, may honor a written request for early termination by acquiring the
Note from the holder.

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<PAGE>   61

FINANCIAL REPORTS

     Our financial statements for each year during which any Notes are
outstanding, as certified by the our independent accountants, will disclose the
unpaid principal amount of the outstanding Notes and the unpaid principal amount
of the eligible collateral included in the pledged assets as of the last day of
our fiscal year. We will covenant in the Indenture to maintain our reporting
obligations under the Securities Exchange Act of 1934 for so long as any of the
Notes remain outstanding or could be issued under the Registration Statement.

EVENTS OF DEFAULT

     Any of the following will constitute an "event of default" with respect to
the Notes: (a) the failure to pay interest on any Note within five days after
such payment is due; (b) the failure to pay the principal of any Note at the
stated maturity thereof; (c) a default in our performance of the covenant in the
indenture to maintain an amount of pledged assets having an aggregate discounted
value at least equal to the basic maintenance amount; (d) the failure to deliver
a certificate calculating the basic maintenance amount and the discounted value
of the pledged assets within three business days of the date on which either is
required to be delivered pursuant to the indenture; (e) a material breach or
inaccuracy of any warranty or representation made by us in or under the
indenture as of the date of which such representation or warranty was made and
five business days after written notice thereof to us by the trustee or to us
and the trustee by the holders of at least two-thirds in aggregate principal
amount of the outstanding Notes and the circumstances or connection in respect
of which such representation or warranty was breached or inaccurate has not been
cured; (f) a default in our performance of a financial or any other covenant in
the indenture and the continuation of such default for 30 days after written
notice to us by the trustee or to us and the trustee by the holders of at least
two-thirds in aggregate principal amount of the outstanding Notes; and (g) an
occurrence of insolvency or similar event of Specialty Mortgage Trust.

     In case an event of default should occur and be continuing, the trustee or
the holders of at least two-thirds in aggregate principal amount of outstanding
Notes may or, in the case of an event of default of the type described in
clauses (a), (b), (c) or (d) or (g) of the preceding paragraph, the trustee
immediately after it has knowledge thereof shall, declare the principal and
accrued interest on the Notes to be immediately due and payable by providing
written notice to us. Such declaration and its consequences may be rescinded and
annulled by the holders of a majority of the in aggregate principal amount of
such outstanding Notes if amounts sufficient to cure any payment default and pay
all related expenses incurred by the Trustee and its agents have been deposited
with the Trustee and any nonpayment defaults have been cured. If any event of
default shall occur and not be cured or waived within thirty days thereafter,
the rate of interest borne by each outstanding Note shall be increased by 0.50%
per annum effective on the date of the event of default.

     If an event of default has occurred and is continuing, the trustee,
directly or through an agent, is permitted: (a) to sell the pledged assets; (b)
to institute litigation to enforce payment of the Notes, or to realize on the
pledged assets and otherwise to protect the interest of the noteholders; (c) to
notify third parties including mortgagors, servicing companies, trustees and
paying agents of the trustee's interest in the pledged assets and to require
that all payments made on such pledged assets be paid directly to it; and (d) to
otherwise exercise all rights and remedies of a secured party under the Uniform
Commercial Code as in effect in the State of Nevada.

     The trustee is also authorized to institute suits against us for the
collection of amounts due on the Notes, to collect the deficiency, if any, after
the sale of the pledged assets and to file proofs of claim in any bankruptcy,
insolvency or similar proceeding involving us. The trustee may also, upon
written request of the holders of a majority of the aggregate principal amount
of the Notes, be required to institute suits to take other appropriate action to
enforce payment of the Notes and to enforce any of the rights or powers of the
trustee or noteholders under the indenture, but shall have the right to decline
to follow any such request if the trustee determines in good faith that such
action would involve the trustee in personal liability or expenses or would not
be in the best interests of the noteholders.

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<PAGE>   62

     The power to effect any sale of any portion of the pledged assets shall not
be exhausted by any one or more sales as to any portion of the pledged assets
remaining unsold, but shall continue unimpaired until all of the pledged assets
shall have been sold or all amounts payable on the Notes shall have been paid,
whichever shall first occur. The trustee shall not in any sale sell all or any
portion of the pledged assets unless either (a) two-thirds of the noteholders
consent to the sale or (b) the proceeds of the sale would not be less than the
entire amount which would be distributable to the noteholders. In connection
with a sale of all or any portion of the pledged assets, any noteholder may bid
for and purchase the property offered for sale, and may, in paying the purchase
money therefor, deliver Notes to the trustee.

     There can be no assurance that the trustee will be able to dispose of the
pledged assets without a significant delay following an event of default or that
the proceeds obtained from the pledged assets will be sufficient to pay all
amounts owing to the noteholders.

     Subject to the provisions of the indenture relating to the duties of the
trustee, in the case an event of default shall occur and be continuing, the
trustee shall be under no obligation to exercise any of the rights or powers
under the indenture at the request or direction of any of the noteholders unless
such holders shall have offered to the trustee reasonable security or indemnity.
The trustee is not required to expend or risk its own funds or incur financial
liability if it has reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured.

     Subject to the provisions for indemnification of the trustee and other
limitations contained in the indenture, the holders of a majority in aggregate
principal amount of the outstanding Notes shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or exercising any trust or power conferred on the trustee with
respect to such Notes.

PRIORITY

     If, following an event of default, the proceeds of liquidation of the
pledged assets were insufficient to pay the entire remaining amount payable on
the Notes, the holders of such Notes would be general creditors of the Company
to the extent of the deficiency and, upon any liquidation of Specialty Mortgage
Trust, such holders would rank on parity with our general creditors.

MERGER

     The indenture provides that we shall not consolidate with or merge into any
other corporation or convey, or transfer its properties and assets substantially
as an entirety unless (i) the successor corporation is incorporated in the
United States and a supplemental indenture is signed by such successor
corporation by which it expressly assumes the obligations of the Company under
the Notes and the indenture; (ii) the successor corporation shall, by
supplemental indenture or agreement, confirm that the pledged assets shall
secure its obligations under the Notes and the indenture; (iii) immediately
after giving effect to such transaction, no event of default or event which with
notice or lapse of time or both would become an event of default has occurred
and is continuing and (iv) the Company shall have delivered to the trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, conveyance or transfer complies with the indenture and
that all conditions precedent therein provided for relating to such transaction
have been complied with.

THE TRUSTEE

     The indenture contains provisions limiting the liability of the trustee and
provides for the indemnification of the trustee by Specialty Mortgage Trust
under specific circumstances. The trustee may resign at any time by giving
written notice to us, such resignation to be effective upon the appointment of a
successor trustee. The trustee may be removed by the holders of a majority in
principal amount of outstanding Notes or by board resolution by us unless an
event of default has occurred and is continuing.

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<PAGE>   63

MODIFICATION

     A supplemental indenture may be entered into by Specialty Mortgage Trust
and the trustee without the consent of the holder of any Note, which modifies or
amends the indenture (including the terms and conditions of the Notes) for the
following purposes: (a) to evidence the succession of another corporation to
Specialty Mortgage Trust; (b) to add to the covenants of Specialty Mortgage
Trust for the benefit of the noteholders or to surrender any right or power
conferred upon Specialty Mortgage Trust under the indenture; (c) to convey,
transfer and assign to the trustee and to subject to the lien of the indenture
additional eligible collateral of Specialty Mortgage Trust and to correct or
amplify the description of any property at any time subject to the lien of the
indenture; (d) to cure any ambiguity in, to correct or supplement any provision
that may be defective or inconsistent with any other provision or to make any
other provisions with respect to matters or questions arising under the
indenture which are not inconsistent with the provisions of the indenture;
provided, that such action will not adversely affect the interests of the
noteholders; (e) to modify, eliminate or include provisions required or
permitted by the Trust Indenture Act of 1939, as amended, or other federal
statutes hereinafter enacted; and (f) to provide for the appointment of a
co-trustee.

     Additional modifications and amendments may be made to the indenture,
including the modification of the noteholders' rights thereunder, with the
consent of the holders of not less than a majority of the aggregate principal
amount of the Notes then outstanding. No such modification or amendment to the
indenture may, without the consent of the holder of each Note so affected,
change the stated maturity of the principal of or any installment of interest on
any such Note; reduce the principal of or interest on any such Note; change the
coin or currency in which any Note or the interest thereon is payable; impair
the right to institute suit for the enforcement of any payment on or after the
stated maturity or any redemption date with respect to any such Note; permit the
creation of any lien prior to or pari passu with the lien of the indenture with
respect to any such Note; permit the creation of any lien of the indenture with
respect to any of the pledged assets or terminate the lien of the indenture with
respect to any pledged assets (except in such cases as permitted by, and
pursuant to, the indenture); deprive the Notes of the security afforded by the
lien of the indenture; or reduce the percentage in principal amount of the
outstanding Notes the consent of whose holders is required for any supplemental
indenture, or the consent of whose Holders is required for any waiver of
compliance with specific provisions of the indenture or defaults thereunder and
their consequences provided for in the indenture. The indenture also permits the
holders of a majority of the aggregate principal amount of the then outstanding
Notes to waive specified past defaults and their consequences and to rescind in
some circumstances the declaration of the acceleration of the amounts due under
the Notes after an event of default has occurred.

LIST OF NOTEHOLDERS

     Three or more holders of the Notes who have held such Notes for a period of
at least six months may, by written request to the trustee, obtain access to the
list of all holders of the Notes, as specified in the request, maintained by the
trustee for the purpose of communicating with other noteholders with respect to
their rights under the indenture. The trustee may elect not to afford the
requesting noteholders access to the list of noteholders if it agrees to mail
the desired communication or proxy, on behalf of the requesting noteholders, to
all such noteholders.

ANNUAL COMPLIANCE STATEMENT

     Specialty Mortgage Trust will be required to file annually with the trustee
a written statement as to fulfillment of its obligations under the indenture.

TRUSTEE'S ANNUAL REPORT

     The trustee will be required to mail each year to all holders of Notes a
brief report relating to its eligibility and qualifications to continue as the
trustee under the indenture, any amounts owing by Specialty Mortgage to it in
the trustee's individual capacity, the property and funds physically held by the

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<PAGE>   64

trustee as such, any additional issue of Notes not previously reported, the
release or release and substitution of any property subject to the lien of the
indenture, and any action taken by it which materially affect the Notes or the
Collateral and which has not been previously reported.

TRUSTEE

     The Bankers Trust Company of California, N.A., a subsidiary of Deutsche
Bank, located in Santa Ana, California, will be the trustee for the Notes. The
trustee also serves as the trustee under another indenture for our Class A
Collateralized Mortgage Notes.

                        FEDERAL INCOME TAX CONSEQUENCES

     The following discussion summarizes the anticipated material federal income
tax consequences of your purchase, ownership and disposition of our Notes as an
initial purchaser. It has been reviewed by our tax counsel, GnazzoThill, A
Professional Corporation, and is based on their conclusions as to the likely
interpretation of applicable legal authorities to an investment in the Notes.
This discussion is based upon the Internal Revenue Code of 1986, as amended, and
related regulations, administrative rulings and court decisions in effect as of
the date of this prospectus, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the federal
income tax laws that may be relevant to all categories of investors and it
assumes that the Notes are being held by you as property held for investment
(i.e., as a capital asset). Moreover, it does not address state, local or
foreign tax concerns. Accordingly, you are urged to consult your own tax advisor
regarding your specific federal, state, local and foreign tax consequences to
you of investing in our Notes.

     Please be advised that we have not received any rulings, and will not seek
any rulings, from the Internal Revenue Service with respect to the federal
income tax consequences discussed below. Thus, there can be no complete
assurance that the Service will agree with our statements. You should also be
aware that under applicable Treasury regulations a provider of advice on
anticipated transactions is generally not considered an income tax return
preparer. Accordingly, in preparing your tax return you are advised to consult
with your own tax advisor regarding the specific consequences to you of your
purchase, ownership and disposition of our Notes, including any potential
changes in applicable tax laws.

TAX CLASSIFICATION OF THE NOTES

     Our tax counsel has advised us that, in their opinion, the Notes will be
classified as debt for federal income tax purposes, and not as an ownership
interest in the collateral securing the Notes or as equity in Specialty Mortgage
Trust. By your acceptance of a Note, and any person that is a beneficial owner
of any interest in a Note, by virtue of that person's acquisition of a
beneficial interest in a Note, you or any beneficial owner will agree with us to
treat the Notes as debt for all tax purposes.

     Our characterization of the Notes as debt is not binding on the Service and
the Service could assert that our Notes represent an ownership interest in the
equity of Specialty Mortgage Trust or an ownership interest in the mortgage
collateral. Successful treatment of our Notes as equity interests could
adversely affect our ability to maintain our REIT status and could result in
collateral tax consequences to our Note investors, including changes in the
characterization and timing of income received with respect to the Notes and an
adverse effect on our cash flow. The remainder of this discussion assumes that
our Notes are treated as debt for federal income tax purposes.

TAX CLASSIFICATION OF SPECIALTY MORTGAGE TRUST

     The Internal Revenue Code of 1986, as amended, provides special tax
treatment for organizations that qualify and elect to be taxed as REITs. We have
made an election to be taxed as a REIT under the Code commencing with our
taxable year ending December 31, 1998. Assuming we maintain our qualification,
we generally will be permitted to deduct our dividend distributions to
stockholders from our taxable income, thereby effectively eliminating the
"double taxation" that normally results when a corporation earns

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<PAGE>   65

income and distributes that income to its stockholders in the form of dividends.
In order to maintain our qualification as a REIT, however, we must satisfy
numerous tests with respect to the sources of our income, the nature and
diversification of our assets, the amount of our distributions to our
stockholders and the ownership of our stock. If we fail to meet those
requirements in a given year, and do not qualify for relief under the Code, we
will be subject to federal income tax as a regular, domestic corporation,
thereby losing the benefit of the dividends received deduction. As a result, we
would incur potentially substantial income tax liabilities that would reduce the
cashflow available to make payments on the Notes.

     Our tax counsel has advised us in connection with our election to be taxed
as a REIT. Based on existing law and certain representations made to our tax
counsel by us, including (without limitation) that: (i) this prospectus
accurately reflects the methods of operation of Specialty Mortgage Trust and
(ii) the fees payable to our manager, including any incentive or termination
fees, are reasonable compensation for our services, comparable to that paid to
others performing similar duties, and assuming that we continue to operate in
the manner described in this prospectus, in the opinion of our tax counsel,
commencing with our taxable year ending December 31, 1998, Specialty Mortgage
Trust has been organized in conformity with the requirements for qualification
as a REIT under the Code and our actual and proposed method of operation
described in this prospectus and as represented by us to our tax counsel should
enable us to continue to qualify as a REIT. However, whether we will in fact so
qualify will depend on actual operating results and compliance with the various
tests for qualification as a REIT relating to our income, assets, distributions,
ownership and certain administrative matters, the results of which may not be
reviewed by our tax counsel. Moreover, certain aspects of our method of
operations and structure for compensating our manager have not been considered
by the courts or the Internal Revenue Service. There can be no assurance that
the courts or the Internal Revenue Service will agree that Specialty Mortgage
Trust qualifies as a REIT. In addition, qualification as a REIT depends on
future transactions and events that cannot be known at this time. Accordingly,
our tax counsel is unable to opine whether Specialty Mortgage Trust will in fact
qualify as a REIT under the Code in all events.

TAX CLASSIFICATION OF THE COLLATERAL POOL

     The Code also contains special rules applicable to entities that issue debt
secured by real estate mortgages. These rules are known as the taxable mortgage
pool rules and, if applicable, can result in entity level federal income
taxation. An entity will be classified as a taxable mortgage pool if it does not
make an election to be classified as a real estate mortgage investment conduit,
called a "REMIC", and (i) substantially all of its assets consist of debt
obligations and more than 50% of such debt obligations are real estate mortgages
or interests therein, (ii) the entity issues debt obligations with two or more
maturities and (iii) payments on the debt obligations issued by it bear a
relationship to payments received on the debt obligations owned by it. In
certain situations, a pool of assets pledged to secure debt of an entity could
also be treated as separate taxable mortgage pool.

     It is possible that the pool of collateral pledged to secure the Notes
could be treated as a taxable mortgage pool. However, it is likely that any such
taxable mortgage pool would nonetheless qualify as a "qualified REIT subsidiary"
within the meaning of Section 856(i) of the Code and would therefore not be
subject to entity level federal income taxes. Thus, only Specialty Mortgage
Trust or its shareholders would be required to include in income any "excess
inclusion income" generated by the taxable mortgage pool. On the other hand, if
the pool of collateral securing the Notes was classified as a taxable mortgage
pool but did not satisfy or maintain status as a "qualified REIT subsidiary", it
would not be permitted to be included in the consolidated federal income tax
return of any other corporation and its net income would be subject to entity
level federal income taxes, thereby reducing cashflow available to pay the
Notes.

     Specialty Mortgage Trust does not intend to make an election to treat the
mortgage and other collateral securing the Notes as a REMIC. Our tax counsel has
advised us that the pool of mortgages and other collateral securing the Notes
will not be classified as a taxable mortgage pool.

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TAX CONSEQUENCES TO NOTEHOLDERS

     Status as Real Property Loans. Assuming the Notes are treated as debt
issued by us, for federal income tax purposes: (i) Notes held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v) and (ii) interests on the Notes held
by a real estate investment trust will not be treated as "interest on
obligations secured by mortgages on real property or on interest in real
property" within the meaning of Code Section 856(c)(4)(B) and the Notes will not
constitute "real estate assets" or "government securities" within the meaning of
Code Section 856(c)(5)(A).

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

     Sale of Notes. Generally, if you sell or otherwise dispose of your Note,
you will recognize gain or loss in an amount equal to the difference between the
amount you realize on the sale and your adjusted tax basis in your Note. Any
such gain or loss recognized will be capital gain or loss if your Note is held
as a "capital asset" (generally, property held for investment) with the meaning
of Code Section 1221, and will be short term capital gain or loss if your
investment has been held for not more than one year. However, certain types of
investors (such as banks, thrifts and other financial institutions), and certain
investors engaged in risk reduction strategies with respect to the Notes, may
not qualify to treat the Notes as capital assets, or the gain or loss therefrom
as capital gain or loss.

     In addition, someone that purchases a Note from you at a discount may
become subject to the market discount rules of sections 1276 - 1278 of the Code.
As a result, some or all of the principal paid or the gain recognized upon the
disposition of the Note by such holder could be taxed as ordinary interest
income.

     Foreign Investors. Assuming the Notes are respected as debt, interest paid
on the Notes to a holder that is a nonresident alien individual, foreign
corporation or other non-United States person, referred to as a "foreign
person", will be exempt from United States federal income and withholding taxes
under the "portfolio interest" provisions so long as (i) the interest is not
effectively connected with a trade or business of the recipient in the United
States, (ii) the foreign person is not (a) a direct or indirect ten percent or
greater shareholder of our company, (b) a controlled foreign corporation, as
that term is defined in the Code, related to our company, or (c) a bank
receiving interest on an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business. Interest paid to a
foreign person that is not engaged in a United States trade or business and that
does not qualify under the portfolio interest exemption will generally be
subject to a 30% United States withholding tax unless the foreign person
qualifies to claim a lower rate under an applicable United States income tax
treaty.

     In all events, a holder that is a foreign person must provide required
information certifications in order to claim any exemptions or reductions from
withholding tax. Foreign investors are urged to consult their tax advisors
concerning recently finalized regulations on withholding and related
certification requirements generally applicable to payments made after December
31, 2000.

     If a Note were recharacterized as ownership of an equity interest in
Specialty Mortgage Trust, or if exemptions from withholding tax are not
available, certain payments related to the Notes made to foreign persons would
become subject to withholding tax at the rate of 30% and, in the hands of a
corporate investor, could become subject to the branch profits tax. We are not
required to indemnify you, or gross-up payments on the Notes, for any
withholding taxes.

     Backup Withholding. Payments on the Notes, or proceeds from a disposition
of the Notes, may become subject to backup withholding of federal income tax if
you fail to furnish certain information, including your taxpayer identification
number, or otherwise fail to establish an exemption from backup withholding. If
required, backup withholding is currently made at a rate of 31%. Any amounts so
deducted and withheld would be allowed as a credit against the noteholder's
federal income tax. Furthermore,

                                       63
<PAGE>   67

certain penalties may be imposed by the Service on a noteholder that is required
to supply information but does not do so in the proper manner.

                       STATE AND LOCAL TAX CONSIDERATIONS

     In addition to the federal income tax consequences described above, you
should also consider the potential state and local income tax consequences of
any investment in the Notes. State and local income tax laws may differ
substantially from the corresponding federal tax laws, and the above discussion
does not purport to describe any state or local income tax consequences of
investing in the Notes. Accordingly, as a prospective noteholder, you should
consult your own tax advisers concerning state and local tax matters applicable
to your investment in the Notes.

                                ERISA INVESTORS

     A fiduciary of a pension, profit-sharing, stock bonus plan or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to the prohibited
transaction provisions of the Code or the fiduciary responsibility provisions of
the Employee Retirement Income Security Act of 1974, known as "ERISA" and,
collectively, a "plan", should consider:

          (a) whether the ownership of our Notes is in accordance with the
     documents and instruments governing the plan,

          (b) whether the ownership of our Notes is consistent with the
     fiduciary's responsibilities and satisfies the applicable requirements of
     ERISA, in particular, the diversification, prudence and liquidity
     requirements of section 404 of ERISA,

          (c) the prohibitions under ERISA 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, or permits, by
     action or inaction, the occurrence of, or fails to remedy, a known breach
     of duty by another fiduciary with respect to plan assets, and

          (d) the need to value the assets of the plan annually.

     You should understand the illiquid nature of your investment in our Notes
and that no secondary market will exist for them.

                              PLAN OF DISTRIBUTION

     We may sell securities offered in this prospectus (1) directly to
purchasers; (2) through agents; (3) through underwriters; (4) through dealers;
or (5) through a combination of any of these methods of sale.

     Except as otherwise indicated in the prospectus supplement, we will sell
these securities directly, without an underwriter or selling agent, and the
securities will be sold by employees of the manager who, under Rule 3a4-1(a) of
the Exchange Act, are deemed not to be brokers. In accordance with the
provisions of Rule 3a4-1(a), employees who sell securities will not be
compensated by commission, will not be associated with any broker or dealer and
will limit their activities so that, among other things, they do not engage in
oral solicitations of, and comply with specified limitations when responding to
inquiries from, potential purchasers.

     Unless otherwise stated in the prospectus supplement, no selling
commissions will be deducted from the proceeds received by us from the issuance
of the Notes. Other expenses of issuance and distribution payable by us are
estimated to be $251,000.

     We may distribute the securities offered in this prospectus in one or more
transactions: (1) at a fixed price or prices, which may be changed; (2) at
market prices prevailing at the time of sale; (3) at prices related to the
prevailing market prices; or (4) at negotiated prices.

                                       64
<PAGE>   68

     We may solicit directly, or agents designated by us from time to time may
solicit, offers to purchase securities offered in this prospectus. We will
disclose in the applicable prospectus supplement any agent, which may be deemed
to be an underwriter as that term is defined in the Securities Act, involved in
the offer or sale of securities offered in this prospectus and any commission
payable by us to that agent. Unless otherwise indicated in the prospectus
supplement, any agent will be acting on a reasonable efforts basis.

     If we use an underwriter or underwriters in the sale of the securities
offered in this prospectus, we will execute an underwriting agreement with the
underwriter(s) at the time of sale to it or them. We will disclose the name(s)
of the underwriter(s) and the terms of the transaction in the prospectus
supplement, which will be used by the underwriter(s) to make resales of the
securities in respect of which this prospectus and the prospectus supplement are
delivered to the public.

     If we use a dealer in the sale of securities offered in this prospectus, we
will sell those securities to the dealer, as principal. The dealer may then
resell the securities to the public at varying prices to be determined by the
dealer at the time of resale.

     The underwriters, dealers or agents used by us in any offering of
securities under this prospectus may be customers of, including borrowers from,
engage in transactions with, and perform services for, us or one or more of our
affiliates in the ordinary course of business.

     Underwriters, dealers, agents and other persons may be entitled, under
agreements that they may enter into with us, to indemnification against civil
liabilities, including liabilities under the Securities Act.

     If indicated in the applicable prospectus supplement, we will authorize
agents and underwriters to solicit offers by institutions to purchase securities
from us at the public offering price set forth in the prospectus supplement
pursuant to delayed delivery contracts providing for payment and delivery on the
date stated in the prospectus supplement. Each contract will be for an amount
not less than, and, unless we otherwise agree, the aggregate principal amount of
securities sold pursuant to contracts shall be not less nor more than, the
respective amounts stated in the prospectus supplement. Institutions with whom
contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but shall in all cases be
subject to our approval. Contracts will not be subject to any conditions except
that the purchase by an institution of the securities covered by its contract
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which that institution is subject. A
commission indicated in the prospectus supplement will be paid to the
underwriters and agents soliciting purchases of debt securities pursuant to
contracts accepted by us.

     Until the distribution of the securities is completed, rules of the SEC may
limit the ability of the underwriters and selling group members, if any, to bid
for and purchase the securities. As an exception to these rules, the
representatives of the underwriters, if any, are permitted to engage in
transactions that stabilize the price of the securities. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of securities.

     Neither we nor the underwriters, if any, make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the securities. In addition, neither we
nor the underwriters, if any, make any representation that the representatives
of the underwriters, if any, will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.

                                 LEGAL MATTERS

     Legal matters relating to the Notes being offered hereby will be passed
upon for the Company by Tobin & Tobin, a professional corporation, San
Francisco, California. Tax matters will be passed on by GnazzoThill, A
Professional Corporation, San Francisco, California.

                                       65
<PAGE>   69

                                    EXPERTS

     Our balance sheets as of December 31, 1999 and 1998 and our statement of
earnings, stockholders' equity and cash flows for the year ended December 31,
1999 and the eleven month period ended December 31, 1998, have been included
herein, in reliance on the report of Grant Thornton LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

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

     This prospectus is part of a registration statement on Form S-11 which we
have filed with the SEC (Registration No. 333-44860). You may request a free
copy of any of the above filings by writing or calling:

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

     You should rely only on the information provided in this prospectus. We
have not authorized anyone else to provide you with different information. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the cover page of this prospectus.

                                SALES LITERATURE

     In addition to this prospectus, a brochure has been prepared by us for use
in the solicitation of offers to purchase notes. When so utilized, such brochure
must be accompanied or preceded by this prospectus. Media advertisements may
also be used to solicit interest in the notes. The offering of the notes is made
only by means of this prospectus.

                                       66
<PAGE>   70

                                    GLOSSARY

     As used in this prospectus, the capitalized and other terms listed below
have the meanings indicated.

     "adjustable rate mortgage" means a mortgage loan, including any mortgage
loan underlying a mortgage security, that features adjustments of the underlying
interest rate at predetermined times based on an agreed margin to an established
index. An adjustable rate mortgage is usually subject to periodic interest rate
and/or payment caps and a lifetime interest rate cap.

     "basic maintenance amount" means the dollar amount equal to one hundred
percent of the aggregate principal amount of all outstanding Notes, determined
as of the valuation date.

     "capital stock" means the shares of capital stock issuable by Specialty
Mortgage Trust under its Charter, and includes common stock and preferred stock.

     the "Code" means the Internal Revenue Code of 1986, as amended.

     "company" means Specialty Mortgage Trust, Inc., a Maryland corporation.

     "conforming mortgage loans" means mortgage loans that either comply with
requirements for inclusion in credit support programs sponsored by FHLMC or FNMA
or are FHA or VA Loans, all of which are secured by first mortgages or deeds of
trust on single-family (one to four units) residences; "nonconforming mortgage
loans" vary in one or more respects from those requirements.

     "ERISA" means the Employee Retirement Income Security Act of 1974.

     "ERISA plan" or "plan" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "FHA" means the United States Federal Housing Administration.

     "FHLMC" or "Freddie Mac" means the Federal Home Loan Mortgage Corporation.

     "FNMA" or "Fannie Mae" means the Federal National Mortgage Association.

     "GAAP" means generally accepted accounting principles.

     "GNMA" or "Ginnie Mae" means the Government National Mortgage Association.

     "HUD" means the Department of Housing and Urban Development.

     "independent director" or "unaffiliated director" means a director of
Specialty Mortgage Trust who is not an officer or employee of Specialty Mortgage
Trust or any affiliate or subsidiary of Specialty Mortgage Trust.

     "interest payment date" means the date each month upon which accrued
interest on the Notes shall be paid, specifically the twentieth day of calendar
month after issuance of the Notes or, if such day is not a business day (i.e.,
Saturday, Sunday or a holiday observed by banking institutions in Nevada), then
the next succeeding business day.

     "LTV" or "loan-to-value ratio" means the percentage obtained by dividing
the principal amount of a loan by the lower of the sales price or appraised
value of the mortgaged property when the loan is originated.

     "manager" means Specialty Financial, formerly Gonzo Financial, a Nevada
corporation wholly owned by Nello Gonfiantini III.

     "pledged assets" means the assets used as collateral for the Notes,
consisting initially of various mortgage loans, but which may also include
short-term money market instruments and cash.

     "REIT" means a real estate investment trust as defined under Section 856 of
the Code.

                                       67
<PAGE>   71

     "REMIC" means a real estate mortgage investment conduit as defined under
the Code.

     "Securities Act" means the Securities Act of 1933, as amended.

     the "Service" means the Internal Revenue Service.

     "single family" means, with respect to mortgage loans, loans secured by
one- to four-unit residential property.

     "stated maturity" means the date upon which Notes will mature, ranging from
one to twelve months from the date of issuance (the applicable date will be
stated on the face of each Note).

     "tax-exempt entity" means a qualified pension, profit-sharing or other
employee retirement benefit plan, Keogh plans, bank commingled trust funds for
such plans, IRAs and any other entity intended to be exempt from Federal income
taxation.

     "taxable income" means for any year the taxable income of Specialty
Mortgage Trust 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 Section 857 of the Code.

     "VA" means the United States Department of Veterans Affairs.

     "valuation date" means the date the Notes are issued and the twentieth day
of each succeeding calendar month thereafter for so long as the Notes remain
outstanding.

                                       68
<PAGE>   72

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Specialty Mortgage Trust, Inc.

     We have audited the accompanying balance sheets of Specialty Mortgage
Trust, Inc. as of December 31, 1999 and 1998, and the related statements of
earnings, stockholders' equity, and cash flows for the year and the eleven
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Specialty Mortgage Trust,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the year and the eleven months then ended in conformity with
accounting principles generally accepted in the United States of America.

                                                /s/ GRANT THORNTON LLP

Reno, Nevada
January 21, 2000

                                       F-1
<PAGE>   73

                         SPECIALTY MORTGAGE TRUST, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      --------------------------    SEPTEMBER 30,
                                                         1998           1999            2000
                                                      -----------    -----------    -------------
                                                                                     (UNAUDITED)
<S>                                                   <C>            <C>            <C>
ASSETS
  Cash and cash equivalents.........................  $    17,317    $ 7,998,709     $    70,115
  Accrued interest receivable.......................      253,352        343,333         492,830
  Investments.......................................           --             --         228,833
  Mortgage loans held for investment, net of
     allowance for loan losses of $100,000,
     $350,000, $625,000 at December 31, 1998, 1999,
     and September 30, 2000, respectively...........   29,500,401     35,755,670      55,898,660
  Deferred charges..................................       64,236         30,338         121,250
  Prepaid expenses..................................           --          4,650           6,972
  Other assets......................................                                     150,000
                                                      -----------    -----------     -----------
     Total assets...................................  $29,835,306    $44,132,700     $56,968,660
                                                      ===========    ===========     ===========
LIABILITIES
  Dividends payable.................................  $        --    $ 1,079,875     $        --
  Accounts payable..................................       49,562         17,717          10,591
  Deposits..........................................           --        225,000              --
  Accrued interest payable..........................       31,996             --          23,077
  Lines of credit...................................    6,518,000             --       3,040,000
  Collateralized notes..............................    1,694,000      5,217,467       7,643,888
  Deferred revenue..................................        5,219         24,237          13,750
                                                      -----------    -----------     -----------
     Total liabilities..............................    8,298,777      6,564,296      10,731,306
                                                      -----------    -----------     -----------
STOCKHOLDERS' EQUITY
  Class A Convertible Preferred Stock; $0.01 par
     value; 5,000,000 shares authorized; 2,169,588,
     3,799,700 and 4,585,695 shares issued and
     outstanding as of December 31, 1998, December
     31, 1999 and September 30, 2000, respectively
     ($45,857,000 liquidation preference at
     September 30, 2000)............................       21,696         37,997          45,857
  Common stock, $0.01 par value; 45,000,000 shares
     authorized; 300,000, 320,200, and 333,200
     shares issued and outstanding as of December
     31, 1998, December 31, 1999 and September 30,
     2000, respectively.............................        3,000          3,202           3,332
  Additional paid-in capital........................   21,597,108     37,842,979      45,677,605
  Accumulated (deficit)/earnings....................      (85,275)      (315,774)        531,201
  Accumulated other comprehensive loss..............           --             --         (20,641)
                                                      -----------    -----------     -----------
     Total stockholders' equity.....................   21,536,529     37,568,404      46,237,354
                                                      -----------    -----------     -----------
     Total liabilities and stockholders' equity.....  $29,835,306    $44,132,700     $56,968,660
                                                      ===========    ===========     ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-2
<PAGE>   74

                         SPECIALTY MORTGAGE TRUST, INC.

                             STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                          ELEVEN MONTHS                          NINE MONTHS ENDED
                                              ENDED         YEAR ENDED     ------------------------------
                                          DECEMBER 31,     DECEMBER 31,    SEPTEMBER 30,    SEPTEMBER 30,
                                              1998             1999            1999             2000
                                          -------------    ------------    -------------    -------------
                                                                                    (UNAUDITED)
<S>                                       <C>              <C>             <C>              <C>
REVENUES
  Interest and dividend income
     Mortgage loans.....................   $2,068,265       $4,312,092      $3,175,738       $3,719,708
     Cash accounts......................      201,881          121,453          59,380          122,839
     Discount on loans..................        8,906           16,648          12,953           24,854
     Dividends..........................           --               --              --           21,291
                                           ----------       ----------      ----------       ----------
       Total interest and dividend
          income........................    2,279,052        4,450,193       3,248,071        3,888,692
                                           ----------       ----------      ----------       ----------
  Interest expense
     Lines of credit....................       61,308           54,528          53,490           49,721
     Collateralized notes...............       15,569          209,105         130,624          315,476
                                           ----------       ----------      ----------       ----------
       Total interest expense...........       76,877          263,633         184,114          365,197
                                           ----------       ----------      ----------       ----------
       Net interest and dividend
          income........................    2,202,175        4,186,560       3,063,957        3,523,495
  Provision for loan losses.............      100,000          250,000         175,000          275,000
                                           ----------       ----------      ----------       ----------
       Net revenues.....................    2,102,175        3,936,560       2,888,957        3,248,495
                                           ----------       ----------      ----------       ----------
EXPENSES
  General and administrative............       37,963           93,664          64,153           83,052
  Management and directors' fees........       38,342           30,480          30,372           10,500
                                           ----------       ----------      ----------       ----------
       Total expenses...................       76,305          124,144          94,525           93,552
                                           ----------       ----------      ----------       ----------
       Earnings before income taxes.....    2,025,870        3,812,416       2,794,432        3,154,943
  Income taxes..........................           --            2,992           3,000               --
                                           ----------       ----------      ----------       ----------
       NET EARNINGS.....................    2,025,870        3,809,424       2,791,432        3,154,943
  Preferred stock dividend..............    2,111,145        4,039,923       1,827,526        2,307,968
                                           ----------       ----------      ----------       ----------
       NET (LOSS) EARNINGS ATTRIBUTABLE
          TO COMMON STOCK...............   $  (85,275)      $ (230,499)     $  963,906       $  846,975
                                           ==========       ==========      ==========       ==========
Basic Earnings Per Share................         (.28)            (.73)           3.09             2.62
Diluted Earnings Per Share..............         (.28)            (.73)            .76              .71
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>   75

                         SPECIALTY MORTGAGE TRUST, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                   CLASS A
                                 CONVERTIBLE                                                       ACCUMULATED
                               PREFERRED STOCK       COMMON STOCK     ADDITIONAL    ACCUMULATED       OTHER
                             -------------------   ----------------     PAID-IN      (DEFICIT)    COMPREHENSIVE
                              SHARES     AMOUNT    SHARES    AMOUNT     CAPITAL      EARNINGS        INCOME          TOTAL
                             ---------   -------   -------   ------   -----------   -----------   -------------   -----------
<S>                          <C>         <C>       <C>       <C>      <C>           <C>           <C>             <C>
BALANCE, JANUARY 1, 1998...         --   $    --   300,000   $3,000   $        --   $       --      $     --      $     3,000
Preferred Stock issued (net
  of offering costs of
  $77,076).................  1,160,467    11,605        --      --     11,515,988           --            --       11,527,593
Mortgages received for
  Preferred Stock..........  1,009,121    10,091        --      --     10,081,120           --            --       10,091,211
Net earnings...............         --        --        --      --             --    2,025,870            --        2,025,870
Dividends declared.........         --        --        --      --             --   (2,111,145)           --       (2,111,145)
                             ---------   -------   -------   ------   -----------   -----------     --------      -----------
BALANCE, DECEMBER 31,
  1998.....................  2,169,588    21,696   300,000   3,000     21,597,108      (85,275)           --       21,536,529
Stock options exercised....         --        --    20,200     202            828           --            --            1,030
Preferred Stock issued (net
  of offering costs of
  $39,776).................  1,454,824    14,548        --      --     14,493,912           --            --       14,508,460
Mortgages and
  collateralized notes
  received for Preferred
  Stock....................    175,288     1,753        --      --      1,751,131           --            --        1,752,884
Net earnings...............         --        --        --      --             --    3,809,424            --        3,809,424
Dividends declared.........         --        --        --      --             --   (4,039,923)           --       (4,039,923)
                             ---------   -------   -------   ------   -----------   -----------     --------      -----------
BALANCE, DECEMBER 31,
  1999.....................  3,799,700    37,997   320,200   3,202     37,842,979     (315,774)           --       37,568,404
Comprehensive income
  (unaudited):
  Net earnings.............         --        --        --      --             --    3,154,943            --        3,154,943
  Net unrealized loss on
    investment
    available-for-sale.....         --        --        --      --             --           --       (20,641)         (20,641)
                             ---------   -------   -------   ------   -----------   -----------     --------      -----------
        Total comprehensive
          income...........         --        --        --      --             --    3,154,943       (20,641)       3,134,302
                             ---------   -------   -------   ------   -----------   -----------     --------      -----------
Stock options exercised....                         13,000     130            200           --            --              330
Preferred stock issued (net
  of offering costs of
  $13,389).................    569,890     5,699        --      --      5,679,812           --            --        5,685,511
Collateralized Notes
  received for Preferred
  Stock....................    119,430     1,194        --      --      1,193,106           --            --        1,194,300
Dividends reinvested for
  Preferred Stock (net of
  offering costs of $4,275)
  (unaudited)..............     96,675       967        --      --        961,508           --            --          962,475
Dividends declared
  (unaudited)..............         --        --        --      --             --   (2,307,968)           --       (2,307,968)
                             ---------   -------   -------   ------   -----------   -----------     --------      -----------
BALANCE, SEPTEMBER 30, 2000
  (UNAUDITED)..............  4,585,695   $45,857   333,200   $3,332   $45,677,605   $  531,201      $(20,641)     $46,237,354
                             =========   =======   =======   ======   ===========   ===========     ========      ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>   76

                         SPECIALTY MORTGAGE TRUST, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                            ELEVEN MONTHS                        NINE MONTHS ENDED
                                                                ENDED        YEAR ENDED    -----------------------------
                                                            DECEMBER 31,    DECEMBER 31,   SEPTEMBER 30,   SEPTEMBER 30,
                                                                1998            1999           1999            2000
                                                            -------------   ------------   -------------   -------------
                                                                                            (UNAUDITED)     (UNAUDITED)
<S>                                                         <C>             <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net earnings............................................  $  2,025,870    $ 3,809,424    $  2,791,432    $  3,154,943
                                                            ------------    ------------   ------------    ------------
  Adjustment to reconcile net earnings to net cash
    provided by operating activities:
    Amortization..........................................        10,189         56,398          47,278          35,755
    Provision for loan losses.............................       100,000        250,000         175,000         275,000
    Non-cash collateralized notes interest reinvested.....            --         38,467           4,052         225,415
    Changes in assets and liabilities:
      Accrued interest receivable.........................      (253,352)       (89,981)       (107,607)       (149,497)
      Prepaid expenses....................................            --         (4,650)         (2,250)         (2,322)
      Other assets........................................            --             --              --        (150,000)
      Accounts payable....................................        49,562        (31,845)        (32,342)         (7,126)
      Deposits............................................            --        225,000              --        (225,000)
      Accrued interest payable............................        31,996        (31,996)        (31,996)         23,077
      Deferred revenue....................................         5,219         19,018          20,015         (10,487)
                                                            ------------    ------------   ------------    ------------
        Total adjustments.................................       (56,386)       430,411          72,150          14,815
                                                            ------------    ------------   ------------    ------------
        Net cash provided by operating activities.........     1,969,484      4,239,835       2,863,582       3,169,758
                                                            ------------    ------------   ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of mortgage loans held for investment..........   (22,548,000)   (22,968,157)    (22,253,499)    (33,247,111)
  Principal repayments of mortgage loans held for
    investment............................................     3,038,810     17,961,772      13,691,232      12,829,121
  Purchase of investments.................................            --             --              --        (249,474)
                                                            ------------    ------------   ------------    ------------
        Net cash used in investing activities.............   (19,509,190)    (5,006,385)     (8,562,267)    (20,667,464)
                                                            ------------    ------------   ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from Preferred Stock offering, net.............    11,527,593     14,262,180      14,261,551       5,685,511
  Proceeds from Common Stock options exercised............            --          1,030           1,030             330
  Cash dividends paid.....................................    (2,111,145)    (2,713,768)     (1,827,526)     (2,425,368)
  Net (payments)/proceeds on line of credit...............     6,518,000     (6,518,000)     (6,518,000)      3,040,000
  Proceeds on collateralized notes........................     1,694,000      4,523,000       3,177,000       4,627,694
  Principal payments on collateralized notes..............            --       (784,100)       (606,000)     (1,232,388)
  Debt issue costs........................................       (74,425)       (22,500)        (17,500)       (126,667)
                                                            ------------    ------------   ------------    ------------
        Net cash provided by financing activities.........    17,554,023      8,747,942       8,470,555       9,569,112
                                                            ------------    ------------   ------------    ------------
        NET INCREASE (DECREASE) IN CASH AND CASH
          EQUIVALENTS.....................................        14,317      7,981,392       2,771,870      (7,928,594)
Cash and cash equivalents at beginning of year............         3,000         17,317          17,317       7,998,709
                                                            ------------    ------------   ------------    ------------
Cash and cash equivalents at end of year..................  $     17,317    $ 7,998,709    $  2,789,187    $     70,115
                                                            ============    ============   ============    ============
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest..................................  $     44,881    $   253,403    $    213,058    $    116,705
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
  FINANCING ACTIVITIES:
  Mortgage loans exchanged for the issuance of Preferred
    Stock.................................................  $ 10,091,211    $ 1,498,884    $  1,498,884    $         --
  Collateralized notes exchanged for the issuance of
    Preferred Stock.......................................  $         --    $   254,000    $    254,000       1,194,300
  Collateralized notes refinanced at maturity.............  $         --    $ 4,147,000    $  1,920,000    $  9,083,292
  Collateralized notes interest reinvested................  $         --    $    38,467    $      4,052    $    225,415
  Dividends declared but not paid.........................  $         --    $ 1,079,875    $         --    $         --
  Dividends reinvested for Preferred Stock................  $         --    $   246,280    $         --    $    962,475
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-5
<PAGE>   77

                         SPECIALTY MORTGAGE TRUST, INC.

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     1. NATURE OF BUSINESS

     Specialty Mortgage Trust, Inc. (the Company) is a Maryland corporation
which acquires and holds mortgage loans secured by property located in Nevada,
California, Arizona and Colorado. The Company's strategy is to focus on small
commercial mortgage loans (generally less than $5 million per loan), land loans,
and nonconforming single-family and small multi-family (generally less than 20
units) residential mortgage loans. The Company has elected to be a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended. The
mortgage loans are originated and serviced by Specialty Financial, formerly
Gonzo Financial (the Manager), a private mortgage finance business operating in
Nevada and wholly owned by the Company's President and Chairman of the Board of
Directors. The Company was incorporated on October 21, 1997 and began operations
on January 31, 1998 following the initial closing of the Company's private
placement.

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

     2. INTERIM FINANCIAL STATEMENTS

     The financial statements as of September 30 and for the nine months ended
September 30, 2000 and 1999 are unaudited; however, in the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the Company's financial position and
results of operations for such period have been included. The results for the
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.

     3. CASH EQUIVALENTS

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

     4. INVESTMENTS

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

     5. MORTGAGE LOANS

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

                                       F-6
<PAGE>   78
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

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

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

     The Company follows the Financial Accounting Standards Board's Statement
No. 114, Accounting by Creditors for Impairment of a Loan, and No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures. Under Statement No. 114, a loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
the contractual interest and principal payments of a loan according to the
contractual terms of the loan agreement. Statement No. 114 requires that
impaired loans be measured on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Statement No. 118 clarifies interest income
recognition and disclosures of Statement No. 114.

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

     6. REVENUE RECOGNITION

     Interest is recognized as revenue when earned according to the terms of the
loan. Points are deferred and amortized over the life of the loan.

     Mortgage loan origination fees or points, charged to a borrower for and
upon the origination extension or refinancing of a mortgage loan, in excess of
2.5% are paid to the Company effectively discounting the purchase price of the
loan and are amortized principally by the effective interest method over the
contractual life of the loan. Mortgage loan origination fees or points up to
2.5% are earned by the manager, prior to the purchase of the mortgage loans by
the Company.

     7. DEFERRED CHARGES

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

     8. INCOME TAXES

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

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

     9. ALLOWANCE FOR LOAN LOSSES

     The Company maintains an allowance for possible credit losses on mortgage
loans. Additions to the reserve are based on an assessment of certain factors
including, but not limited to, estimated future losses on the loans, and general
economic conditions. Additions to the reserve are provided through a charge to
earnings. Actual losses on loans are recorded as a charge-off or a reduction to
the loan loss reserve. Subsequent recoveries of amounts previously charged off
are added back to the reserve.
                                       F-7
<PAGE>   79
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

     10. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Financial Accounting Standards Board's Statement No. 107, disclosures
about fair value of financial instruments, requires the determination of fair
value of certain of the Company's assets. The following methods and assumptions
were used to estimate the fair value of financial statements included in the
following categories:

          (a) CASH AND CASH EQUIVALENTS. The carrying amount approximates fair
     value because of the relatively short maturity of these instruments.

          (b) INVESTMENTS. Carried at quoted market value.

          (c) MORTGAGE LOANS HELD FOR INVESTMENT. The carrying value of these
     instruments approximates the fair value. The fair value is estimated based
     upon projected cash flows discounted at the estimated current interest
     rates at which similar loans would be made. The allowance for loan losses
     should also be considered in evaluating the fair value of mortgage loans.

          (d) LINES OF CREDIT AND COLLATERALIZED NOTES. The fair value of the
     Company's lines of credit and collateralized notes are estimated based on
     the quoted market prices for the same or similar issues or on the current
     rates offered to the Company for debt of the same remaining maturities.

     11. RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The Company believes the adoption of SAB 101 will not have a
material impact on the Company's financial position and results of operation.

     In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB 25. This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the next fiscal year
beginning after June 15, 2000. We will adopt SFAS 133 in our quarter ending
March 31, 2001 and do not expect such adoption to have a material effect on our
financial statements.

                                       F-8
<PAGE>   80
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

     12. EARNINGS PER SHARE

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

NOTE B -- FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

     Financial instruments with concentration of credit and market risk include
cash and mortgage notes.

     The Company maintains cash deposit accounts which, at times, may exceed
federally insured limits.

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

     Concentration of mortgage loans exist in northern Nevada and southern
Nevada with approximately 49% and 33% for 1999, and 84% and 10% for 1998. At
September 30, 2000, 71% of the Company's $56.5 million mortgage loan portfolio
was invested in loans secured by Nevada property, approximately 33% in the Reno
area and 37% in the Las Vegas area. As such, the Company has a significant
geographic concentration of credit risk that may be adversely affected by
periods of economic decline.

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

<TABLE>
<CAPTION>
                                               DECEMBER 31,    DECEMBER 31,    SEPTEMBER 30,
                                                   1998            1999            2000
                                               ------------    ------------    -------------
<S>                                            <C>             <C>             <C>
Land.........................................       57%             84%              77%
Construction.................................       24%              4%               9%
Commercial Building..........................        7%              2%               8%
Other........................................       12%             10%               6%
                                                   ---             ---              ---
  Total......................................      100%            100%             100%
                                                   ===             ===              ===
</TABLE>

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

     Group concentration of credit risk exists in borrowers of mortgage loans.
At December 31, 1998, December 31, 1999, and September 30, 2000, 42%, 45%, and
46% of mortgage loans were concentrated in multiple loans to three, five and six
borrowers, respectively. The amount of loss is limited to the recorded amounts
of the loans of $12,341,329, $16,367,548 and $25,760,478 at December 31, 1998,
December 31, 1999 and September 30, 2000, respectively. Multiple loans to one
borrower or to related entities generally contain cross default provisions. At
December 31, 1999, there were three instances where loans with cross default
provisions exceeded 10% of the portfolio in the aggregate amounts of $4,906,114,
$5,000,000 and $5,356,000, respectively. At September 30, 2000, there were no
instances of loans with cross default provisions

                                       F-9
<PAGE>   81
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

in excess of 10% of the portfolio. No other security other than the collateral
property supports these financial instruments. As such the company has a
significant borrower concentration of credit risk that may be adversely affected
by periods of economic decline.

NOTE C -- INVESTMENTS

     Available-for-sale investments at September 30, 2000 consist of:

<TABLE>
<CAPTION>
                                                           GROSS
                                                         UNRELATED      FAIR
                                                          LOSSES       VALUE
                                                         ---------    --------
<S>                                                      <C>          <C>
Preferred stock........................................   $20,641     $228,833
                                                          =======     ========
</TABLE>

NOTE D -- BANK LINE OF CREDIT

     At December 31, 1999, the Company maintained a revolving line of credit
that bore interest at prime (8.5% at December 31, 1999) and expired June 15,
2000. The terms of the credit agreement allowed the Company to borrow up to
$5,000,000 to provide funding for new loans originated by the Company. No
balance was outstanding on this line as of December 31, 1999. Under the terms of
this agreement, the Company was required to maintain certain financial covenants
including maintaining a debt to equity ratio no greater than .5:1. At December
31, 1999, the Company was in compliance with the covenants. The credit facility
was collateralized by a pledge of promissory notes evidencing indebtedness of
mortgages held by the Company.

     At December 31, 1998, the Company maintained two revolving lines of credit
that both expired in 1999. Both lines bore interest at the prime rate (7.75% at
December 31, 1998), with a maximum borrowing base of $8,000,000. $6,518,000 was
outstanding on these lines at December 31, 1998.

     At September 30, 2000, the Company maintained three revolving lines of
credit. One line of credit allows the Company to borrow up to $2,500,000 to
provide funding for new loans. This line bears interest indexed on the bank's
base rate (9.5% at September 30, 2000) and matures July 1, 2001. The other two
lines of credit allow the Company to borrow up to $5,000,000 each. These lines
bear interest at the bank's prime rate (9.5% at September 30, 2000) and mature
July 1, 2001 and October 1, 2001. On September 30, 2000, $3,040,000 was
outstanding on these lines of credit. All lines of credit are collateralized by
secured interest in mortgage loans and require the Company to maintain certain
financial covenants including maintaining a debt to equity ratio of 1:1. The
Company was in compliance with these covenants as of September 30, 2000.

NOTE E -- COLLATERALIZED NOTES

     The Company has issued Class A collateralized notes (the notes) due in two
to six months from the date of issue. These notes bear a fixed rate of interest
(6% to 8.75% for periods ending December 31, 1999, December 31, 1998, and
September 30, 2000) and are payable on the 20th of each month. The notes are
collateralized by the Company's mortgage loans in an aggregate principal amount
at least equal to two times the aggregate principal amount outstanding on the
notes. A UCC financing statement is held by a trustee for the collateral of the
notes receivable. At December 31, 1999, December 31, 1998 and September 30,
2000, $12,797,393, $5,166,294, and $9,706,336 of mortgage notes were used as
collateral, respectively.

                                      F-10
<PAGE>   82
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

NOTE F -- STOCKHOLDERS' EQUITY

     The Preferred Stock will convert to the Company's Common Stock, par value
$.01 per share ("Common Stock") on a 1 to 1 basis: (1) upon the closing of a
firm commitment underwritten initial public offering of the Common Stock
resulting in aggregate gross proceeds to the Company of at least $20 million and
at a price per share of at least $10 or such lesser amount of proceeds and/or
lower price per share as may be approved by holders of two-thirds of the
Preferred Stock (a "Qualified IPO"); (2) after March 31, 2000 when and if the
return on equity for the previous four quarters exceeds 13%; or (3) after March
31, 2001 when and if the return on equity for the previous four quarters exceeds
12%.

     The Preferred Stock has a liquidation preference over Common Stock at an
amount equal to the original purchase price of $10 per share, plus any declared
but unpaid dividends. Therefore, to the extent any assets remain in the Company,
such assets shall be distributed in equal amounts per share to holders of common
stock and Preferred Stock on an "as converted" basis, that is, as if the
Preferred Stock had converted into shares of Common Stock.

     As long as Preferred Stock remains outstanding, the holders of Common Stock
are not entitled to dividends or distributions. The Preferred stockholders and
Common stockholders vote together as a class.

NOTE G -- STOCK OPTIONS

     In October 1997, the Company adopted the 1997 Executive and Non-Employee
Director Stock Option Plan (the Plan) pursuant to which 300,000 shares of the
Common Stock have been reserved for issuance upon the exercise of options
granted. Options granted may be designated as either (a) incentive stock options
(ISO's) under the Internal Revenue Code of 1986, as amended, at 100% fair market
value, or (b) nonqualified options at a Board of Director determined option
price. ISO's and nonqualified options may be granted by the Board of Directors
to participating directors, officers, other key employees of the Company or its
manager, agents and consultants that are linked directly to increases in
stockholder value. Fair market value is determined periodically by the Board of
Directors.

     25% of the shares subject to such stock options shall become exercisable on
the first anniversary of the date of grant of the stock option, and an
additional 25% shall become exercisable on each of the next three anniversaries
of the date of grant. In general, vested options must be exercised within three
months after an employee leaves the Company. There are no employees benefiting
under this plan.

     The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which calls for companies to measure non-employee stock
compensation expense based upon the fair value method of accounting. The Company
also adopted SFAS 123 for directors.

                                      F-11
<PAGE>   83
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

     Presented below is a summary of the Company's stock options and the related
transactions for the year ended December 31, 1999 and for the eleven months
ended December 31, 1998.

<TABLE>
<CAPTION>
                                                                         WEIGHTED
                                                                         AVERAGE
                                                                         EXERCISE
                                                              SHARES      PRICE
                                                              -------    --------
<S>                                                           <C>        <C>
BALANCE AT JANUARY 1, 1998..................................   75,000     $ .01
Granted.....................................................   30,000      1.08
Exercised...................................................       --        --
Forfeited/expired...........................................       --        --
                                                              -------     -----
BALANCE AT DECEMBER 31, 1998................................  105,000       .32
Granted.....................................................   20,000      5.00
Exercised...................................................  (20,200)      .05
Forfeited/expired...........................................       --        --
                                                              -------     -----
BALANCE AT DECEMBER 31, 1999................................  104,800     $1.26
                                                              =======     =====
</TABLE>

<TABLE>
<CAPTION>
                                                   STOCK OPTIONS           STOCK OPTIONS
                                                    OUTSTANDING             EXERCISABLE
                                              -----------------------    ------------------
                                               WEIGHTED      WEIGHTED              WEIGHTED
                                                AVERAGE      AVERAGE               AVERAGE
                                              CONTRACTUAL    EXERCISE              EXERCISE
    RANGE OF EXERCISE PRICES       SHARES        LIFE         PRICE      SHARES     PRICE
    ------------------------       -------    -----------    --------    ------    --------
<S>                                <C>        <C>            <C>         <C>       <C>
DECEMBER 31, 1998:
  $ .01..........................   75,000       8.82          $.01      18,750      $.01
    .05..........................   20,000       9.09           .05          --        --
   3.15..........................   10,000       9.58          3.15          --        --
                                   -------                               ------
     Totals......................  105,000                               18,750
                                   =======                               ======
DECEMBER 31, 1999:
  $ .01..........................   60,000       7.82          $.01      22,500      $.01
    .05..........................   15,000       8.09           .05          --        --
   3.15..........................    9,800       8.58          3.15       2,300      3.15
   5.00..........................   20,000       9.81          5.00          --        --
                                   -------                               ------
     Totals......................  104,800                               24,800
                                   =======                               ======
</TABLE>

     The fair value of the Company's stock options was estimated as of the grant
date using the Black-Scholes Option Pricing Model with the following weighted
average assumptions for the eleven months ended December 31, 1998 and the year
ended December 31, 1999: Dividend yield of 0.0%, expected volatility of 0.0%,
weighted average risk free interest rate of 5.98% and 5.4%, respectively, and an
expected holding period of four years. Based on these assumptions, compensation
expense was immaterial for the year ended December 31, 1999 and for the eleven
months ended December 31, 1998.

NOTE H -- CAPITAL TRANSACTIONS

     The Company was incorporated in the State of Maryland in October 1997 and
was capitalized by its founder purchasing 300,000 shares of Common Stock at $.01
per share. The Company began operations in

                                      F-12
<PAGE>   84
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

January 1998. The Common Stock of the Company is not entitled to any dividends
as long as Preferred Stock is outstanding.

     In March 1998, the Company completed its initial private placement of
2,169,588 shares of Class A Convertible Preferred Stock, $.01 par value, for
cash of $11,604,669 and mortgage loans of $10,091,211. The mortgage loans were
originated by the Manager prior to 1998. Mortgage loans of $1,186,367 at
adjusted cost basis were contributed by the Manager or officers of the Company.

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

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

     In October 1999 the Company issued 24,628 shares of Preferred Stock under a
dividend reinvestment plan at $10 per share for cash of $246,280.

     On July 1, 2000 the Company issued 689,320 additional shares of Preferred
Stock at $10 per share for total cash proceeds of $5,685,511 and collateralized
notes of $1,194,300.

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

                                      F-13
<PAGE>   85
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

NOTE I -- EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                                 NINE MONTHS ENDED
                                   ELEVEN MONTHS                           ------------------------------
                                       ENDED             YEAR ENDED        SEPTEMBER 30,    SEPTEMBER 30,
                                 DECEMBER 31, 1998    DECEMBER 31, 1999        1999             2000
                                 -----------------    -----------------    -------------    -------------
<S>                              <C>                  <C>                  <C>              <C>
Net Earnings...................     $ 2,025,870          $ 3,809,424        $ 2,791,432      $ 3,154,943
Less: Preferred Dividends......      (2,111,145)          (4,039,923)        (1,827,526)      (2,307,968)
                                    -----------          -----------        -----------      -----------
Income available to common
  stockholders used in basic
  EPS..........................         (85,275)            (230,499)           963,906          846,975
                                    -----------          -----------        -----------      -----------
Preferred Dividends............       2,111,145            4,039,923          1,827,526        2,307,968
Income available to common
  stockholders after assumed
  conversions of dilutive
  securities...................       2,025,870            3,809,424          2,791,432        3,154,943
                                    -----------          -----------        -----------      -----------
Weighted average number of
  common shares used in basic
  EPS..........................         300,000              314,244            312,207          323,429
Effect of dilutive securities:
  Stock Options................                                                  74,571           65,422
  Convertible Preferred
     Stock.....................                                               3,265,165        4,082,081
                                    -----------          -----------        -----------      -----------
Weighted average number of
  common shares and dilutive
  potential common shares used
  in diluted EPS...............         300,000              314,244          3,651,944        4,470,933
                                    ===========          ===========        ===========      ===========
Antidilutive Securities:
  Stock Options................          80,187               67,174                 --               --
  Convertible Preferred
     Stock.....................       2,169,588            3,402,081                 --               --
</TABLE>

NOTE J -- RELATED PARTY

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

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

                                      F-14
<PAGE>   86
                         SPECIALTY MORTGAGE TRUST, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1999 AND 1998
           (DATA RELATED TO SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

the eleven months ended December 31, 1998, the year ended December 31, 1999, and
the nine months ended September 30, 2000, the Manager earned the following:

<TABLE>
<CAPTION>
                                       DECEMBER 31,    DECEMBER 31,    SEPTEMBER 30,
                                           1998            1999            2000
                                       ------------    ------------    -------------
<S>                                    <C>             <C>             <C>
Loan Origination Fees................    $375,943        $662,651        $669,808
Loan Servicing Fees..................      73,251         148,252         146,020
Late Payment Charges.................         660          12,539          40,451
Incentive Compensation Bonus.........      22,468          18,480              --
</TABLE>

NOTE K -- MORTGAGE LOAN PRODUCTS

     The Company has four mortgage loan products consisting of land,
construction, commercial building and other. Substantially all mortgage loans
have similar effective interest rates ranging from 12% to 13%. Revenue by
product will fluctuate based upon relative balances during the period. Due to
the similar nature of the effective interest rates the Company does not compile
and report revenues by product type. The following table sets forth balances of
mortgage loans by product type:

<TABLE>
<CAPTION>
                                     DECEMBER 31,    DECEMBER 31,    SEPTEMBER 30,
                                         1998            1999            2000
                                     ------------    ------------    -------------
<S>                                  <C>             <C>             <C>
Land...............................  $16,784,829     $30,238,839      $43,723,912
Construction.......................    7,175,000       1,339,170        4,969,037
Commercial Building................    1,930,000         653,688        4,390,929
Other..............................    3,710,572       3,873,993        3,439,782
                                     -----------     -----------      -----------
  Totals...........................  $29,600,401     $36,105,690      $56,523,660
                                     ===========     ===========      ===========
</TABLE>

                                      F-15
<PAGE>   87

        REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES

Board of Directors
Specialty Mortgage Trust, Inc.

     In connection with our audit of the financial statements of Specialty
Mortgage Trust, Inc. referred to in our report dated January 21, 2000, which is
included in the S-11 filing, we have also audited Schedule II and Schedule IV
for the year ended December 31, 1999 and for the eleven months ended December
31, 1998. In our opinion, these schedules present fairly, in all material
respects, the information required to be set forth herein.

                                                /s/ GRANT THORNTON LLP

Reno, Nevada
January 21, 2000

                                      F-16
<PAGE>   88

                                                                     SCHEDULE II

                         SPECIALTY MORTGAGE TRUST, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                     PROVISION FOR LOAN LOSSES ROLLFORWARD

<TABLE>
<S>                                                           <C>
BALANCE JANUARY 1, 1998.....................................  $     --
  Charges to costs and expenses.............................   100,000
  Deductions................................................        --
                                                              --------
BALANCE AT DECEMBER 31, 1998................................   100,000
  Charges to costs and expenses.............................   175,000
  Deductions................................................        --
                                                              --------
BALANCE AT SEPTEMBER 30, 1999...............................   275,000
  Charges to costs and expenses.............................    75,000
  Deductions................................................        --
                                                              --------
BALANCE AT DECEMBER 31, 1999................................   350,000
  Charges to costs and expenses (unaudited).................   275,000
  Deductions (unaudited)....................................        --
                                                              --------
BALANCE AT SEPTEMBER 30, 2000 (UNAUDITED)...................  $625,000
                                                              ========
</TABLE>

                                      F-17
<PAGE>   89

                                                                     SCHEDULE IV

                         SPECIALTY MORTGAGE TRUST, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                           MORTGAGE LOAN ROLLFORWARD

<TABLE>
<S>                                                           <C>
BALANCE JANUARY 1, 1998.....................................  $        --
                                                              -----------
  Additions during the period
     New mortgage loans.....................................   22,548,000
     Mortgage loans exchanged for issuance of preferred
      stock.................................................   10,091,211
                                                              -----------
                                                               32,639,211
                                                              -----------
  Deductions during the period
     Collections of principal...............................    3,038,810
                                                              -----------
BALANCE AT DECEMBER 31, 1998................................   29,600,401
                                                              -----------
  Additions during the period
     New mortgage loans.....................................   22,253,499
     Mortgage loans exchanged for issuance of preferred
      stock.................................................    1,498,884
                                                              -----------
                                                               23,752,383
                                                              -----------
  Deductions during the period
     Collections of principal...............................   13,691,232
                                                              -----------
BALANCE AT SEPTEMBER 30, 1999...............................   39,661,552
                                                              -----------
  Additions during the period New mortgage loans............      714,658
                                                              -----------
  Deductions during the period
     Collections of principal...............................    4,270,540
                                                              -----------
BALANCE AT DECEMBER 31, 1999................................   36,105,670
  Additions during the period
     New mortgage loans (unaudited).........................   33,397,111
  Deductions during the period
     Collections of principal (unaudited)...................   12,829,121
                                                              -----------
BALANCE AT SEPTEMBER 30, 2000 (UNAUDITED)...................  $56,673,660
                                                              ===========
</TABLE>

                                      F-18
<PAGE>   90

                                                                     SCHEDULE IV

                         SPECIALTY MORTGAGE TRUST, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                       MORTGAGE LOANS BY TYPE OF PROPERTY
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                         CARRYING                         AMOUNT
                          INTEREST       FACE AMOUNT      AMOUNT         MATURITY       SUBJECT TO
  TYPE OF PROPERTY          RATE         OF MORTGAGE    OF MORTGAGE        DATE         DELINQUENCY
  ----------------     --------------    -----------    -----------    -------------    -----------
<S>                    <C>               <C>            <C>            <C>              <C>
Commercial...........  8.75% - 12.00%    $ 2,240,000    $ 2,223,688    02/00 - 04/03    $       --
Construction.........    12% - 12.25%      1,610,000        569,170    11/00 - 04/00            --
Land.................    12% - 19.00%     65,389,771     31,008,839    09/99 - 05/03     5,756,000
Other................    12% - 13.50%      3,407,500      2,303,993     4/00 - 12/06       706,000
                       --------------    -----------    -----------
          Total......                    $72,647,271    $36,105,690
                                         ===========    ===========
</TABLE>

                                      F-19
<PAGE>   91

                                                                     SCHEDULE IV

                         SPECIALTY MORTGAGE TRUST, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                        MORTGAGE LOANS BY LIEN POSITION
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                       FACE AMOUNT     INTEREST     CARRYING AMOUNT      MATURITY       AMOUNT SUBJECT
    LIEN POSITION      OF MORTGAGE       RATE         OF MORTGAGE          DATE         TO DELINQUENCY
    -------------      -----------    ----------    ---------------    -------------    --------------
<S>                    <C>            <C>           <C>                <C>              <C>
1st..................  $68,830,000     8.5% - 13%     $30,618,677      08/99 - 04/03      $2,806,000
1st and 3rd..........      365,000         12.50%         365,000              11/99              --
2nd..................    2,479,000    12% - 13.5%       2,335,993      04/00 - 12/06         870,000
3rd..................    3,400,000            12%       2,786,000              12/99       2,786,000
</TABLE>

                                      F-20
<PAGE>   92

                                                                     SCHEDULE IV

                         SPECIALTY MORTGAGE TRUST, INC.

                         MORTGAGE LOANS ON REAL ESTATE
                    MORTGAGE LOANS THAT EXCEED THREE PERCENT
                                OF THE PORTFOLIO
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                   FACE       CARRYING       AMOUNT
                            INTEREST    MATURITY      LIEN      AMOUNT OF     AMOUNT OF    SUBJECT TO
   DESCRIPTION OF LOAN        RATE        DATE      POSITION     MORTGAGE     MORTGAGE     DELINQUENCY
   -------------------      --------    --------    --------    ----------    ---------    -----------
<S>                         <C>         <C>         <C>         <C>           <C>          <C>
Residential land dev./
  infrastructure..........   12.00%      4/1/03       1st       $1,100,000    1,100,000    $       --
Residential
  subdivision/land only...   12.25%      8/1/01       1st        2,000,000    1,200,000            --
Residential land
  dev./infrastructure.....   12.00%      7/1/00       1st        2,540,000    1,286,689            --
Commercial land...........   12.25%      4/1/00       1st        6,000,000    1,377,791            --
Commercial land...........   12.00%     11/1/00       1st        1,500,000    1,500,000            --
Motels/weekly rentals.....   12.00%      4/1/03       1st        1,570,000    1,570,000            --
Residential land
  dev./infrastructure.....   12.00%      6/1/02       1st        6,500,000    1,625,704            --
Commercial/residential
  land....................   12.25%      4/1/01       1st        4,400,000    1,694,934            --
Residential land dev./
  infrastructure..........   12.00%      6/1/00       1st        2,260,200    1,700,000     1,700,000
Residential land dev./
  infrastructure..........   12.00%     12/1/99       3rd        3,400,000    2,786,000     2,786,000
Commercial land...........   12.50%      6/1/01       1st        3,500,000      300,000            --
Commercial land...........   13.00%      7/1/00       1st        5,625,000    3,125,000            --
Residential land dev./
  infrastructure..........   12.50%      8/1/01       1st        7,000,000    4,485,000            --
</TABLE>

                                      F-21
<PAGE>   93

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

     YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT
INFORMATION.

     WE ARE NOT OFFERING THE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.

     WE DO NOT CLAIM THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE STATED ON THE COVER.

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

                               Up to $250,000,000

                               SPECIALTY MORTGAGE
                                  TRUST, INC.

                        Collateralized Investment Notes

                                [SPECIALTY LOGO]

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

                                   PROSPECTUS
                                JANUARY 19, 2001
                           -------------------------

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