UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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


For the quarterly period ended: June 30, 2004


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

For the transition period from to
Commission file number: 333-86972

SPECIALTY TRUST, INC.

(Formerly Specialty Mortgage Trust, Inc.)

(Exact name of Registrant as specified in its Charter)


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


6160 Plumas St. Reno, Nevada (Address of principal executive offices)		89509 (Zip Code)

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

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


Yes [X]		No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)


Yes [ ]		No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Common Stock ($.01 par value)		8,111,032 as of August 4, 2004

INDEX


		Page
	PART I. FINANCIAL INFORMATION
Item 1	Financial Statements – Specialty Trust, Inc. (Unaudited)		3
	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		3
	Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 2004 and 2003		4
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Six Months Ended June 30, 2004 and the Year Ended December 31, 2003		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003		6
	Notes to Consolidated Financial Statements		7
Item 2	Management’s Discussion and Analysis of Financial Condition And Results of Operations		15
Item 3	Quantitative and Qualitative Disclosures about Market Risk		25
Item 4	Controls and Procedures		26
	PART II. OTHER INFORMATION
Item 1	Legal Proceedings		27
Item 2	Changes in Securities ,Use of Proceeds and Issuer Purchases of Equity Securities		27
Item 3	Defaults Upon Senior Securities		27
Item 4	Submission of Matters to a Vote of Security Holders		27
Item 5	Other Information		27
Item 6	Exhibits and Reports on Form 8-K		27
Signatures			29
Exhibit 31.1			30
Exhibit 31.2			31
Exhibit 32.1			32
Exhibit 32.2			33
EXHIBIT 31.1
EXHIBT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30, 2004		December 31, 2003
ASSETS
Cash and Cash Equivalents	$	11,612,577	$	2,593,407
Accrued Interest Receivable		1,140,381		875,474
Accounts Receivable		25,798		70,313
Land Held for Residential Development		1,767,696		2,377,457
Real Estate Owned (held for sale)		7,916,212		7,913,160
Mortgage Loans Held for Investment, net of allowance for loan losses of $1,505,852 and $1,424,256 and unearned discount of $56,643 and $103,966 at June 30, 2004 and December 31, 2003, respectively		91,232,042		94,081,942
Other Assets		516,123		546,941

Total Assets	$	114,210,829	$	108,458,694

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Dividends Payable	$	2,391,475	$	2,305,444
Accounts Payable – Related Party		22,833		119,284
Accounts Payable and Accrued Expenses		214,127		326,844
Accrued Interest Payable		58,576		56,952
Deferred Revenue and Other Liabilities		113,400		113,400
Collateralized Notes		36,558,621		31,881,866
Collateralized Notes — Related Parties		591,464		1,528,413

Total Liabilities		39,950,496		36,332,203

STOCKHOLDERS’ EQUITY
Common Stock; $0.01 par value; 50,000,000 shares authorized, 7,971,583 and 7,684,813 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively	$	79,716	$	76,848
Additional Paid-in Capital		74,180,617		71,828,838
Retained Earnings		—		220,805

Total Stockholders’ Equity		74,260,333		72,126,491

Total Liabilities and Stockholders’ Equity	$	114,210,829	$	108,458,694

The accompanying notes are an integral part of these unaudited statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS


	Three Months Ended					Six Months Ended
	June 30, 2004		June 30, 2003			June 30, 2004			June 30, 2003
	(UNAUDITED)					(UNAUDITED)
Revenue
Interest Income:
Mortgage Loans	$	2,730,545	$	2,909,935		$	5,397,808		$	5,746,329
Cash Accounts		34,654		14			64,154			58

		2,765,199		2,909,949			5,461,962			5,746,387

Interest Expense:
Lines of Credit		—		144,019			3,513			259,403
Notes Payable		—		1,431			—			2,896
Collateralized Notes		511,502		304,734			984,658			583,241

Total Interest Expense		511,502		450,184			988,171			845,540

Net Interest Income		2,253,697		2,459,765			4,473,791			4,900,847
Provision for Loan Losses, net		58,230		421,233			81,596			482,911

Net Interest Income After Provision for Loan Losses		2,195,467		2,038,532			4,392,195			4,417,936
Loss on Sale of Real Estate Owned		—		(208,316	)		(47	)		(208,316	)
Other Income		33,500		51,241			68,100			52,245

Net Revenues		2,228,967		1,881,457			4,460,248			4,261,865

Expenses
General and Administrative		123,758		168,377			290,313			255,726
Manager and Directors’ Fees		149,119		72,152			336,465			264,284
Other Expenses		105,779		227,486			209,466			283,443

Total Expenses		378,656		468,015			836,245			803,453

NET EARNINGS	$	1,850,311	$	1,413,442		$	3,624,004		$	3,458,412
Basic Earnings per Share	$	0.23	$	0.19		$	0.46		$	0.47
Diluted Earning per Share	$	0.23	$	0.19		$	0.46		$	0.47

The accompanying notes are an integral part of these unaudited statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)



	Common Stock				Additional Paid-in			Retained
	Shares		Amount		Capital			Earnings			Total
Balance, January 1, 2003		7,183,004	$	71,830	$	67,447,861		$	—		$	67,519,691
Net Earnings and Comprehensive Income		—		—		—			8,252,745			8,252,745
Stock Options Exercised		19,503		195		47,318			—			47,513
Dividends Reinvested on Common Stock		476,306		4,763		5,234,600			—			5,239,363
Stock Granted		6,000		60		65,940			—			66,000
Dividends Declared on Common Stock		—		—		(966,881	)		(8,031,940	)		(8,998,821	)

Balance, December 31, 2003		7,684,813	$	76,848	$	71,828,838		$	220,805		$	72,126,491

Net Earnings and Comprehensive Income		—		—		—			3,624,004			3,624,004
Stock Options Exercised		20,530		205		130,270			—			130,475
Dividends Reinvested on Common Stock		263,240		2,633		2,893,007			—			2,895,640
Stock Granted		3,000		30		32,970			—			33,000
Dividends Declared on Common Stock		—		—		(704,468	)		(3,844,809	)		(4,549,277	)

Balance, June 30, 2004		7,971,583	$	79,716	$	74,180,617		$	—		$	74,260,333

The accompanying notes are an integral part of these unaudited statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended
	June 30, 2004			June 30, 2003
Cash Flows from Operating Activities:
Net Earnings	$	3,624,004		$	3,458,412
Adjustment to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Amortization and Depreciation		35,567			101,707
Provision for Loan Losses		81,596			482,911
Amortization of Loan Fees on Mortgage Loans		(47,323	)		(45,214	)
Loss on Sale of Real Estate Owned		47			208,316
Noncash stock compensation		33,000			—
Changes in Assets and Liabilities:
Accrued Interest Receivable		(264,907	)		(210,659	)
Deferred loan points		—			25,000
Other Assets and Accounts Receivable		39,766			(93,304	)
Accounts Payable (including Related Party) and Accrued Interest Payable		(207,544	)		(168,382	)

Net Cash Provided by Operating activities		3,294,206			3,758,787

Cash flows from investing activities:
Investment in Real Estate Owned		(375,467	)		(19,433	)
Proceeds from Sale of Real Estate Owned		372,368			111,838
Investment in Land Held for Residential Development		(43,001	)		(30,840	)
Proceeds from Sale of Land Held for Residential Development		652,762			167,672
Purchase of Mortgage Loans Held for Investment		(28,791,075	)		(27,388,918	)
Principal repayments of Mortgage Loans Held for Investment		31,606,702			14,148,458

Net Cash Provided by (Used in) Investing Activities		3,422,289			(13,011,223	)

Cash flows from financing activities:
Proceeds from Common Stock Options Exercised		130,475			46,485
Cash Dividends Paid		(1,567,606	)		(1,803,819	)
Net Proceeds on Lines of Credit		—			6,433,000
Proceeds on Collateralized Notes		21,044,000			8,386,114
Interest Reinvested on Collateralized Notes		732,421			—
Debt Issue Costs		—			(13,587	)

Principal Payments on Collateralized Notes		(18,036,615	)		(3,368,253	)

Net Cash Provided by Financing Activities		2,302,675			9,679,940

NET INCREASE IN CASH AND CASH EQUIVALENTS		9,019,170			427,504
Cash and Cash Equivalents at Beginning of Period		2,593,407			92,684

Cash and Cash Equivalents at End of Period		11,612,577			520,188

Supplemental Cash Flow Information:
Cash Paid for Interest	$	986,547		$	356,580

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Collateralized Notes Refinanced at Maturity	$	8,458,859		$	9,035,869

Dividends Reinvested for Common Stock	$	2,895,640		$	2,546,445

Proceeds to be Received from Sale of Real Estate Owned		—		$	1,115,945

Common Stock Grants	$	33,000		$	33,000

Foreclosure of Property		—		$	1,579,915

The accompanying notes are an integral part of these unaudited statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

June 30, 2004
(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

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

The unaudited consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10Q. In the opinion of the Company all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. The results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or for any other period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

The unaudited consolidated financial statements for the six months ended June 30, 2004; include the accounts of the Company and its wholly owned subsidiaries, Specialty Acquisition Corporation (SAC), a taxable REIT subsidiary and Specialty Acquisition Corp. II (SAC II), a qualified REIT subsidiary. SAC was formed on May 2, 2002 to enable the Company to perform development activities to land it had foreclosed upon (Note 4), and to maintain the Company’s qualified REIT status. SAC II was formed on January 17, 2003 to enable the Company to hold property (Note 6). All inter-company accounts and transactions have been eliminated upon consolidation.

The prior period financial statements contain certain reclassifications to conform to the current period classifications. These reclassifications had no effect on net earnings.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses.

Land Held for Residential Development

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

Real Estate Owned

Real Estate Owned consists of real estate acquired through foreclosure and is carried at the lower of cost or the property’s estimated fair value, less estimated costs to sell.

Stock Options

The Company accounts for stock based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation,” which requires the measurement of stock compensation expense using the fair value method of accounting.

Mortgage Loans

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

The mortgage loans are originated by the Manager, in the name of the Manager, and simultaneously sold, in whole or in part, to the Company. Loan servicing is retained by the Manager.

The Company follows the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standard (SFAS) 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS 118, “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.” Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect the contractual interest and principal payments of a loan according to the contractual terms of the loan agreement. SFAS 114 requires that impaired loans be measured on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The Company generally obtains a third party appraisal on the underlying collateral for impaired loans to determine the amount of impairment, if any. SFAS 118 clarifies interest income recognition and the disclosure requirements of SFAS 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 the Company does not believe the Company’s investment in the loan is fully recoverable.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned according to the terms of the loan. However, revenue ceases to be recognized when the loan becomes 90 days delinquent, when foreclosure proceedings have been initiated, or when the Loan-to-Value ratio exceeds 100%, whichever event occurs first.

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

Earnings per Share

Basic Earnings Per Share (EPS) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net earnings by the weighted-average common shares and potentially dilutive securities outstanding during the period. For the diluted EPS calculation, the weighted average common shares and potentially dilutive securities outstanding include the average number of shares of common stock outstanding, adjusted for the dilutive effect of unexercised stock options using the treasury stock method.

Allowance for Loan Losses

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

Evaluation of the adequacy of the allowance for loan losses is based primarily on the Company’s periodic assessment and grading of the loan portfolio. Additional factors considered by the Company include the consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral and other regulatory or legal issues that could affect loan losses. While the Company uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions and the impact of such changes on the Company’s borrowers.

Income Taxes

Our financial results generally do not reflect provisions for current or deferred income taxes. Management believes that we have and intend to continue to operate in a manner that will continue to allow the Company to be taxed as a REIT and as a result, does not anticipate the payment of substantial corporate level taxes. Many of these requirements, however, are highly technical and complex. If we were to fail to meet any of these requirements, we would be subject to federal income tax.

On May 2, 2002, we formed Specialty Acquisition Corp. (SAC) a wholly owned taxable REIT subsidiary effective January 1, 2003. A taxable REIT subsidiary is generally subject to corporate level income tax on its income and will generally be able to distribute only its net after tax earnings to the Company as dividends. Management believes that the deferred tax assets related to net operating losses will most likely not be recovered.

As of January 17, 2003, we formed a Qualified REIT Subsidiary (SAC II). A Qualified REIT subsidiary is a corporation in which a REIT owns 100% of the stock and which is not a taxable REIT subsidiary. As a Qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, it is subject to the Internal Revenue Service (“IRS”) REIT asset, income and distribution requirements. In addition, all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities, and income, deductions and credit of the REIT. Also, its activities are treated as activities of the REIT for purposes of the REIT qualification tests and prohibitive transaction limits.

NOTE 2. MORTGAGE LOANS HELD FOR INVESTMENT

Mortgage Loan Products

The Company has four mortgage loan products consisting of land, construction, commercial building and other. Substantially all mortgage loan products have similar stated interest rates ranging from 10.5% to 13.25%. Due to the similar nature of the effective interest rates among the four loan products, the Company does not compile or

report revenues by product type.

Pursuant to existing loan agreements, the Company is committed to fund additional loan advances totaling $3,461,091 as of June 30, 2004.

Allowance for Loan Losses

The Company sets aside an allowance for loan losses through periodic charges to earnings. While there exists probable asset quality problems in the loan portfolio, the Company believes sufficient reserves have been provided in the allowance to absorb probable losses in the loan portfolio at June 30, 2004 and December 31, 2003.

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


Balance at January 1, 2003	$	1,815,576
Provision for Loan Losses		25,137
Charge Offs		(416,457	)

Balance at December 31, 2003	$	1,424,256
Provision for Loan Losses		81,596
Charge Offs		—

Balance at June 30, 2004	$	1,505,852

NOTE 3. DELINQUENT LOANS

At June 30, 2004, the Company had 5 loans that were 60 to 546 days past due, totaling approximately $11.5 million in principal and accrued interest. The Company accrued interest on these five loans until the loans were 90 days past due; however, in accordance with the Company’s revenue recognition policy, the Company ceased accruing additional interest income when the loan became 90 days past due. Accrued interest recorded during the 90-day period remains accrued if the Company determines that the underlying collateral supports recovery of the full principal and accrued interest. The accrued interest recorded on the delinquent loans at June 30, 2004 was approximately $208,000. The Company has evaluated the collectability of these delinquent loans including accrued interest in light of the types and dollar amounts of the loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loans and has determined that the amounts are collectible.

At December 31, 2003, the Company had three loans that were 153 to 364 days past due, totaling approximately $6.6 million in principal and accrued interest. The Company accrued interest on these three loans until the loans were 90 days past due; however, in accordance with the Company’s revenue recognition policy, the Company ceased accruing additional interest income when these loans became 90 days past due. Accrued interest recorded during the 90-day period remains accrued if management determines that the underlying collateral supports recovery of the Notes, principal and accrued interest. The accrued interest on one delinquent loan was reversed because management determined that the underlying collateral did not support recovery of the interest. The accrued interest recorded on the other delinquent loans at December 31, 2003 was approximately $91,000. Management has evaluated the collectability of these delinquent loans in light of the types and dollar amounts of the loans, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan and determined that the amounts are collectible.

NOTE 4. LAND HELD FOR RESIDENTIAL DEVELOPMENT

In February 2001, the Company foreclosed on a mortgage loan in default and obtained ownership of the residential land development project (the “Project”) securing the loan. The Company’s recorded investment in the loan at the time of foreclosure was approximately $2.7 million. The Company obtained a third-party appraisal of the Project at the time of the foreclosure, which was used by management to value the Project at approximately $2.5 million, net of estimated costs to sell. A loss of $225,000 was recorded upon recording the initial carrying value of the Project upon foreclosure. The three phases comprising the Project, which totaled 117 lots, were in various stages of completion. The appraisal provided an allocation of the fair value as follows: (i) phase I’s 15 lots at $30,000 each, (ii) phase II’s 61 lots at approximately $15,000 each, and (iii) phase III’s 41 lots at approximately $15,000 each. The appraisal was based on the current condition of the lots and did not consider costs, which the Company or its assignee would incur to prepare these lots for the commencement of homebuilding. The Company subsequently contributed the Project to Specialty Acquisition Corporation (“SAC”), its wholly owned taxable REIT subsidiary.

In June 2002, SAC entered into an agreement with a third-party homebuilder to transfer title of the lots to the homebuilder in exchange for an upfront payment, in cash, equal to a portion of the original appraised value of the uncompleted lots. Additionally, the homebuilder is responsible to pay SAC the difference between the agreed value per lot and the cash previously received, upon sale of the homes to third parties. SAC is also entitled to 50% of the profits, if any, realized by the homebuilder upon closing of the sale of each home, as well as repayment of infrastructure costs borne by the Company prior to the agreement.

SAC receives a security interest in each lot transferred to the homebuilder, subordinate to the senior interest held by the homebuilder’s construction lender. SAC is not obligated for any future of the Project once a completed lot is delivered to the homebuilder. This arrangement is accounted for as a real estate investment by which cash received upfront upon delivery of the completed lots reduces SAC’s investment in the land held for residential development. Upon the sale of competed homes by the homebuilder to an independent third-party, SAC reduces land held for residential development based on all cash proceeds received under the cost recovery method. After the investment has been fully recovered, SAC will recognize revenue equal to its share of the profits realized and received from home sales and may record a provision for income taxes if SAC is anticipated to generate taxable income for the year.

On June 30, 2003, the homebuilder neglected to exercise his option to purchase Phase III of the Project. The Company has subsequently listed the property for sale.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon payment to SAC of $565,943. In order to complete the lots, SAC incurred site mapping and other engineering costs, real estate taxes and insurance fees all of which were capitalized. Twelve homes were sold during the quarter ended June 30, 2004 while twenty-one homes were sold during the quarter ended March 31, 2004. The following table provides a roll-forward of this account:


Balance at December 31, 2003	$	2,377,457
Capitalized Costs		43,001
Net proceeds from sale of homes		(652,762	)

Balance at June 30, 2004	$	1,767,696

NOTE 5. REAL ESTATE OWNED (HELD FOR SALE)

As of June 30, 2004 and December 31, 2003, real estate owned totaled $7.9 million and $7.9 million respectively. The properties acquired were as follows:

•		A personal residence in Telluride, Colorado acquired on September 25, 2003 with a loan balance of approximately $1.7 million.

•		Two parcels of raw land in Mesquite, Nevada acquired in August of 2003 with loan balances of approximately $2.6 million and $2.5 million.

•		A commercial property located in Las Vegas, Nevada acquired in August 2002 with a loan balance of $950,000.

During the year ended December 31, 2003, the Company had write-downs of $250,000 related to the Mesquite, Nevada properties in the net balance of Real Estate Owned.

NOTE 6. QUALIFIED REIT SUBSIDIARY

As of January 17, 2003, the Company created a second subsidiary, SAC II (a “qualified REIT subsidiary”), incorporated in Delaware. A “qualified REIT subsidiary” is any corporation in which a REIT owns 100% of the stock. As a qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, it is subject to the IRS REIT asset, income and distribution requirements. In addition, all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities and income of the REIT. Also, its activities are treated as activities of the REIT for purposes of the REIT qualification tests and prohibitive transaction limits.

As of and for the six months ended June 30, 2004 there was no activity recorded in SAC II.

NOTE 7. COLLATERALIZED NOTES

On May 7, 2002, the Company’s registration statement (the “2002 Registration”) was declared effective by the Securities and Exchange Commission (SEC) increasing the amount of Collateralized Notes available for sale up to $269,312,000 (including amounts remaining unsold under the prior registration) from the original $250,000,000, which had been declared effective by the SEC on January 18, 2001. This 2002 Registration permits the issuance of Collateralized Notes with maturities of up to five years. The Collateralized Notes are secured by mortgage loans at least one and one-half times the aggregate principal amount outstanding on the Collateralized Notes. The outstanding Collateralized Notes have maturities ranging from 3 months to five years from the date of issue and bear a fixed rate of interest ranging from 2.50% to 7.50% at June 30, 2004 and December 31, 2003. The effective yield of Collateralized Notes outstanding at June 30, 2004 and December 31, 2003 was 5.80% and 5.58%, respectively. At June 30, 2004 and December 31, 2003, the Collateralized Notes were secured by $44,808,657 and $52,036,733 respectively, of mortgage loans pledged as collateral.

NOTE 8. RELATED PARTY

On October 23, 1997, the Company entered into a Management Agreement with the Manager. The Agreement was subsequently updated through the Second Amended and Restated Management Agreement dated January 1, 2004. The Manager is responsible for the day-to-day operations of the Company and performs such services and activities relating to the assets and operations of the Company as are provided for in the Agreement. The Manager originates the mortgage loans in the name of the Manager, and sells the loans, in whole or in part, to the Company. The Manager retains the servicing of the mortgage loans.

The Manager receives mortgage placement fees or points, usually charged to the borrower for and upon

origination, extension or refinancing of loans, up to 2.5% of the loan balance, with any additional fees or points paid to the Company. The Manager receives a fee for loan servicing equal to one-half of one percent per annum of all loans serviced. These fees are earned directly by the Manager and are deducted from the interest or late payments paid to the Company to cover the Manager’s costs to manage the portfolio, effectively reducing the yield to the Company. Under the Amended Agreement, the Manager receives a monthly base management fee equal to one-half of one percent of the Mortgage Asset Portfolio at the end of the preceding quarter which includes Mortgage Loans net of allowances and unearned discounts, Real Estate Owned and Land Held for Residential Development. In addition, the Manager receives, as incentive compensation for each fiscal quarter, an amount equal to 50% of the tax — based net income before the dividend deduction of the Company, in excess of an annualized return to the Company equal to 12%.

Fees earned by the Manager for the three months and six months ended June 30, 2004 and 2003, are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Loan Origination and Extension Fees	$	297,487	$	414,675	$	853,987	$	1,024,950
Loan Servicing Fees		103,560		110,732		214,117		219,295
Late Payment Charges		30		4,200		7,354		9,555

Subtotal		401,077		529,607		1,075,458		1,253,800
Base Management Fee		118,605		—		249,072		—
Incentive Compensation Bonus		—		35,613		—		190,275

Total Compensation	$	519,682	$	565,220	$	1,324,530	$	1,444,075

The loan origination fees are received by the Manager as part of the initial funding of the loan. Loan servicing fees reduce the amount of interest income recognized by the Company as the Manager withholds the servicing fee from interest payments received from borrowers. Late payment charges are received directly by the Manager from the borrower. The Base Management Fee is paid monthly to the Manager by the Company. The Manager’s incentive compensation is calculated in accordance with the Agreement and is paid for or accrued in the line item, Manager and Directors Fees, in the Company’s financial statements.

There are several related parties who held Collateralized Notes issued by the Company. As of June 30, 2004 and December 31, 2003, they owned $591,464 and $1,528,413 in Collateralized Notes, which represents approximately 1.6% and 4.6% of the total Collateralized Note balance, respectively.

In addition, SAC currently has an agreement with a realtor related to the development of the land held for residential development discussed in Note 4. SAC will pay the realtor finder’s fee of $300 per lot and a 3.5% sales commission for each home sold. The realtor is an employee of a real estate company, which is owned by an independent director and member of the Company’s Audit Committee. As of June 30, 2004 and December 31, 2003, SAC did not have any outstanding payables to the realtor related to the finder’s fee. Total fees paid to the real estate company for the six months ended June 30, 2004 and 2003 were approximately $125,000 and $166,000 respectively.

NOTE 9. EARNINGS PER SHARE

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Basic:
Net earnings applicable to common stock	$	1,850	$	1,413	$	3,624	$	3,458

Weighted average number of shares – basic		7,934		7,433		7,879		7,342

Earnings per share – basic	$	0.23	$	0.19	$	0.46	$	0.47

Diluted:
Net earnings applicable to diluted earnings per share	$	1,850	$	1,413	$	3,624	$	3,458

Weighted average number of shares – basic		7,934		7,433		7,879		7,342
Weighted average shares of dilutive stock options using average period stock price under the treasury stock method		14		28		14		28

Weighted average number of shares – diluted		7,948		7,460		7,893		7,370

Earnings per share – diluted	$	0.23	$	0.19	$	0.46	$	0.47

NOTE 10- SUBSEQUENT EVENT

On April 26, 2004, our Board of Directors adopted, subject to approval of the stockholders, amendments to the Specialty Trust, Inc. 1997 Executive and Non-Executive Director Stock Option Plan (the “Plan”). The stockholders approved the amendments on June 21, 2004. The principal effect of the Plan amendments is to make an additional 515,000 shares available for grant under the Plan, limit the number of dividend equivalent rights (DERS), that may be attached to future grants to 235,350 shares and limit the number of shares of restricted stock that may be the subject of future grants to the same 235,350 shares.

On July 22, 2004, the Company sold a property classified as REO for $1.3 million. The property had a basis of approximately $1.1 million dollars and the sale will result in a gain of approximately $160,000 after commissions have been paid.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Safe Harbor Statement

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion regarding Specialty Trust, Inc., and our business, which are not historical facts, are “forward-looking statements” that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, please refer to “Risk Factors” commencing on Page 12 of our Prospectus included in the Registration Statement on Form S-11 (File No. 333-86972) relating to our Collateralized Notes Program.

Company Overview

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

Our business objective and strategy is to build and hold a portfolio of mortgage loans for investment that generates net income for distribution to stockholders. Loans are made principally to borrowers in the States of Nevada, Arizona, Colorado, California and Utah whose needs are generally not being served by traditional financial institutions. Our strategy is to focus on land loans, construction loans, commercial building loans and nonconforming single-family and small multi-family residential loans. We generally limit the amount of our investment in any single mortgage loan or in mortgage loans to one borrower to 10% of our total assets (approximately $10 million), although the Board of Directors may approve exceptions. Most loans will have terms of one to three years. Our mortgage loans may be secured by unimproved as well as improved real property and non-income producing property as well as income-producing real property. Some mortgage loans may be secured by a borrower’s leasehold interest in real property. Our loans generally produce higher yields than those obtained on traditional single-family residential mortgage loans, but are subject to higher risks of default and loss.

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

Specialty Financial serves as our manager and is responsible for loan originations, loan servicing, and our day-to-day operations, subject to the supervision of our Board of Directors.

Significant Aspects of Second Quarter 2004 and Year End 2003

At June 30, 2004, we owned approximately $92.8 million of mortgage loans, approximately $1.8 million of land held for residential development and $7.9 in real estate owned and held for resale. Our total assets were approximately $114.2 million. These assets are financed with approximately $37.2 million of recourse short-term debt, and approximately $74.3 million of equity.

As of June 30, 2004, our equity-to-assets ratio was 65.0%, our debt-to-equity ratio was 50.0% and our annualized return on equity for the six months ended June 30, 2004 was 10.1%.

At December 31, 2003, the Company owned approximately $95.6 million of mortgage loans, approximately $2.4 million of land held for residential development and $7.9 million real estate owned and held for resale. Our total assets were approximately $108.5 million. The assets were financed with approximately $33.4 million in collateralized notes, and approximately $72.1 million of equity.

As of December 31, 2003, our equity-to-assets ratio was 66.5%, our debt-to-equity ratio was 46.3%, and our average return on equity for the year ended December 31, 2003 was 11.4%.

Critical Accounting Policies

The Company’s management is responsible to insure that its policies and methodologies are in accordance with generally accepted accounting principles. During the second quarter of 2004, management reviewed and evaluated the Company’s critical accounting policies and believes them to be appropriate.

The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SAC and SAC II. The preparation of consolidated financial statements in accordance with generally accepted accounting principals requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. In preparing these consolidated financial statements, we have used our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates.

The following summarizes the components of our consolidated financial statements where understanding accounting policies is critical to understanding and evaluating our reported financial results, especially given the significant estimates used in applying the policies. The discussion is intended to demonstrate the significance of estimates to our financial statements and the related accounting policies. Detailed accounting policies are described in Note 1 to the Company’s consolidated financial statements. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed these disclosures.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned according to the terms of the loan. However, revenue is no longer recognized when the loan has become delinquent for 90 days, when foreclosure proceedings have been initiated, or when the loan-to-value ratio exceeds 100%, whichever event occurs first. Management believes the Company’s revenue recognition policies are appropriate to reflect the substance of the underlying transactions.

Allowance for Loan Loss

The Company maintains an allowance for loan losses on its mortgage loans. Additions to the allowance are based on an assessment of certain factors including, but not limited to, a review of collateral values, borrower payment ability and general economic conditions. Management believes that the Company’s policies and methodology are appropriate to reflect the potential loss on the current loan portfolio.

Impairment of Long-Lived Assets

Real estate investments held represent “long-lived” assets for accounting purposes. The Company periodically reviews long-lived assets for impairment in value whenever an event or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In management’s opinion, and based on our estimates, real estate owned and land held for development are considered to be held for sale and are not carried at amounts

in excess of their estimated fair value. Land held for residential development is carried at the lower of cost or fair value less estimated costs to sell. Fair value is derived using estimates and assumptions relating to eventual sales prices and estimates for costs to complete. Management believes the assumptions used in determining fair value are based on the best information available at the time of analysis.

Income Taxes

As of January 17, 2003, we formed a Qualified REIT Subsidiary (SAC II). A Qualified REIT subsidiary is a corporation in which a REIT owns 100% of the stock and which is not a taxable REIT subsidiary. As a Qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, it is subject to the IRS REIT asset, income and distribution requirements. In addition, all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities, and income, deductions and credit of the REIT. Also, its activities are treated as activities of the REIT for purposes of the REIT qualification tests and prohibitive transaction limits.

Changes in Financial Condition

Assets

Cash and Cash Equivalents

Cash and cash equivalents increased by approximately $9.0 million (348%) as of June 30, 2004, compared to December 31, 2003. The timing of loan fundings and the timing of debt or equity issues generally determine the amount of cash held by the Company. Our goal is to keep cash invested in loans or other financial instruments and therefore to keep cash balances low whenever possible.

Accrued Interest Receivable

Accrued interest receivable increased by approximately $265,000 (30%) as of June 30, 2004 compared to December 31, 2003 primarily as the result of the timing of interest payments made during the year ended December 31, 2003 as compared to the six months ended June 30, 2004.

Land Held for Residential Development

Land held for residential development decreased by approximately $610,000 (26%) as of June 30, 2004 compared to December 31, 2003 as a result of increased home sales. Land held for residential development consists of three phases of undeveloped lots (the “Project”), which were obtained by the Company through foreclosure in February 2001. This Project originally included 117 lots, which were in various stages of completion at the time of foreclosure. An appraisal was obtained at the time of foreclosure which provided an allocation of the fair value as follows: (i) phase I’s 15 lots at $30,000 each, (ii) phase II’s 61 lots at approximately $15,000 each and (iii) phase III’s 41 lots at approximately $15,000 each. The appraisal was based on the current condition of the lots and did not consider costs, which the Company or its assignee would incur to prepare these lots for the commencement of homebuilding. The Company subsequently contributed the Project to Specialty Acquisition Corp. (SAC), its wholly owned taxable REIT subsidiary formed in May 2002.

In June 2002, SAC entered into an agreement with a third-party homebuilder to transfer title to the lots on a

phased basis to the homebuilder in exchange for an upfront cash payment equal to a portion of the original appraised value of the uncompleted lots. Additionally the homebuilder is responsible to pay SAC the difference between the original appraisal value per lot and the cash previously received, upon sale of the homes to third parties. SAC is also entitled to 50% of the profits, if any, realized by the homebuilder upon closing of the sale of each home built, as well as repayment of infrastructure costs borne by the Company prior to the agreement. SAC receives a security interest in each lot transferred to the homebuilder, subordinate to the senior interest held by the homebuilder’s construction lender. SAC is not obligated for any future costs of the Project once a completed lot is delivered to the homebuilder. This arrangement is accounted for as a real estate investment by which cash received upfront upon delivery of the completed lots reduces SAC’s investment in the land held for residential development. Upon the sale of lots and completed homes by the homebuilder to a third-party, SAC will record proceeds as a reduction to the land held for residential development under the cost recovery method.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon payment to SAC of $565,943. In order to complete delivery of the lots, SAC incurred site mapping costs, other engineering costs, real estate taxes, and insurance fees; in 2002, all of which were capitalized. Thirty three (33) completed homes were sold during the six months ended June 30, 2004, leaving twenty four (24) homes in Phases I and II remaining to be sold. The following table a roll-forward of this account:


Balance at December 31, 2003	$	2,377,457
Capitalized Costs		43,001
Net proceeds from sale of homes		(652,762	)

Balance at June 30, 2004	$	1,767,696

Real Estate Owned

Real Estate Owned changed minimally compared to December 31, 2003, increasing by approximately $3,000 (.04%).

Mortgage Loans

Mortgage loans held for investment net of allowance for loan losses and unearned discounts decreased by approximately $2.8 million (3%) as of June 30, 2004 compared to December 31, 2003. This decrease was due primarily to an overall decrease in the mortgage loan portfolio due to loan payoffs. The allowance for loan losses was increased approximately $82,000 during the period to provide for potential future loan losses. There were no credit losses recorded during the period.

Liabilities

Dividends Payable

Dividends payable increased by approximately $86,000 (4%) as of June 30, 2004 compared to December 31, 2003 due primarily to a corresponding increase in the number of shares outstanding.

Accounts Payable and Accrued Expenses and Accounts Payable – Related Party Accounts payable and accrued expenses and accounts payable related party decreased by approximately $209,000 (47%) as of June 30, 2004 compared to December 31, 2003. This decrease was due primarily to the management fee payable to the Manager being higher, as of December 31, 2003 than as of June 30, 2004. In addition, professional fees related to the preparation of Form 10K were accrued as of December 31, 2003; and paid during the first six months of 2004.

Collateralized Notes and Collateralized Notes – Related Party Collateralized Notes increased by approximately $3,740,000 (11%) as of June 30, 2004 compared to December 31, 2003 due to increased issuance of such notes caused by increased demand. Demand increased primarily because the stated interest rates of the notes are slightly higher than the average rates paid by banks. Our Collateralized Notes were authorized for public sale on January 19, 2001.

Results of Operations

The rate volume analysis set forth in the following table analyzes changes in net interest income for the periods indicated by their rate and volume components.


	Three months Ended									Six months Ended
	June 30, 2004									June 30, 2004
	Over/Under									Over/Under
	June 30, 2003									June 30, 2003
	Net									Net
	Change			Rate			Volume			Change			Rate		Volume
Interest Income
Mortgage Loans		(179,390	)		185,198			(364,588	)		(348,521	)		271,155		(619,676	)
Cash Accounts		34,640			(4	)		34,644			64,096			21		64,075

Total		(144,750	)		185,194			(329,944	)		(284,425	)		271,176		(555,601	)

Expense
Line of Credit		(144,019	)		—			(144,019	)		(255,890	)		—		(255,890	)
Note Payable		(1,431	)		—			(1,431	)		(2,896	)		—		(2,896	)
Collateralized Notes		206,768			15,750			191,018			401,417			17,245		384,172

Total		61,318			15,750			45,568			142,631			17,245		125,386

Change in net interest income		(206,068	)		169,444			(375,512	)		(427,056	)		253,931		(680,987	)

Our operating results include all of the reported income of our mortgage finance operation. A comparison of the three and six months ended June 30, 2004 to the three and six months ended June 30, 2003 follows:

Interest Income, Mortgage Loans and Interest Income Cash Accounts Interest income decreased approximately $145,000 (5%) and $284,000 (5%) for the three and six months ended June 30, 2004, respectively, as compared to the same periods in prior year, due primarily to the overall decrease in the mortgage loan portfolio.

Interest Expense – Lines of Credit

Interest expense on lines of credit decreased by approximately $144,000 (100%) and $256,000 (99%) for the three and six months ended June 30, 2004, respectively, as compared to the same periods in prior year, primarily due to the Company not utilizing its lines of credit during the three and six months ended June 30, 2004.

Interest Expense – Collateralized Notes

Interest expense on Collateralized Notes increased by approximately $207,000 (68%) and $401,000 (69%) for the three and six months ended June 30, 2004, respectively, as compared to the same periods in prior year. The increase was primarily due to the additional issuance of collateralized notes.

Provision for Loan Losses

Provision for loan losses decreased by approximately $363,000 (86%) and $401,000 (83%) for the three and six months ended June 30, 2004, respectively, as compared the same periods in prior year. This decrease was primarily due to improvement in the mortgage loan portfolio.

Loss on Sale of Real Estate Owned

Loss on sale of real estate owned decreased by approximately $208,000 (100%) for the three and six months ended June 30, 2004, as compared the same periods last year. This decrease was primarily due to the sale of

property in the prior year resulting in a loss that did not occur in current year.

General and Administrative Expenses

General and administrative expenses decreased by approximately $45,000 (27%) for the three months ended June 30, 2004, as compared to the same period in prior year. This was primarily due to a decrease in advertising expenditures in second quarter 2004. General and administrative expenses increased by approximately $35,000 (14%) for the six months ended June 30, 2004, as compared to the same period in prior year. This was primarily due to an increase in professional fees in the first quarter of 2004.

Manager and Directors’ Fees

Manager and directors fees increased by approximately $77,000 (107%) and $72,000 (27%) for the three and six months ended June 30, 2004, respectively, as compared to the same periods in prior year. This was primarily due to an increase in the base management fee per the terms of the Amended Management Agreement with Specialty Financial effective January 1, 2004.

Other Expenses

Other expenses decreased by approximately $122,000 (54%) and $74,000 (26%) for the three and six months ended June 30, 2004, respectively, as compared to the same periods in prior year. The decrease was the result of a reduction in foreclosure costs due to an improvement in the mortgage loan portfolio.

Interest Rate/Market/Credit Risk

We seek to manage the interest rate risk, credit risk and market risk to 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 monitor the quality of our loans through the consistent application of our underwriting guidelines and loss mitigation practices of our servicing procedures. In this way, we seek to control credit risk. The majority of our loans are located in Nevada; however, the Company is also acquiring loans in Arizona, Colorado, California and Utah to help diversify the portfolio and reduce the risk of investing in one market.

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


	Annualized						Annualized
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Interest Income
Mortgage Loans		12.08	%		11.32	%		12.04	%		11.48	%
Cash Accounts		1.04	%		1.36	%		1.05	%		.82	%
Interest Expense
Lines of Credit		0.00	%		4.28	%		4.00	%		4.24	%
Notes Payable		0.00	%		0.49	%		0.00	%		0.50	%
Collateralized Notes		5.62	%		5.36	%		5.56	%		5.40	%
Net Interest Spread		5.04	%		6.52	%		5.15	%		6.66	%

Liquidity and Capital Resources

We manage our short-term liquidity (defined as our funding needs to cover commitments and anticipated uses occurring over the next 12 months) in a number of ways. First, the scheduled interest payments from our

mortgage portfolio produce monthly cash flow, which can be used to originate new loans and to pay dividends to stockholders. This source provided approximately $5.1 million during the 6 months ended June 30, 2004 and $11.7 million during the 12 months ended December 31, 2003, respectively.

Secondly, the payoff and the prepayment of loans provides additional liquidity to our portfolio. Historically, we have experienced annual loan payoffs and prepayments of approximately 30% to 35% of our outstanding portfolio. Since our loan terms are usually one to three years, the rate of principal payoffs is significant. With a current portfolio of approximately $92.8 million, we would anticipate annual cash flows from principal pay downs of approximately $31 million. Based on the timing of the loan maturity, the actual cash flow may differ substantially. As we continue to issue Collateralized Notes, our loan portfolio will be able to be increased as will the cash flow from principal pay downs. Typically, these funds are used to originate new mortgage loans, but there are no restrictions on the use of the funds.

The following table illustrates the scheduled maturities of mortgage loan investments subsequent to June 30, 2004:


Maturity	Amount
July 1, 2004 to December 31, 2004	$	24,704,211
2005		47,278,596
2006		20,811,730

	$	92,794,537

Under existing mortgage loans, the Company is obligated to fund additional loan amounts totaling $3,461,091 as of June 30, 2004.

Thirdly, we have the ability to issue Collateralized Notes to provide additional liquidity. Starting May 7, 2002, as a result of the 2002 Registration, the Company was permitted to offer Collateralized Notes with maturities of up to five years. Although not a committed source, we may utilize Collateralized Notes to meet a portion of our short-term funding needs under normal market conditions.

The following table reflects the maturities of Collateralized Notes as of June 30, 2004:


Maturity	Amount
July 1, 2004 to December 31, 2004	$	18,203,846
2005		16,162,997
2006		1,197,785
2007		348,966
2008		891,490
Thereafter		345,001

	$	37,150,085

Lastly, we had two committed lines of credit with commercial banks to provide another level of liquidity as of June 30, 2004. We can borrow $6.5 million and $7.0 million on two separate lines of credit to provide funding for new mortgage loans, for an aggregate of $13.5 million in available credit. The $6.5 million is available through June 15, 2005. The $7.0 million line is available through October 15, 2004. All lines of credit are collateralized by a secured interest in mortgage loans and require the Company to maintain certain financial covenants. Such covenants include restrictions on (i) any change in business activities from those we are presently engaged in, and (ii) any change in executive and management personnel that would result in reduced qualifications and experience compared to present personnel. Such covenants also contain requirements for (i) minimum tangible net worth, (ii) maximum debt to equity ratio, (iii) fixed charge coverage ratio, and (v) a maximum allowable for lines of credit of $20 million. The Company was in compliance with these covenants as of June 30, 2004.

We believe the combination of these sources of capital allows us to manage our short-term liquidity needs in

virtually any business situation and thereby efficiently use our capital resources.

With respect to our long-term liquidity (funding needs during periods beyond the next 12 months), our only commitments that require funding are those arising from our construction loans. There are no commitments for material capital expenditures or payments due on long-term debt obligations. We believe the same sources we rely on for short-term liquidity needs will be sufficient to fund our long-term needs as well.

Risk Management and the Allowance for Loan Losses

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

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

Loans are initially risk graded prior to loan origination. They are re-graded quarterly. Numerous factors are considered such as renewal, loans to the same borrower, identified facts demonstrating heightened risk of nonpayment, or if they have become delinquent. The loan review, or grading process attempts to identify and measure problem and watch list loans. Problem loans are those loans with higher than average risk with workout and/or legal action probable within one year. These loans are reported quarterly to the Company’s Board of Directors for action. Watch list loans are those loans considered as having weakness detected in character, capacity to repay or balance sheet concerns, which prompt management to take corrective action at the earliest opportunity. Problem and watch list loans generally exhibit one or more of the following characteristics:

•		Adverse financial trends and conditions

•		Decline in the entire industry

•		Managerial problems

•		Customer’s failure to provide financial information or other collateral documentation

•		Repeated delinquency, overdrafts or renewals

The Loan Review Committee of the Board of Directors reviews every significant problem loan and assessments are performed quarterly to confirm the risk rating to that loan, proper accounting and the adequacy of loan loss reserve assigned.

After reviewing the loan portfolio, management will allocate or assign a portion of the allowance for loan loss to groups of loans and to individual loans to cover management’s estimate of probable loss. Allocation is related to the grade of the loan and includes a component resulting from the application of the measurement criteria of SFAS 114 “Accounting by Creditors for Impairment of a Loan” and SFAS 118 “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures.” Management then compares the amounts allocated for probable losses to the current allowance. To the extent that the current allowance is insufficient to cover estimated probable losses, management records an additional provision for credit loss. If the allowance is greater

than required at that point in time, provision expense is adjusted accordingly.

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

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

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

The second or “general” component of the allowance for loan loss is intended to absorb inherent losses that may not be provided for by the first component. The primary reason that the first component might not be sufficient to absorb the losses present in the portfolio, (and the unallocated portion of the allowance for loan loss is used to provide for the losses that have occurred), is due to the inherent limitations to any credit risk grading process. Even for experienced loan reviewers, grading loans and estimating losses involves a significant degree of judgment regarding the present situation with respect to individual loans and the portfolio as a whole. In addition, it is possible that grading and loan review may be performed without the assurance that all relevant facts are available to the reviewer. For example, troubled borrowers may inadvertently or deliberately omit important information from correspondence with the reviewer regarding the borrower’s financial condition and the diminished strength of repayment sources.

While there exists probable asset quality problems in the Company’s loan portfolio, management believes sufficient amounts have been provided in the allowance for loan loss to absorb probable losses in the loan portfolio at June 30, 2004.

Non-Performing Loans, Potential Problem Loans, and Other Real Estate

As a Company policy the accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. If collectibility is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than recorded as interest income. Accrued interest recorded during the 90-day period remains accrued if management determines that the underlying collateral supports recovery of principal and accrued interest. At June 30, 2004, the Company had 5 loans that were 60 to 546 days past due, totaling approximately $11.5 million in principal and accrued interest.

Land Held for Residential Development and Real Estate Owned (Held for Sale)

Land held for residential development and real estate owned (held for sale) consists of real estate acquired through foreclosure and is carried at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated selling costs. Costs related to the improvements to the property are capitalized. Any other costs are expensed.

Inflation

Virtually all of the Company’s assets and liabilities are financial in nature. As a result, interest rates and other factors drive the Company’s performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates and changes in inflation rates. The Company’s consolidated financial statements are prepared in accordance with US GAAP, while dividends are based on net income calculated for

tax purposes. In each case, the Company’s Statements of Operations and Balance Sheets are measured with reference to historical cost or fair value without considering inflation.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in future SEC filings, or in other written or oral communications, the words or phrases “will likely result,” “are expected to,” “will continue”, “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 1934 Act, as amended, and as such may involve known and unknown risks, uncertainties and assumptions.

These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, risks relating to: increases in prepayment rates on the mortgage loans; changes in short-term interest rates; the Company’s ability to use borrowings to finance its assets; risks associated with investing in real estate, including changes in business conditions and the general economy; changes in government regulations affecting the Company’s business; and the Company’s ability to maintain its qualification as a REIT for Federal income tax purposes. These risks, uncertainties, and factors could cause the Company’s actual results to differ materially from those projected in any forward-looking statements it makes.

All forward-looking statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Readers are cautioned that the Company’s actual results could differ materially from those set forth in such forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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.

For the most part, our loans provide for either monthly payments of interest only and a payment of principal in full at the end of the loan term, or monthly payments of 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 100-200 basis point increase or decrease in general interest rates (from those prevailing at June 30, 2004) would have a significant impact on the fair value of our fixed rate loan portfolio. A significant increase in interest rates could, however, make it more difficult for our borrowers to sell or refinance their respective properties. This could have a material adverse effect on us, either through loan defaults or the need to grant extensions of the maturity dates, thereby delaying repayment. Additionally, a real estate market decline in Nevada, Arizona, Colorado, California, or Utah 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, the 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.

ITEM 4. CONTROLS AND PROCEDURES

(a)		Disclosure Controls and Procedures

		The undersigned principal executive officer and principal financial officer of Specialty Trust, Inc. conclude that Specialty Trust, Inc.’s disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as of the end of the period covered by this report.

(b)		Changes in internal control Over Financial Reporting

		There have been no significant changes in Specialty Trust, Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934 that occurred during Specialty Trust, Inc.’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Specialty Trust, Inc’s internal control over financial reporting

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

At June 30, 2004, other than litigation by the Company in the ordinary course of business involving foreclosures or other exercise of its rights as a creditor, there were no material pending proceedings to which the Company was a party or of which any of its property was subject.

ITEM 2. CHANGES IN SECURITIES ,USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.

None. The Company did not repurchase any of its equity securities during the second quarter of 2004 and has not adopted any plan for such repurchase.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

In addition, at the Annual Meeting of Stockholders held on June 21, 2004, the following voting results occurred:

(a)		The election of Class I Directors: Nello Gonfiantini III and Stephen V. Novecek.

(b)		Ratification of selection of KPMG LLP as independent auditors for the fiscal year ending December 31, 2004.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits


Exhibit No.		Document
	3.1*	Articles of Incorporation

	3.3*	Bylaws

	3.3.1*	Amendment to Bylaws

	31.1	Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-oxley Act of 2002.

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

(b)

Reports on Form 8-K None filed during the quarter ended June 30, 2004

SIGNATURES

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


	SPECIALTY TRUST, INC.

Dated: August 16, 2004			By:	/s/ NELLO GONFIANTINI III

		Nello Gonfiantini III
		Chairman, President, and Secretary

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

Dated: August 16, 2004			By:	/s/ TANYA MCCAFFERY

		Tanya McCaffery
		Interim Chief Financial Officer

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

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SPECIALTY TRUST INC 10-Q