U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 2003.

[ ] 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 000-32409

UNITED MORTGAGE TRUST
(Exact name of registrant as specified in its charter)

MARYLAND 75-6496585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

5740 Prospect Avenue, Suite 1000, Dallas TX 75206
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (214) 237-9305

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the Registrant (1) has filed all
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 if no disclosure of delinquent filers in
response to Item 405 of Regulation S-K (Section 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K [X]

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2) Yes [X] No [ ]

The aggregate market value of the registrant's stock held by non-
affiliates of the registrant at June 30, 2003 computed by reference to
the price at which the common equity was last sold was $112,606,320.

As of March 1, 2004, 7,028,106 of the Registrant's Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None

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TABLE OF CONTENTS

Page
PART I

Item 1. Description of Business......................................1

Item 2. Description of Property......................................4

Item 3. Legal Proceedings............................................4

Item 4. Submission of Matters to a Vote of Security Holders..........5

PART II

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

Item 6. Selected Financial Data. ....................................6

Item 7. Management's Discussion and Analysis of Financial
Condition of the Company.....................................8

Item 7A. Quantitative and Qualitative Disclosures
About Market Risk..........................................27

Item 8. Financial Statements and
Supplementary Data.........................................27

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................43

Item 9A. Controls and Procedures....................................43

PART III

Item 10. Directors and Executive Officers of the Registrant.........44

Item 11. Executive Compensation.....................................50

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............50

Item 13. Certain Relationships and Related Transactions.............51

Item 14. Principal Accountant Fees and Services.....................53

Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................55

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

We are a Maryland real estate investment trust formed on July 12, 1996. We
invest exclusively in the following types of investments: (1) first lien,
fixed rate mortgages secured by single-family residential property throughout
the United States (we refer to those investments as residential mortgages);
(2) the seller's unencumbered interest in fixed rate contracts for deed (also
known as land contracts) for the purchase of single-family residential
property throughout the United States (we refer to those investments as
contracts for deed); and (3) loans of 12 months or less in term, made to
investors for the construction, purchase, renovation, and sale of single-
family homes (we refer to those investments as interim mortgages). The use of
a mortgage or a contract for deed for homebuyers is generally dependent upon
the creditworthiness of the borrower, with less creditworthy borrowers
qualifying more easily for a contract for deed. The properties underlying each
of the types of liens we use to secure our loans are generally the same;
although in the case of interim mortgages the properties are typically
unimproved residential properties.

The typical term for residential mortgages, contracts for deed and
interim mortgages (collectively referred to as "mortgages investments") are
360 months, 360 months and 12 months, respectively. The risks to us and the
legal recourse that we have in the event of a default is essentially the same
for all three types of security instruments that we rely upon except that
eviction proceedings are somewhat simpler in the case of contracts for deed,
where the title to the property is not held by the borrower.

We seek to produce net interest income on our portfolio of mortgage
investments while maintaining strict cost controls in order to generate net
income for monthly distribution to our shareholders. We intend to continue to
operate in a manner that will permit us to continue to qualify as a Real Estate
Investment Trust ("REIT") for federal income tax purposes. As a result of that
REIT status, we are permitted to deduct dividend distributions to shareholders,
thereby effectively eliminating the "double taxation" that generally results
when a corporation earns income and distributes that income to shareholders in
the form of dividends. Our principal executive offices are located at 5740
Prospect Avenue, Suite 1000, Dallas, TX 75206, telephone (214) 237-9305 or
(800) 955-7917, facsimile (214) 237-9304.

The overall management of our business is invested in our Board of
Trustees. Our Advisor, UMT Advisors, Inc., ("UMTA" or "Advisor") has been
retained to manage our day-to-day operations and to use its best efforts to
seek out and present to us, whether through its own efforts or those of third
parties retained by it, a sufficient number of suitable investment
opportunities which are consistent

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with our investment policies and objectives and consistent with the investment
programs the Trustees may adopt from time to time in conformity with the
Declaration of Trust. The Company's President, Cricket Griffin, is an
employee of the Advisor, for which she serves as President. Previously, she
was also an employee of the Company.

We acquire mortgage investments from several sources. The amount of
mortgage investments to be acquired from them cannot be determined at
this time and will depend upon the mortgage investments that are
available from them or other sources at the time we have funds to invest.
All mortgage investments purchased from affiliates of the Advisor are at
prices no higher than those that would be paid to unaffiliated third
parties for mortgages with comparable terms, rates, credit risks and
seasoning.

We use the services of Prospect Service Corp ("PSC"), an affiliated
company, to service the residential mortgages and contracts for deed we
acquire. The servicing of the mortgages investments includes the
collection of monthly payments from the borrower, the distribution of all
principal and interest to us, the payment of all real estate taxes and
insurance to be paid out of escrow, regular distribution of information
regarding the application of all funds received and enforcement of
collection for all delinquent accounts, including foreclosure of those
accounts when and as necessary.

In addition to this annual report, we file quarterly and special
reports, proxy statements and other information with the SEC. All
documents that we file with the SEC are available free of charge on our
website, which is www.unitedmorgagetrust.com. You may also read and copy
any document that we file at the public reference facilities of the SEC
at 450 Fifth Street NW, Washington DC 20549. Please call the SEC at (800)
SEC-0330 for further information about the public reference facilities.
These documents also my be accessed through the SEC's electronic data
gathering, analysis and retrieval system ("EDGAR") via electronic means,
including the SEC's home page on the internet (http://www.sec.gov).

INVESTMENT OBJECTIVES AND POLICIES

PRINCIPAL INVESTMENT OBJECTIVES

Our principal investment objectives are to invest in mortgage investments
secured by single-family residential real estate. Those investments are
expected to:

(1) produce net interest income;

(2) provide monthly distributions from, among other things,
interest on mortgage investments; and

(3) permit reinvestment of payments of principal and proceeds of
prepayments, sales and insurance net of expenses.

INVESTMENT POLICY

Our primary investment policy is to purchase the following types of
mortgage investments: (1) first lien, fixed rate mortgages secured by single-
family residential property throughout the United States

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(2) the seller's unencumbered interest in fixed rate contracts for deed for
the sale of single-family residential property throughout the United States;
and (3) loans of 12 months or less in term, made to investors for the
construction, purchase, renovation, and sale of conventional single-family,
modular and manufactured homes.

A significant portion of the home buying public is unable to qualify for
government insured or guaranteed or conventional mortgage financing. Strict
income ratios, credit record criteria, loan-to-value ratios, employment history
and liquidity requirements serve to eliminate conventional financing
alternatives for many working class homebuyers. A large market of what are
referred to as "B", "C", "D", and "DD" grade mortgage notes has been generated
through utilization of non-conforming underwriting criteria for those borrowers
who do not satisfy the underwriting requirements for government insured or
guaranteed or conventional mortgage financing. Although there is no industry
standard for the grading of those non-conforming loans, the grade is primarily
based on the credit worthiness of the borrower.

We acquire what we consider to be "B", "C" and "D" grade mortgage loans.
Typically non-conforming notes bear interest at above market rates consistent
with the perceived increased risk of default. In practice, non-conforming
notes experience their highest percentage of default in the initial 12 months
of the loan. We attempt to reduce the rate and expense of early payment
defaults through the adherence to investment policies that require the seller
of a note to us with a payment history of less than 12 months to replace or
repurchase any non-performing note and to reimburse us for any interest,
escrows, foreclosure, eviction, and property maintenance costs.

Approximately 90% of our mortgage investments are geographically
concentrated in Texas due to proximity of our loan servicers and seasoned loans
in that area. We anticipate that this concentration will continue, although it
is our intention to expand our geographic presence through the purchase of
interim mortgages and other mortgage investments in other geographic areas of
the United States.

Currently, the major portion of our portfolio is comprised of interim
mortgages. We have been shifting to a portfolio that is more heavily weighted
to interim mortgages because 1) to date we have not experienced income loss
due to default with interim mortgages since those loans are subject to limited
or full recourse, and 2) blended yields for interim mortgages offered to us
have been higher than those of the other mortgage investments. We expect this
trend to continue for the foreseeable future.

COMPETITION

We believe that our principal competition in the business of
acquiring and holding mortgage investments is from financial
institutions such as banks, savings and loans, life insurance companies,
institutional investors such as mutual funds and pension funds, and
certain other mortgage REITs. While most of these entities have
significantly greater resources than we do, we believe that we are able

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to compete effectively and to generate relatively attractive rates of
return for shareholders due to our relatively low level of operating
costs, our relationships with our sources of mortgage investments and
the tax advantages of our REIT status.

EMPLOYEES

We have no employees.

ITEM 2. DESCRIPTION OF PROPERTY.

OFFICE LEASE

We do not maintain any physical properties.

ITEM 3. LEGAL PROCEEDINGS.

Except as described below, we are unaware of any threatened or pending
legal action or litigation that individually or in the aggregate could have a
material effect on us.

On December 17, 2003 we filed a registration statement to register
1,078,309 shares on Form S-11 in order to address a contingent liability for
rescission in the approximate amount of $22 million plus interest and less
dividends paid to those persons who purchased our shares between May 1, 2002
and October 31, 2002 during a period when we were required to file updated
financial information with the SEC and failed to do so. The offer was
commenced on December 29, 2003 and was concluded on January 28, 2004. Twenty-
one shareholders, holding an aggregate of 30,165 shares, accepted the offer.

The rescission offer was intended to address federal and state compliance
issues by allowing holders of shares covered by the rescission offer to sell
those shares back to us and to reduce our contingent liability with respect to
those shares. In each state where the offer was made, the right to sue is
lost except, with respect to Texas, the right is not lost if a purchaser
rejected in writing the offer and expressly reserved the right to sue. No such
reservations were received by us. Further, the statute of limitations for
noncompliance with the requirement to register securities under the Securities
Act of 1933, as amended (the 'securities Act") is one year, while under the
various state securities laws in which the rescission offer was made, the
statute of limitation ranges from one to four years from the date of the
transaction. The periods set forth in the statutes of limitations provided for
in the Securities Act and in most of the states in which the offer was made
have expired.

Notwithstanding the foregoing, the rescission offer does not necessarily
relieve us of our contingent liability for fines or penalties under state
securities laws or for civil liability that arises as a result of having
failed to make the rescission offer in compliance with applicable laws and
rules. However, no claims have been made to date.

On June 30, 2003, subsequent to filing an amended tax return for 2001 and
the 2002 return, we received a closing agreement from the Internal Revenue
Service ("IRS") wherein the IRS confirmed our status as a REIT and levied no
taxes or penalties. We requested a closing agreement because our 2001 federal
tax return characterized certain amounts that, if given effect, would mean
that we did not meet one of the requirements for classification as a REIT. We

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also recorded an inter-company transaction with the Advisor for the 2002
taxable year that was reversed prior to the filing of the Company's 2002
federal income tax return and was therefore not reported on that tax return.
That 2002 transaction, if given effect, could have meant that we did not meet
one of the requirements for classification as a REIT.

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

No items were submitted to a vote of our shareholders during the fourth
quarter.

PART II

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

There is currently no established public trading market for our shares.
As an alternative means of providing limited liquidity for our shareholders,
we maintain a share redemption plan. Under our plan, shareholders who have
held the shares for at least one year are eligible to request that we
repurchase their shares. In any consecutive twelve (12) month period we may
not repurchase more than 5% of the outstanding shares at the beginning of the
twelve (12) month period. The repurchase price will be based on the value of
our properties or fixed pricing schedule, as determined by the Trustee's
business judgment based on our book value, operations to date and general
market and economic conditions and may not, in any event, exceed any current
public offering price. Currently, we are repurchasing shares at a price of $20
per share.

The Board of Trustees has valued our shares at $20 per share based on
their business judgment regarding the value of the shares with reference to
our book value, our operations to date and general market and economic
conditions.

As of December 31, 2003, we had 7,028,106 shares outstanding
compared to 4,856,489 shares outstanding at December 31, 2002 and
3,332,161 at December 31, 2001. The shares were held by 2,898, 1,909 and
1,414 beneficial owners and by 2,588, 1,671 and 1,050 shareholders of
record in 2003, 2002 and 2001, respectively. No single shareholder owned
5% or more of our outstanding shares.

We distribute substantially all of our taxable income with respect to
each year (which does not ordinarily equal net income as calculated in
accordance with GAAP) to our shareholders so as to comply with the REIT
provisions of the Internal Revenue Code (the "Code"). To the extent we have
available funds, we declare regular monthly dividends (unless the Trustees
determine that monthly dividends are not feasible, in which case dividends
would be paid quarterly). Any taxable income remaining after the
distribution of the final regular monthly dividend each year is distributed
together with the first regular monthly dividend payment 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
Trustees. All distributions are made by us at the discretion of the Board
of Trustees and depend on our taxable earnings, our financial condition,
maintenance of our REIT status and such other factors as the Board of
Trustees deems relevant.

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Distributions to shareholders are generally subject to taxation as
ordinary income, although a portion of those distributions may be designated
by us as capital gain or may constitute a tax-free return of capital. We do
not intend to declare dividends that would result in a return of capital.
Any distribution to shareholders of income or capital assets from us is
accompanied by a written statement disclosing the source of the funds
distributed. If, at the time of distribution, this information is not
available, a written explanation of the relevant circumstances accompanies
the distribution and the written statement disclosing the source of the
funds is distributed to the shareholders not later than 60 days after the
close of the fiscal year in which the distribution was made. In addition, we
will annually furnish to each of our shareholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains, or return of capital.

We began making distributions to our shareholders on September 29,
1997. Monthly distributions have continued each month thereafter. At year-
end we had paid 76 consecutive monthly dividends. Distributions for the
year ended December 31, 2003, 2002 and 2001 were made at a rate of 9.2%
($1.84), 10% ($2.00) and 9.8% ($1.96), respectively. The dividend portion
of the distribution was $1.47, $1.81 and $1.81 per weighted share for 2003,
2002 and 2001, respectively.

On October 22, 2003, we filed a post-effective amendment to our
registration statement on Form S-11 filed on March 5, 2001 (Registration No.
333-56520, which became effective on June 4, 2001, in order to terminate that
offering and to deregister 745,403 shares of beneficial interest remaining
unsold under the registration statement. The registration statement registered
a total of 5,000,000 shares at $20.00 per share for an aggregate offering
price of $100,000,000 and an additional 750,000 shares at $20.00 per share for
sale under our Share Reinvestment Plan for an aggregate offering price of
$15,000,000. We sold an aggregate of 4,924,183 shares under that offering for
gross offering proceeds of approximately $98,484,000. Our offering expenses
totaled $12,292,000 consisting of $7,745,000 in commissions, $1,881,000 for
wholesaling and marketing fees and $2,666,000 in acquisition fees paid to our
Advisor. Our President, Cricket Griffin, is also the president of our Advisor.
No other offering expenses were paid, directly or indirectly to our trustees
or officers or to affiliates. Our net offering proceeds of $86,960,000 from
the offering were applied to the purchase of mortgage investments.

ITEM 6. SELECTED FINANCIAL DATA

We present below selected financial information. We encourage you to
read the financial statements and the notes accompanying the financial
statements in this Annual Report. This information is not intended to be a
replacement for the financial statements.

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<Table>
<Caption>
December 31,
2003 2002 2001 2000 1999
---------------------------------------------------------------

OPERATING DATA
Total revenues $12,076,341 $8,277,742 $5,679,657 $3,857,612 $2,502,504
Total expenses $ 3,487,222 $ 901,843 $ 894,824 $1,129,230 $ 695,004
Net income $ 8,589,119 $7,375,899 $4,784,833 $2,728,382 $1,807,500
Net income per share $1.47 $1.81 $1.81 $1.80 $1.90
Weighted average
shares outstanding 5,859,639 4,083,488 2,641,072 1,514,014 952,098
</Table>

<Table>
<Caption>
December 31,
2003 2002 2001 2000 1999
---------------------------------------------------------------------

BALANCE SHEET DATA
Cash $ 4,199,455 $ 646,570 $ 33,569 $ 200,912 $ 14,331
Residential mortgages and
contracts for deed $ 29,634,352 $35,299,701 $37,182,782 $31,906,587 $20,611,108
Foreclosed residential
mortgages and contracts
for deed $ 3,242,004 $ 3,676,070 $ 2,500,461 $ 1,512,812 $ 1,266,360
Interim Mortgages $ 71,482,192 $49,136,321 $17,529,898 $ 6,453,111 $ 4,199,632
Foreclosed interim mortgages $ 1,228,350 -- -- -- --
Line-of-credit
receivable, affiliate $ 6,093,493 -- -- -- --
Other assets $ 4,445,972 $ 2,333,229 $ 1,538,911 $ 832,664 $ 310,715
Total assets $120,325,818 $91,091,891 $58,785,621 $40,906,086 $26,402,146

Line-of-credit payable $ -- $ 6,245,000 $ 810,000 $ 7,000,000 $ 5,000,000
Other liabilities $ 1,835,145 $ 1,357,303 $ 685,137 $ 311,845 $ 227,307
Total Liabilities $ 1,835,145 $ 7,602,303 $ 1,495,137 $ 7,311,845 $ 5,227,307
Total temporary equity -- $21,566,181 -- -- --
Total shareholders' equity $118,490,673 $61,923,407 $57,290,484 $33,594,241 $21,174,839
Total liabilities and
shareholders' equity $120,325,818 $91,091,891 $58,785,621 $40,906,086 $26,402,146
</Table>

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE
COMPANY

The following section contains forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act and should be read in conjunction with our Financial Statements and
related notes appearing in this Form 10-K. Such forward-looking statements may
be identified by the words "anticipate," "believe," "estimate," "expect" or
"intend" and similar expressions. Forward looking statements are likely to
address such matters as our business strategy, future operating results,
future sources of funding for mortgage loans brokered by us, future economic
conditions and pending litigation involving us, each of which are discussed
herein under the caption "Factors that may Affect Future Results."

We were organized in Maryland in 1996 as a real estate investment trust
to invest in mortgages and contracts for deed. Most if not all of the
mortgages and contracts for deed that we purchase are not insured or
guaranteed by a federally owned or guaranteed mortgage agency and involve
borrowers who do not satisfy all of the income ratios, credit record criteria,
loan-to-value ratios, employment history and liquidity requirements of
conventional mortgage financing. The great majority of our investments are
concentrated in Texas. Increasingly we have emphasized investments in interim
mortgages over longer-term residential mortgages and contracts for deed since
interim mortgages generate a higher yield to us due to their higher interest
rates. At the end of 2003, our mortgage portfolio totaled approximately
$105,937,000.

We completed a public offering of our securities in October 2003, raising
approximately $130,615,000 in net offering proceeds. In November 2003, we
received a merger proposal from UMT Holdings, L.P, an entity organized by
persons that include some of our officers and owners and our Advisor. A
committee comprised of our Independent Trustees is currently evaluating the
proposal.

The following table sets forth certain information about the mortgage
investments that we purchased during the periods set forth below.

<Table>
<Caption>
Years Ended
December 31,
2003 2002 2001
-----------------------------------------

RESIDENTIAL MORTGAGES
Purchase price $ 1,078,000 $ 3,544,000 $ 5,100,000
Total number 20 70 111
Number purchased from affiliates 0 0 13
Number purchased from other sources 20 70 98
Blended interest rate 12.44% 12.86% 12.63%
Aggregate principal balance $ 1,079,000 $ 3,548,000 $ 5,120,000
Average principal balance $54,000 $51,000 $ 46,000
Remaining term in months (1) 314 325 328
Current yield (1) 12.50% 12.87% 12.71%
Investment-to-value ratio (1)(2) 83.39% 81.21% 75.55%

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CONTRACTS FOR DEED
Purchase price $ 282,000 $ 360,000 $ 4,010,000
Total number 7 8 82
Number purchased from affiliates 0 0 2
Number purchased from other sources 7 8 80
Blended interest rate 12.39% 12.21% 11.85%
Aggregate principal balance $ 286,000 $ 360,000 $ 4,015,000
Average principal balance $41,000 $45,000 $50,000
Remaining term in months (1) 320 334 337
Current yield (1) 12.53% 12.21% 11.88%
Investment-to-value ratio (1)(2) 79.76% 84.13% 83.23%

INTERIM MORTGAGES
Portfolio beginning balance at Jan 1 $49,136,000 $17,500,000 $ 6,500,000
Portfolio ending balance at Dec 31 $72,811,000 $49,136,000 $17,500,000
Net increase in portfolio
from prior period $23,675,000 $31,636,000 $11,000,000
Total number participated in
during period 2,216 1,653 724
Number purchased from affiliates 2,000 993 700
Number purchased from other sources 216 660 24
Blended interest rate 13.66% 13.58% 12.96%
Remaining term in months: less than 12 months 12 months 12 months
Current yield at year-end (1) 13.80% 13.77% 13.14%
Investment-to-value ratio (1)(2) 66.75% 62.00% 56.00%

<FN>
(1) These amounts were determined at the time the mortgage investments were
purchased.

(2) The investment-to-value ratio is determined at the time a mortgage
investment is acquired and is determined by dividing the amount paid to
acquire that mortgage investment by the value of the underlying real estate
that is security for that mortgage investment.
</FN>
</Table>

MANAGEMENT's DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

As of December 31, 2003, our mortgage portfolio consisted of 557
residential mortgages, 65 contracts for deed and 1,136 interim mortgages. The
portfolio had an unpaid principal balance ("UPB") of approximately
$105,937,000. The average loan in the portfolio had a blended interest rate of
13.12%, a current annual yield of 12.44%, an investment-to-value ratio of
70.34%, an average UPB of $60,000, and a term remaining of 334 months for
residential mortgages and contracts for deed. Interim mortgages have terms of
12 months or less, depending on the collateral securing the interim mortgage
and the borrower. The more extensive the rehabilitation work on the property
or the construction requirements, the longer the term of the loan. One of our
interim mortgage sources, Capital Reserve Corporation ("CRC"), an affiliated
company, which represented 12% of our interim mortgages at year end, reported

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that historically its average loan had a term of 6 months but paid off in 3.9
months. Another interim source, Ready Mortgage Corp. ("RMC"), an affiliated
company, which represented 9% of our interim portfolio, advised that
historically its average loan had a term of 12 months and the average loan
paid off in 7.2 months.

As of December 31, 2002, our mortgage portfolio consisted of 608
residential mortgages, 219 contracts for deed and 846 interim mortgages. The
portfolio had a UPB of approximately $88,112,000 at December 31, 2002. The
average loan in the portfolio had a blended interest rate of 12.92%, a current
annual yield of 13.04%, an investment-to-value ratio of 69.66%, an average UPB
of $53,000, and a term remaining of 321 months for residential mortgages and
contracts for deed. Interim mortgages have terms of 12 months or less,
depending on the collateral securing the interim mortgage and the borrower.
The more extensive the rehabilitation work on the property or the construction
requirements, the longer the term of the loan.

By comparison, as of December 31, 2001, our mortgage portfolio consisted
of 593 residential mortgages, 261 contracts for deed and 391 interim
mortgages. The portfolio had a UPB of approximately $57,213,000 at December
31, 2001. The average mortgage investment in the portfolio had an interest
rate of approximately 12.14%, a current annual yield of approximately 12.30%,
and a investment-to-value ratio of 72.67%, an average UPB of $46,000 and a
term remaining term of 332 for residential mortgage and contracts for deed and
12 months or less for interim mortgages.

<Table>
<Caption>
MORTGAGE PORTFOLIO TABLE
(dollars are approximate)

at 12-31-2003 at 12-31-2002 at 12-31-2001
------------- ------------- -------------

Residential Mortgages 557 608 593
Contracts for Deed 65 219 261
Interim Mortgages 1,136 827 391
Unpaid Principal Balance $105,937,000 $88,112,000 $57,213,000
Blended Interest Rate 13.12% 12.92% 12.14%
Annual Yield 12.44% 13.04% 12.30%
Investment-to-Value Ratio 70.34% 69.66% 72.67%
Average Loan UPB $60,000 $53,000 $46,000
</Table>

The great majority of the properties that are security for our mortgage
investments are located in Texas. Of the 1,758 active loans at December 31,
2003 approximately 52% were in the Dallas/Fort Worth area compared to 59% at
the end of 2002 and 62% at the end of 2001. In April 2002, we began to test
markets in states with similar foreclosure laws as Texas by purchasing a
limited number of loans in those areas, including California, Florida,
Georgia, Illinois, Missouri, North Carolina, Oklahoma and Tennessee. Each of
the properties was adequately covered by a mortgagee's title insurance policy
and hazard insurance. Some of our mortgage investments are covered by full or
limited recourse agreements with note sellers. In making the decision to
invest in other states, we consider the availability of non-judicial
foreclosure, as is available in Texas, to be the primary legal consideration.
While Texas does not provide a statutory right of redemption and permits
deficiency judgments, we do not rely upon those provisions in the enforcement

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of our liens and therefore we believe that the risks in mortgage investments
in most other states will not be significantly different than those we face in
Texas.

We neither buy nor sell servicing rights to the loans we purchase, nor do
we retain servicing rights. Residential mortgages and contracts for deed are
serviced by PSC, an affiliate. Interim mortgages are serviced by nonaffiliated
and affiliated companies. Affiliates include UMTH Lending ("UMTHL"), RMC, CRC
and Ready America Funding Corp. ("RAFC"). We pay monthly loan servicing fees
to PSC of 1/12th of 1/2 of 1% of the UPB of each loan.

During the years ended December 31, 2003, 2002 and 2001 our interest
income was approximately $12,076,000, $8,278,000, and $5,680,000,
respectively, 46% increases each year. In all three years, the primary reason
for the increases in income was a result of purchasing significant numbers of
mortgage investments with capital raised from the sale of our shares and
reinvesting principal receipts.

Operating expenses were approximately $3,487,000, $902,000 and $895,000,
respectively, 287% and 1% increases, respectively. Below listed are the
significant changes of operating expenses:

FORECLOSED PROPERTIES LOSS: increased 26,223% in 2003 and increased 16% in
2002

During the last few months of 2003, we aggressively sold foreclosed properties
that had been held by the Company on average for 657 days, for an average of
$0.61 on the dollar, and have reinvested the proceeds into higher yield
interim mortgages. The loss recognized for 2003 was approximately $2.2 million
dollars, which included a reserve of $350,000 as of December 31, 2003.
Although we do not anticipate loan losses to that extent in 2004, we have
reserved $350,000 at year end for losses in 2004 and will continue to adjust
the reserve monthly to account for the Company's best estimates of projected
losses in our portfolio. We have not experienced loans losses on interim
mortgages but anticipate a modest amount in 2004. Most if not all of our
interim mortgages are recoursed by the borrowers.

INTEREST EXPENSE: increased 87% in 2003 and decreased 82% in 2002

We use our credit facility to purchase loans in advance of receiving net
proceeds from the sale of our shares. The use of our credit facility depends
on the number of suitable investments available at any given time and the
amount of cash we have on hand.

LOAN SERVICING FEES: decreased 26% in 2003 and increased 6% in 2002

Loan servicing fees, paid to an affiliate, PSC, decreased because residential
mortgages and contracts for deed were prepaid.

TRUST ADMINISTRATION FEES: increased 64% in 2003 and increased 78% in 2002

The trust administration fee was paid to our Advisor. The fee was calculated
as 1/12th of 1/2 of 1% per month of the first $50,000,000 of income producing
assets and 1/12th of 1% per month of income producing assets in excess of
$50,000,000. As the portfolio grew so did the trust administration fee. The
trust administration fee may increase if we draw on our line of credit to
acquire mortgage investments.

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Payroll expenses increased 15% in 2003 and 40% in 2002. Payroll expenses are
paid by the Advisor and included as part of the trust administration fees.
They were $305,000, $265,000 and $189,000 for the comparable periods.

Rent expenses increased 106% in 2003 and decreased 11% in 2002. Rent expense
is paid by the Advisor and included as part of the trust administration fee.
They were $35,000, $17,000 and $19,000 for 2003, 2002, and 2001, respectively.
The increase in 2003 was due to additional office space leased by our Advisor.

GENERAL AND ADMINISTRATIVE EXPENSES: increased 68% in 2003 and 682% in 2002

General and administrative fees include third party expenses such as transfer
agent fees, which increased as the number of shareholders increased, printing
expenses, which increased as we added more shareholders and as we printed more
than the usual number of post-effective amendments in 2003, and audit and
accounting fees which grew as the size of our Company grew and included
additional fees associated with the closing agreement with the IRS, the
rescission and the end of our offering. We expect an increase in operating
expenses in the coming periods but we believe that the percentage of operating
expenses to income will remain relatively the same.

Operating expense as a percentage of income (not including interest
expense) was 27.67%, 9.95% and 8.17% for the three years, respectively.
Operating expense as a percentage of average invested assets was 3.35%, 1.13%
and 0.96% during the years, respectively. In both categories the 2003 amount
exceeds our limitation on operating expenses as outlined in our Declaration of
Trust. Our trustees have agreed to make an exception in 2003 on the
limitation, which is 25% and 2% respectively, after reviewing the nature of
the increase in expenses, primarily the significant foreclosure losses.

Net income was approximately $8,589,000, $7,376,000 and $4,785,000 for
the three years, respectively, 16% and 54% increases. The smaller increase in
2003 was a result of loan losses taken and reserves recognized, and the
increase in 2002 was due to the purchase of additional income producing
assets. Earnings per share were $1.47, $1.81 and $1.81, respectively.

Fluctuations in earnings are a function of the relationships between the
use of our credit facility, the amount of uninvested assets (amounts earned
but not received during the periods and cash balances), changes in the average
coupon of our portfolio as we add mortgage investments, loan losses and
default rates experienced between comparable periods, and the rate at which we
raise money.

Our average daily outstanding balance on our line of credit during 2003
was approximately $2,996,000 compared to approximately $1,438,000 during 2002
and $4,467,000 during 2001. Use of leverage can have a positive impact on
earnings because our cost of funds on leveraged dollars (4.88% weighted
average interest in 2003, 5.44% in 2002 and 10.15% in 2001) is lower than the
rate at which we are earning on the mortgage investments we purchase with
those dollars (a yield of 12.44% in 2003, 13.04% in 2002 and 12.30% in 2001).
Also, when comparing leverage dollars to net proceeds, we are at an advantage
when we buy loans with borrowed funds. Each dollar borrowed on our line of
credit netted us approximately $0.95 to invest compared to $0.87 on each
dollar raised through the offering in 2003. During the first seven months of
2003 we relied on our credit facility to fund loan purchases in advance of
receiving net proceeds. The pace at which we raised funds in the last few
months of the year, until we ended our offering, enabled us to pay down our
line of credit to zero by mid-July. During 2002 we were receiving offering

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proceeds at a rate commensurate with our ability to buy loans and had less of
a need to use our credit facility. In 2001 we used our credit facility
extensively. We believe that in today's low interest rate environment a
greater reliance upon borrowed funds will have a positive impact upon our
earnings. As our offering has ended we foresee using our line of credit
extensively during 2004.

In addition, during 2003 we carried higher cash balances in the bank. The
average daily cash balance was approximately $4,758,000 compared to $405,000
during 2002 and $189,000 during 2001. Gross proceeds from the sale of shares
were used to buy suitable investments or to pay down our credit facility, but
if our line of credit had no outstanding balance or if not enough suitable
investments were available, the cash was deposited in a money market or money
fund account and earned between 1% and 2%, while at the same time we paid a
9.2% dividend on those funds. Higher cash balances in the bank had a negative
impact on earnings.

Average interest receivable outstanding in 2003 compared to 2002
increased 80% and it also increased 56% between 2002 and 2001. Interest
receivable is interest earned on our investments but not immediately paid to
us by borrowers or by loan servicing agents. The timing between making
investments and receiving interest income had a negative impact on earnings
because the funds were not available to invest in income producing assets.
Finally, loans that were in default and thus not producing interest income had
a negative impact on earnings.

South Central Mortgage, Inc. ('sCMI") has agreed that if the obligor on
any residential mortgage or contract for deed sold to us by SCMI or its
affiliates that has had less than 12 payments made on it defaults in making any
payment or other obligation thereon during the period ending before the 12th
payment after we bought that Residential Mortgage or Contract for Deed, then
SCMI shall buy that mortgage investment from us or our assignee at a price
equal to the total unpaid principal balance due thereon, plus accrued interest
to the date of the purchase, plus insurance premiums, taxes and any other
amounts that we spent in the maintenance, protection or defense of our interest
therein or in the real property, including reasonable attorneys' fees. SCMI
may satisfy its obligations under the foregoing purchase or repurchase
requirement by either:

(a) Assigning and transferring to us a replacement Residential Mortgage or
Contract for Deed (the "Replacement Mortgage Investment"), provided: (i)
the real property securing the Replacement Mortgage Investment, the
creditworthiness of the obligor on the Replacement Residential Mortgage
Investment and other general underwriting criteria are reasonably
acceptable to us; and (ii) the value of the Replacement Residential
Mortgage Investment at the date of transfer to us shall be computed by us
in accordance with our then applicable pricing schedule for acquisition of
such residential mortgages or contracts for deed, giving due regard to
principal balance, interest rate, term, amortization and other general
factors used by us for acquisition of residential mortgages at that time;
or

(b) Payment by SCMI to us, on a month to month basis, of all lost
interest, tax and insurance escrow payments, as well as any costs incurred
by us related to curing the default or obtaining title to and possession
of the property securing the defaulted obligation, including but not

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limited to foreclosure, deed in lieu of foreclosure, bankruptcy claims or
motions, evictions, maintaining and/or securing the property and marketing
costs less any additional down payments or settlements received by us.

We began 2003, 2002 and 2001 with 78, 54 and 33 defaulted, foreclosed
properties, and foreclosed an additional 83, 67 and 55 loans during the
respective years. We sold 89 properties in 2003 compared to 43 properties
in 2002 and 34 in 2001, leaving 72, 78 and 54 foreclosed loans at the end
of 2003, 2002 and 2001. In addition, we foreclosed approximately $1.2
million interim mortgages during 2003 and none in 2002 or 2001. As a
percentage of our income producing assets the default rate for 2003 was
4.18% compared to 4.07% for 2002 and 4.34% for 2001.

At year end 2003, approximately 5% of our residential mortgages and
contracts for deed were covered under a recourse agreement. During 2003 all
of the foreclosed properties sold were financed by third parties. We did
not carry back notes with new borrowers on any of our foreclosed
properties. At year end 2002, approximately 13% residential mortgages and
contracts for deed were covered under a recourse agreement compared to 25%
at year end 2001. During 2002 all of the foreclosed properties sold were
financed by third parties. We did not carry back notes with new borrowers
on any of our foreclosed properties. During 2001 we carried back notes on
28 of the 34 properties sold. In 2001 we raised the standards of our
underwriting criteria after a review of the number of early pay defaults we
experienced in prior periods. That meant that the pool of available
homebuyers was reduced and in turn slowed the process of disposition. Our
analysis shows that buyers increasingly utilize third party financing (i.e.
FHA or VA Loans) which has increased the time required to process and close
third party financed sale of our foreclosed properties.

We purchase mortgage investments that generate interest income to us.
From the interest income received, we pay trust administration fees and other
expenses and distribute a minimum of 90% of the net income to our shareholders
as dividends. The loans we purchase have various fixed rates of interest. We
endeavor to blend interest rates from lower-yield, long-term mortgage loans,
which we refer to as residential mortgages and contracts for deed (at year end
2003 a 11.74% blended rate, at year end 2002 a 11.82% blended rate and at year
end 2001 a 11.87% blended rate), with higher yield interim mortgages (at year
end 2003 a blended rate of 13.12% compared to a blended rate of 13.77% in 2002
and 12.94% in 2001) in order to produce our targeted net yield for our
shareholders. Until 2001 our portfolio balance was weighted heavily toward
lower-yield, long-term loans (84%). To mitigate the lower-yield and higher
percentage of loss of interest income from defaulted long-term loans in a
portfolio that was becoming weighted toward non-recoursed status as it aged
(recourse is in effect for the first 12 payments of recoursed long-term
loans), we began expanding the percentage of our portfolio placed in higher
yield loans. We intend to continue investing in interim mortgages almost
exclusively.

Funds invested in residential mortgages and contracts for deed in 2003
decreased by approximately 15% from 2002. Funds invested in residential
mortgages and contracts for deed in 2002 decreased by approximately 1.8% from
2001. The significant growth between years was in the interim mortgage portion
of our portfolio, growing approximately 48.2% and 180.0% between years,
respectively.

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Below is a chart comparing our three loan categories, which shows the
growth trends during the past three years. Our Trustees and Advisor have
determined that we will continue to shift to a portfolio weighted to interim
mortgages for a number of reasons, the most compelling of which are: 1) to
date interim mortgages have had less risk and as a result we have not
experienced income loss due to default, because all of the loans are subject
to limited or full recourse, and 2) blended yields for interim mortgages have
been higher than those of the other mortgage investments which will lead to
potentially higher earnings.

<Table>
<Caption>
2003 2002 2001
----------- ----------- ----------

RESIDENTIAL MORTGAGES $28,487,000 $28,555,000 $27,463,000
Percentage increase
over prior year (1%) 4% 10%

CONTRACTS FOR DEED $4,638,000 $11,285,000 $12,220,000
Percentage increase
over prior year (59%) (7%) 42%

INTERIM MORTGAGES $72,811,000 $49,136,000 $17,530,000
Percentage increase
over prior year 48% 180% 172%
</Table>

It may be useful to also see how each category compares as a percentage
of the portfolio.
<Table>
<Caption>
2003 2002 2001
---- ---- ----

RESIDENTIAL MORTGAGES 27% 32% 48%
CONTRACTS FOR DEED 4% 13% 21%
INTERIM MORTGAGES 69% 55% 31%
</Table>

Distributions per share of beneficial interest for the years ended
December 31, 2003, 2002 and 2001 were $1.84, $2.00 and $1.96 per share,
respectively, on earnings of $1.47, $1.81 and $1.81, respectively.
Distributions declared by our Trustees during both comparable periods were at
a 9.2%, 10% and 9.8% annualized rate of return for our shareholders. We are
under no obligation to pay dividends at that same rate and from time to time
the rate at which we pay dividends may be adjusted.

CRITICAL ACCOUNTING POLICIES

We prepared our financial statements in accordance with accounting
principles generally accepted in the United States (GAAP). GAAP represents a
comprehensive set of accounting and disclosure rules and requirements, the
application of which requires management judgments and estimates. In response
to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies", we have identified the most critical
accounting policies upon which our financial statements are based on as
follows:

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<Page>
INTEREST INCOME ACCRUAL

We monitor each loan in our portfolio on a monthly basis to track pay
histories and performance. On a quarterly basis we determine whether to
accrue income on a given loan that is delinquent based on the borrower's
performance in past periods and based on discussions with the collection
staff of our loan servicer, relying on their contact with a delinquent
homeowner to determine the likelihood that a borrower will continue to make
mortgage payments. There is no assurance that the interest income we
recognize in our accrual at the end of each quarter, based on management's
best estimate, will be paid by a borrower thus requiring an adjustment in
the following quarter thereby effectively reducing net income. The effect
is that actual interest income collected from delinquent borrowers may be
lower than we projected for that period. We will continue to closely
monitor performance of our portfolio to recognize income as accurately as
possible.

MORTGAGE INVESTMENT LOSS RESERVES

Through 2002 we had not established mortgage investment loss reserves
because we believed our exposure to losses at that date was nominal based
on our historical experience. Mortgage investment losses are estimated to
be the difference between the outstanding loan balance at the time of
foreclosure less any value to be realized from the disposition of the
underlying collateral. We annually adjust to current market value the
foreclosed collateral and the difference between the estimated market value
and the outstanding loan balance creates a mortgage investment loss
reserve. During 2002 we realized an insignificant loss on the disposition
of foreclosed properties compared to an insignificant loss from the sale of
foreclosed property in 2001. During 2003 we experienced significant
mortgage investment losses as we aggressively pursued the sale of non-
income producing, foreclosed properties that had been on our books an
average of 657 days. These properties were sold at a discount of 38%.
Additionally, in the fourth quarter of 2003 we recorded a mortgage
investment loss reserve of $350,000 and will continue to reserve for
mortgage investment losses monthly during 2004 by reviewing our portfolio
monthly and estimating the proceeds from the sale of foreclosed properties
based on management's best estimate.

RESCISSION OFFER

We were required to file a post-effective amendment to the registration
statement by April 30, 2002 to include updated financial information and did
not do so until November 4, 2002. As a result, we faced a contingent
liability for rescission in the approximate amount of $22 million plus
interest (the amount of which will be subject to the laws of the state in
which the purchaser resides) and less the dividends paid to those persons who
purchased our shares between May 1, 2002 and October 31, 2002 when we stopped
selling shares. During that period we sold 1,078,309 shares for gross offering
proceeds of approximately $22 million. On October 22, 2003, in accordance with
the undertakings given by our registration statement on Form S-11 filed on
March 5, 2001 (Registration No. 333-56520, which became effective on June 4,
2001) we filed Post Effective Amendment No.6 deregistering 745,403 shares. The
Securities and Exchange Commission order of effectiveness was dated October
27, 2003. On December 17, 2003 we filed a registration statement to register
1,078,309 shares on Form S-11 in order to address a contingent liability for
rescission in the approximate amount of $22 million plus interest and less
dividends paid to those persons who purchased our shares between May 1, 2002

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and October 31, 2002. The offer commenced on December 29, 2003 and concluded
on January 28, 2004. Twenty-one shareholders, holding an aggregate 30,165
shares, accepted the offer.

ANNUAL VALUATION

CAPITAL RESOURCES AND LIQUIDITY FOR
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

We use funds made available on our bank line of credit and repayment of
principal on our mortgage investments to purchase mortgage investments. In
addition, until October 2003 we used funds made available from the sale of
shares. We do not have commitments to purchase any mortgage investments but
rather purchase them, as funds are available. (Dollars are approximate.)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2003 2002 2001
--------------------------------------------

Shares issued 2,525,499 1,643,377 1,448,118
Number of new shareholders 989 628 522
Shares repurchased ('sRP") (323,717) (80,002) (39,047)
Gross offering proceeds $50,510,000 $32,912,000 $28,866,000
Net offering proceeds (after
deduction of selling
commissions and fees) $44,267,000 $25,575,000 $24,825,000
Share repurchase payments ($6,460,000) ($1,583,000) ($750,000)
Principal receipts from
Residential Mortgages and
Contracts for Deed $ 8,421,000 $4,564,000 $2,906,000
Principal receipts from
Interim Mortgages $76,241,000 $32,118,000 $13,151,000
Net borrowing - credit line $(6,245,000) $5,435,000 ($6,190,000)
</Table>

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On June 4, 2001 the SEC issued its order of effectiveness for the sale of
an additional 5,750,000 shares of beneficial interest over and above an
original registration of 2,500,000 shares. Of the new shares offered for sale,
750,000 were set aside for the Dividend Reinvestment Plan. On October 22,
2003, in accordance with the undertakings given in our registration statement
on Form S-11 filed on March 5, 2001 (Registration No. 333-56520, which became
effective on June 4, 2001) we filed Post Effective Amendment No.6
deregistering 745,403 shares. The Securities and Exchange Commission order of
effectiveness was dated October 27, 2003, ending our offering. On November,
14, 2003 we filed an S-3 registration with the SEC to register 511,000 shares
of beneficial interest under our Dividend Reinvestment Plan. On December 5,
2003 we filed an 8-K with the SEC setting out our Share Redemption Program for
the repurchase of shares in order to provide our shareholders with limited
liquidity.

The aggregate number of shares issued by us during our initial and
subsequent offerings as of December 31, 2003, was 7,501,037, with 442,766
retired to treasury and 30,165 were rescinded leaving 7,028,106 shares
outstanding. Gross offering proceeds were approximately $149,821,000. The
gross offering proceeds were allocated as follows, shown as dollars and as a
percentage of gross offering proceeds: net offering proceeds to us of
approximately $130,615,000 (87.18%); commissions and fees paid to
participating NASD dealers of approximately $14,460,000 (9.65%); wholesaling
and marketing fees paid to the Advisor of $1,903,000 (1.27%) and acquisition
fees to the Advisor of $2,842,000 (1.90%).

The aggregate number of shares issued by us during our initial and
subsequent offerings as of December 31, 2002, was 4,975,538, with 119,049
retired to treasury leaving 4,856,489 shares outstanding. Gross offering
proceeds were approximately $99,259,000. The gross offering proceeds were
allocated as follows, shown as dollars and as a percentage of gross offering
proceeds: net offering proceeds to us of approximately $86,960,000 (87.61%);
commissions and fees paid to participating NASD dealers of approximately
$9,336,000 (9.40%); wholesaling and marketing fees paid to the Advisor of
$971,000 (0.98%) and acquisition fees to the Advisor of $1,594,000 (1.61%).

As of December 31, 2001 our aggregate sales of shares was 3,332,161, with
shares retired to treasury of 39,047 leaving 3,293,114. Gross offering
proceeds to date were $66,345,000 and net offering proceeds to us (after the
deduction of selling commissions and fees) were $58,385,000 (approximately
88.0% of gross offering proceeds). Total fees and commissions in the aggregate
included acquisition fees of $765,000 (equal to 3% of net proceeds paid to our
Advisor during 2001), commissions paid to selling group member firms of
$6,864,000 and wholesaling and marketing of $330,000.

With Trustee approval and effective July 11, 2001 we amended and extended
our $10,000,000 credit facility with the same lender for twelve months with a
floating rate of 1/2 percent above the bank's prime rate. We then extended the
loan on July 11, 2002 for another twelve months with the interest rate fixed
at 5.25% and again extended it on July 11, 2003. The line-of-credit was
collateralized with the assignment of certain residential mortgages. We
utilized the credit facility to acquire mortgage investments as they became
available. The outstanding balance of the line-of-credit was reduced as new
offering proceeds were received. The outstanding loan balance was $6,245,000

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and $810,000 at December 31, 2002, and 2001, respectively. There was no
outstanding balance on the line-of-credit at December 31, 2003. Under the
terms of our Declaration of Trust we can borrow an amount up to 50% of our Net
Assets (total assets less liabilities). The percentage outstanding at the end
of the years was zero, 7.5% and 1.4% of Net Assets, respectively. We intend to
continue to utilize our line of credit and may increase the maximum borrowings
if our funding needs rapidly increase. As anticipated, we used our line of
credit extensively in the first half of 2003 but raised money at an
accelerated rate through the sale of our shares in the second half of 2003 and
did not use our credit facility. We anticipate a significant increase in the
use of our facility in 2004 because our offering has ended and we are no
longer raising money from the sale of shares, except through our dividend
reinvestment plan.

As of December 31, 2003, we had in the aggregate purchased approximately
$214,900,000 of interim mortgages from various sources. During 2003 we funded
approximately $98,900,000, during 2002 we funded $64,000,000 and in 2001 we
funded approximately $24,000,000. The following table sets forth, as a
percentage of the whole, the amount funded with affiliates during 2003, 2002
and 2001.

Affiliated Company 2003 2002 2001
- --------------------- ---- ---- ----
Capital Reserve Corp. 13% 41% 96%
Ready America Funding 23% 18% 0%
REO Property Company 2% 0% 0%
Ready Mortgage Corp. 13% 15% 0%
South Central Mortgage 0% 1% 4%
**United Development Funding 7% 0% 0%
UMTH Lending 17% 0% 0%

**We extended a revolving line-of-credit ("LOC") to an affiliate, United
Development Funding, L.P., which is collateralized by the affiliates real
estate assets.

Outstanding balances for interim mortgages at December 31, 2003, 2002 and
2001 purchased from affiliates were:

Affiliated Company 2003 2002 2001
- --------------------- ----------- ----------- -----------
Capital Reserve Corp. $ 9,194,000 $19,209,000 $14,919,000
Ready America Funding $14,565,000 $ 9,424,000 --
REO Property Company $ 1,735,000 -- --
Ready Mortgage Corp. $ 6,346,000 $ 6,091,000 --
South Central Mortgage $ 306,000 $ 923,000 $ 929,000
United Development Funding $ 6,093,000 -- --
UMTH Lending $13,713,000 -- --

Residential mortgages and contacts for deed have been purchased from
various sources. At December 31, 2003, of the $48,884,000 purchased,
approximately $18,000,000 has been purchased from SCMI, an Affiliate.

Effect of Transactions With Related Parties

We do not have any employees. All administrative services and facilities
are provided to us by our Advisor, UMTA, under the terms of an Advisory
Agreement effective January 1, 2001. The services of the Advisor include all
day-to-day administrative services including managing our development of

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investment guidelines, overseeing servicing, negotiating purchases of loans and
overseeing the acquisition or disposition of investments and managing our
assets. The Advisor also provides office space to us.

For these services, we pay the Advisor a monthly trust administration fee
equal to 1/12th of 1/2 of 1% of the amount of average invested assets up to
$50,000,000 and 1/12th of 1% of the average invested assets in excess of
$50,000,000 and a subordinated incentive fee equal to 25% of the amount by
which our net income for a year exceeds a 10% per annum non-compounded
cumulative return on our adjusted contributions.

For each year which it receives a subordinated incentive fee, the Advisor
also receives 5-year options to purchase 10,000 Shares at a price of $20.00 per
share (not to exceed 50,000 shares). The Advisor is also eligible to receive
real estate brokerage commissions and for public offerings that we make, an
offering administrative fee and an acquisition fee equal to 3% of the net
offering proceeds of the offering. The Advisor and its affiliates are also
entitled to reimbursement of costs of goods, materials and services used for
and by us obtained from unaffiliated third parties except for note servicing
and for travel and expenses incurred in seeking any investments or seeking the
disposition of any of our investments.

The Advisory Agreement provides for the Advisor to pay all of our expenses
and for us to reimburse the Advisor for any third-party expenses that should
have been paid by us but which were instead paid by the Advisor. However, the
Advisor remains obligated to pay: (1) the employment expenses of its employees,
(2) its rent, utilities and other office expenses (except those relating to
office space occupied by the Advisor that is maintained by us) and (3) the cost
of other items that generally fall under the category of the Advisor's overhead
that is directly related to the performance of services for which it is
otherwise receiving fees from us.

Loan servicing fees are paid to PSC, an affiliate. The fee is paid monthly
and calculated as 1/12th of 1/2% of the outstanding principal balance of each
loan.

Property management fees on vacant properties are paid to REO Property Co.
("REOPC"), an affiliate. The fee is paid monthly and calculated as 1/12th of
1/2% of the outstanding balance of the loan when the property was classified as
REO.

Below is a chart listing fees paid to affiliates during the years:
<Table>
<Caption>

Type of Fee Payee 2003 2002 2001
- ------------------------ ----------- ---------- -------- ---------

Trust Management Fees UMTA $ 730,000 $445,000 $249,000
Acquisition Fees UMTA $1,248,000 $829,000 $765,000
Marketing and Wholesaling
Allowance UMTA $ 932,000 $641,000 $330,000
Incentive Fee UMTA -- -- --
Stock Options UMTA -- -- --
Loan Servicing Fees PSC $ 146,000 $197,000 $185,000
Property Management Fees REOPC $ 26,000 -- --
- -----------------------------------------------------------------------------
</Table>

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OFF BALANCE SHEET TRANSACTIONS

We do not have any off balance sheet transactions. We have formed a
special purpose entity into which we will transfer our residential
mortgages and contracts for deed with the purpose of a securitization of a
majority of the loans. On September 12, 2003, with Trustee approval, we
entered into a letter of intent with Bayview Financial Trading Group, L.P.,
("Bayview") that contemplates the sale of a 75% interest in approximately
60% of our long-term residential mortgages and contracts for deed (the
"Loan Pool"). We intend to transfer the Loan Pool to a Special Purpose
Entity ('sPE") and a Senior Security Certificate equaling 75% of the Loan
Pool with a 9.25% coupon will be issued to Bayview and we will receive a
Subordinate Security Certificate equal to 25% of the Loan Pool with an
11.66% coupon and earn approximately 2.41% on the Senior Security. We will
receive cash equal to 75% of the unpaid principal balance of the loans
transferred. We believe that the transaction will increase the yield of our
remaining long-term portfolio interests and allow us to reallocate cash
from these investments to interim Mortgages with average yields at or above
13.66%. The completion of the transaction is dependent on a successful due
diligence review by Bayview. We anticipate the closing of the transaction
in April 2004.

DISCLOSURE OF CONTRACTURAL OBLIGATIONS

The table below represents our obligations and commitments to make future
payments under debt obligations, maintenance contracts and lease agreements as
of December 31, 2003.

Payments due by period:
- -----------------------------------------------------------------------------
Total < 1 year 1-3 years 3-5 years > 5 years

Line of credit ** -- -- --

**payments are due only if there is an outstanding balance on the line of
credit. At December 31, 2003 there was no outstanding balance.

DIVIDENDS DECLARED AND DISTRIBUTIONS MADE

During the year ended December 31, 2003, we declared dividends and made
distributions on a monthly basis as shown below. Although last year we
declared distributions at a rate of 9.2%, and 10% the year before, we are
under no obligation to continue to do so. During 2003 we were on target for a
9.2% dividend until the last quarter when we sold a significant number of
properties at a discount, which reduced our earnings.

For the Years Ended
December 31,
2003 2002 2001
------- ------- --------
Monthly distribution rate $0.1533 $0.1667 $0.1667
Total distribution per share $1.84 $2.00 $1.96
Amount in excess
of earnings per share $0.37 $0.19 $0.15

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<Page>
MERGER PROPOSAL

We have received a merger proposal from an entity organized by
persons that include officers and owners of the Company and its advisor.
The proposal by UMT Holdings, L.P. ("UMTH") a Delaware limited
partnership and real estate finance company based in Dallas, Texas,
provides that we would be merged into UMTH. As currently proposed, each
holder of our shares of beneficial interest at the time of the closing of
the merger would receive a 10-year senior subordinated note having an
original principal amount of $21 for each share owned by such holder and
an annual interest rate of 9.5%, which interest shall be payable monthly.
The proposal contains other terms and may be amended or modified at any
time.

In response to the proposal, our Board of Trustees has formed a
special committee comprised of Richard D. O'Connor, Jr., Paul R. Guernsey
and Douglas R. Evans, each an independent and disinterested trustee. The
special committee has retained legal and financial experts to assist it
in evaluating the proposal. The special committee has been charged with
negotiating the final terms of any transaction with UMTH on behalf of the
Company, evaluating the fairness of the terms to our shareholders who are
not affiliated with UMTH, and making a recommendation to the full Board
of Trustees with respect to the transaction. In addition, the special
committee may entertain other unsolicited inquiries from any other
parties interested in the possible acquisition of our outstanding shares
of beneficial interest and, as appropriate, provide information, enter
into discussions and negotiate with such parties in connection with any
such inquiries. As of March 1, 2004 there have been no inquiries from
other sources.

UMTH's proposal is contingent upon, among other things, (i) the
negotiation, execution and delivery of a definitive agreement, (ii)
approval of the transaction by the special committee, the Company's full
Board of Trustees and the Company's shareholders, (iii) the special
committee's receipt of a fairness opinion from its financial advisor,
(iv) the effectiveness of a registration statement with the Securities
and Exchange Commission to permit the submission of the merger to a vote
of the Company's shareholders and to register the notes, (v) applicable
regulatory approvals, (vi) obtaining any necessary third-party consents
or waivers, and (vii) certain other conditions including UMTH's
satisfaction with the results of its due diligence investigation.

There can be no assurance that a definitive merger agreement will
be executed and delivered, or that UMTH's proposed transaction will be
consummated. The proposed transaction may only be completed in accordance
with the applicable state and federal laws, including the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

We believe that negotiations for a definitive agreement will commence
in mid-March 2004.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our dividend can fluctuate because it is based on earnings.

As reflected on our restated financial statements, since 1999 our
distributions have exceeded our earnings with the result that a portion of the
distributions to shareholders represented a return of capital. Although our

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<Page>
Trustees determined that we would not pay dividends in excess of earnings from
2003 forward, during the last quarter of 2003 we aggressively sold foreclosed
properties that had been vacant for over 365 days. In doing so we sold those
properties for $0.61 on the dollar; the loss is recorded as an expense and
thus reduced our earnings. Although we believe that the bulk of substandard
properties have been liquidated, we are subject to market conditions when
liquidating properties, which could affect our earnings.

Our investments are subject to a higher risk of default than conventional
mortgage loans.

Most, if not all, of the residential mortgages, contracts for deed and
interim mortgages that we purchase are not insured or guaranteed by a federally
owned or guaranteed mortgage agency. Also, most of our loans involve borrowers
who do not satisfy all of the income ratios, credit record criteria, loan-to-
value ratios, employment histories and liquidity requirements of conventional
mortgage financing. Accordingly, the risk of default by the borrower in those
"non-conforming loans" is higher than the risk of default in loans made to
persons who qualify for conventional mortgage financing.

We will purchase mortgage investments from our affiliates as well as from other
sources.

While we acquire our mortgage investments from several sources, many are
acquired from Affiliates of the Advisor. Due to the affiliation between the
Advisor and those entities and the fact that those entities may make a profit
on the sale of mortgage investments to us, the Advisor has a conflict of
interest in determining if mortgage investments should be purchased from
affiliated or unaffiliated third parties.

We face competition for the time and services of officers and trustees.

We rely on the Advisor and its Affiliates, including our President, who is
the President and an employee of our Advisor, for management of our operations.
Because the Advisor and its Affiliates engage in other business activities,
conflicts of interest may arise in operating more than one entity with respect
to allocating time between those entities.

We have a limited ability to meet our fixed expenses.

Our operating expenses, including certain compensation to our Advisor,
servicing and administration expenses payable to an Affiliate and unaffiliated
mortgage servicers and the Independent Trustees, must be met regardless of our
profitability. We are also obligated to distribute 90% of our REIT Taxable
Income (which may under certain circumstances exceed our Cash Flow) in order to
continue to qualify as a REIT for federal income tax purposes. Accordingly, it
is possible that we may be required to borrow funds or liquidate a portion of
our investments in order to make the required cash distributions to
shareholders. Although we generally may borrow funds, we cannot be assured
that such funds will be available to the extent, and at the time, required by
us.

Our results are subject to market and business conditions.

The results of our operations depend on, among other things, the level of
net interest income generated by our mortgage investments, the market value of
those mortgage investments and the supply of and demand for those mortgage
investments. Our net interest income varies as a result of changes in interest

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<Page>
rates, borrowing costs and prepayment rates, the behavior of which involve
various risks and uncertainties as set forth below. Interest rates, borrowing
costs and credit losses depend upon the nature and terms of the mortgage
investments, the geographic location of the properties securing the mortgage
investments, 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.

Fluctuations in interest rates may affect our return on investment.

Mortgage interest rates may be subject to abrupt and substantial
fluctuations. If prevailing interest rates rise above the average interest
rate being earned by our mortgage investments, investors may be unable to
quickly liquidate their investment in order to take advantage of higher returns
available from other investments. Furthermore, interest rate fluctuations may
have a particularly adverse effect if we use money borrowed at variable rates
to fund fixed rate mortgage investments. To date, all of the Company's
borrowings have been at fixed rates.

We have a high geographic concentration of mortgage investments in Texas.

A large percentage of our mortgage investments are located in Texas, with
approximately 52% in the Dallas/Fort Worth area. As a result, we have a
greater susceptibility to the effects of an economic downturn in that area or
from slowdowns in certain business segments that represent a significant part
of that area's overall economic activity such as energy, financial services and
tourism.

Risk of loss on non-insured, non-guaranteed mortgage loans.

We generally do not obtain credit enhancements for our mortgage
investments, because the majority, if not all, of those mortgage loans are
"non-conforming" in that they do not meet all of the underwriting criteria
required for the sale of the mortgage loan to a federally owned or guaranteed
mortgage agency. Accordingly, during the time we hold mortgage investments for
which third party insurance is not obtained, we are subject to the general
risks of borrower defaults and bankruptcies and special hazard losses that are
not covered by standard hazard insurance (such as those occurring from
earthquakes or floods). In the event of a default on any Mortgage Investment
held by us, including, without limitation, defaults resulting from declining
property values and worsening economic conditions, we would bear the risk of
loss of principal to the extent of any deficiency between the value of the
related mortgage property and the amount owing on the mortgage loan. Defaulted
mortgage loans would also cease to be eligible collateral for borrowings and
would have to be held or financed by us out of other funds until those loans
are ultimately liquidated, which could cause increased financing costs and
reduced net income or a net loss.

Bankruptcy of borrowers may delay or prevent recovery.

The recovery of money owed to us may be delayed or impaired by the
operation of the federal bankruptcy laws. Any borrower has the ability to
delay a foreclosure sale for a period ranging from a few months to several
months or more by filing a petition in bankruptcy, which automatically stays
any actions to enforce the terms of the loan. The length of this delay and the
costs associated therewith will generally have an adverse impact on our
profitability.

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<Page>
We must compete with others for mortgage investments.

In acquiring mortgage investments, we compete with other REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, other lenders, Ginnie Mae, Fannie Mae,
Freddie Mac and other entities purchasing mortgage investments, most of which
have greater financial resources than we do. In addition, there are mortgage
REITs similar to us, and others may be organized in the future. Some of these
entities have substantially greater experience than the Advisor and we have in
originating or acquiring mortgage investments. The effect of the existence of
additional potential purchasers of mortgage investments may be to increase
competition for the available supply of mortgage investments suitable for
purchase by us.

We are exposed to potential environmental liabilities.

In the event that we are forced to foreclose on a defaulted Mortgage
Investment to recover our investment, we may be subject to environmental
liabilities in connection with that real property which may cause its value to
be diminished. 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 of that property
to a third party. If those hazardous substances are discovered on a property,
we may be required to remove those substances or sources and clean up the
property. There can be no assurances that we would not incur full recourse
liability for the entire cost of any removal and clean up, that the cost of
such removal and clean up would not exceed the value of the property or that we
could recover any of those costs from any third party. 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.

We face risks from borrowed money.

We are allowed to incur borrowings with respect to the acquisition of
mortgage investments in an aggregate amount not to exceed 50% of our Net
Assets. An effect of leveraging is to increase the risk of loss. The higher
the rate of interest on the financing, the more difficult it would be for us to
meet our obligations and the greater the chance of default. These borrowings
may be secured by liens on our mortgage investments. Accordingly, we could
lose our mortgage investments if we default on the indebtedness. To the extent
possible, such debt will be of non-recourse type, meaning that we will not be
liable for any deficiency between the proceeds of a sale or other disposition
of the mortgage investments and the amount of the debt.

We are required to rely on appraisals that may not be accurate or which may be
affected by subsequent events.

Since our investment decisions are based in major part upon the value of
the real estate underlying our mortgage investments and less upon the
creditworthiness of the borrowers, we rely primarily on the real property
securing the mortgage investments to protect our investment. Thus, we rely on
appraisals and on Broker Price Opinions ("BPO's"), both of which are paid for
and most of which are provided by note sellers, to determine the fair market
value of real property used to secure the mortgage investments we purchase.
BPO's are determinations of the value of a property based on a study

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<Page>
of the comparable values of similar properties prepared by a licensed real
estate broker. We cannot be sure that those appraisals or BPO's are accurate,
in any or all cases. Moreover, since an appraisal or BPO is given with
respect to the value of real property at a given point in time, subsequent
events could adversely affect the value of real property used to secure a
loan. Such subsequent events may include changes in general or local economic
conditions, neighborhood values, interest rates and new construction.
Moreover, subsequent changes in applicable governmental laws and regulations
may have the effect of severely limiting the permitted uses of the property,
thereby drastically reducing its value. Accordingly, if an appraisal is not
accurate or subsequent events adversely affect the value of the property, the
Mortgage Investment would not be as secure as anticipated, and, in the event
of foreclosure, we may not be able to recover our entire investment.

Our mortgages may be considered usurious.

Usury laws impose limits on the maximum interest that may be charged on
loans and impose penalties for violations that may include restitution of the
usurious interest received, damages for up to three times the amount of
interest paid and rendering the loan unenforceable. Most, if not all, of the
mortgage investments we purchase will not be exempt from state usury laws and
thus there exists some uncertainty with respect to mortgage loans in states
with restrictive usury laws. However, we only purchase mortgage investments if
they provide that the amount of the interest charged thereon will be reduced
if, and to the extent that, the interest or other charges would otherwise be
usurious.

We face risks of bankruptcy of our mortgage servicer.

Our residential mortgages and contracts for deed are serviced by PSC or by
other entities. We require that our loan servicer maintain a fidelity bond and
directors' and officers' indemnity insurance to lower risk of liability from
the actions of such entities. However, there may be additional risks in the
event of the bankruptcy or insolvency of any of those entities or in the event
of claims by their creditors. Those additional risks would not be present if
we were qualified in all instances to service our residential mortgages and
contracts for deed directly.

We face the risk of an inability to maintain our qualification as a REIT.

We are organized and conduct our operations in a manner that we believe
enables us to be taxed as a REIT under the Internal Revenue Code (the "Code").
To qualify as a REIT, and thereby avoid the imposition of federal income tax on
any income we distribute to our shareholders, we must continually satisfy two
income tests, two asset tests and one distribution test.

If, in any taxable year, we fail to distribute at least 90% of our taxable
income, we would be taxed as a corporation and distributions to our
shareholders would not be deductible in computing our taxable income for
federal income tax purposes. Because of the possible receipt of income without
corresponding cash receipts due to timing differences that may arise between
the realization of taxable income and net cash flow (e.g. by reason of the
original issue discount rules) or our payment of amounts which do not give rise
to a current deduction (such as principal payments on indebtedness), it is
possible that we may not have sufficient cash or liquid assets at a particular
time to distribute 90% of our taxable income. In that event, we could declare
a consent dividend or we could be required to borrow funds or liquidate a
portion of our investments in order to pay our expenses, make the required

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<Page>
distributions to shareholders, or satisfy our tax liabilities, including the
possible imposition of a 4 percent excise tax. There can be no assurance that
such funds will be available to the extent, and at the time, required by us.

In the event of any adjustment of deductions of gross income by the IRS we
could declare a deficiency dividend.

If we were taxed as a corporation, our payment of tax would
substantially reduce the funds available for distribution to shareholders or
for reinvestment and, to the extent that distributions had been made in
anticipation of our qualification as a REIT, we might be required to borrow
additional funds or to liquidate certain of our investments in order to pay
the applicable tax. Moreover, should our election to be taxed as a REIT be
terminated or voluntarily revoked, we may not be able to elect to be treated
as a REIT for the following four-year period.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We may be exposed to interest rate changes primarily as a result of
annual renewals of our bank line of credit. Our bank line of credit has a
one year term and expires in July 2004. During the annual renewal, the
interest rate is negotiated. A higher interest rate may have a negative
impact on earnings, but we do not anticipate a significant increase above
the 5.25% we are obligated through July 2004.

We have no long-term borrowings.

ITEM 8. FINANCIAL STATEMENTS.

UNITED MORTGAGE TRUST

INDEX TO FINANCIAL STATEMENTS

Page

Report of Independent Auditors 28

Balance Sheets as of December 31, 2003 and 2002 29

Statements of Income for the
Years Ended December 31, 2003, 2002 and 2001 30

Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 31

Statements of Cash Flows for the
Years Ended December 31, 2003, 2002 and 2001 32

Notes to Financial Statements 33

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<Page>
REPORT OF INDEPENDENT AUDITORS

Board of Trustees
United Mortgage Trust

We have audited the accompanying balance sheets of United Mortgage Trust as of
December 31, 2003 and 2002, and the related statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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.

As discussed in Note G to the financial statements, certain errors resulting
in an overstatement of previously reported net income and shareholders' equity
as of and for the year ended December 31, 2001 were discovered by management
of the Company subsequent to issuance of those financial statements.
Accordingly, the financial statements have been restated to correct the error.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Mortgage Trust as of
December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America.

/S/ Whitley Penn

Dallas, Texas
February 13, 2004

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<page>
<Table>
<Caption>
UNITED MORTGAGE TRUST
BALANCE SHEETS

December 31,
2003 2002
----------------------------
ASSETS

Cash and cash equivalents $ 4,199,455 $ 646,570
Investment in residential mortgages
and contracts for deed, less reserve
for loan losses of $146,000 and none,
respectively 29,634,352 35,299,701
Residential mortgages and contracts
for deed foreclosed, less reserve for
loan losses of $104,000 and none,
respectively 3,242,004 3,676,070
Interim mortgages, less reserve for
loan losses of $65,000 and none,
respectively 71,482,192 49,136,321
Interim mortgages foreclosed, less
reserve for loan losses of $35,000
and none, respectively 1,228,350 --
Line-of-credit receivable, affiliate 6,093,493 --
Accrued interest receivable 3,453,824 1,917,088
Receivable from affiliate 59,117 109,594
Equipment, less accumulated depreciation
of $4,612 and $3,336, respectively 21,245 22,520
Other assets 911,786 284,027
------------ ----------
Total Assets $120,325,818 $91,091,891
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Line-of-credit, payable $ -- $ 6,245,000
Distributions payable 1,071,000 806,423
Accounts payable & accrued
liabilities 152,175 550,880
Amounts due for redemption of
beneficial interest 611,970 --
----------- ----------
Total Liabilities 1,835,145 7,602,303
----------- ----------

Commitments and contingencies -- --

Shares of beneficial interest redeemable
1,078,309 shares issued and outstanding
in 2002 -- 21,566,181

Shareholders' equity:
Shares of beneficial interest; $.01 par
value; 100,000,000 shares authorized;
7,470,872 and 3,897,229 shares
issued; 7,028,106 and 3,778,180
outstanding, respectively 74,708 38,972
Additional paid-in capital 130,539,921 65,354,916
Advisor's reimbursement 397,588 397,588
Cumulative distributions in excess
of earnings (3,728,496) (1,535,323)
Retained earnings -- --
----------- ----------
127,283,721 64,256,153
Less treasury stock, 442,766 and
119,049 shares, respectively,
at cost (8,793,048) (2,332,746)
----------- ----------

Total Shareholders' Equity 118,490,673 61,923,407
------------ -----------
Total Liabilities and Shareholders'
Equity $120,325,818 $91,091,891
------------ -----------
<FN>
See accompanying notes to financial statements.
</FN>
</Table>

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<Page>

<Table>
<Caption>
UNITED MORTGAGE TRUST
STATEMENTS OF INCOME

Year Ended December 31,
2003 2002 2001
--------------------------------------

Revenues:
Interest income $12,076,341 $8,277,742 $5,679,657

Expenses:
Foreclosed properties loss 2,172,197 8,252 7,085
Interest expense 146,196 78,203 430,790
Loan servicing fees 145,904 196,661 185,366
Trust administration fee 729,935 444,509 249,298
General and administrative 292,990 174,218 22,285
----------- ---------- ----------
3,487,222 901,843 894,824
----------- ---------- ----------

Net income $ 8,589,119 $7,375,899 $4,784,833
=========== ========== ==========

Earnings per share of
beneficial interest $1.47 $1.81 $1.81
=========== ========== ==========
Weighted average shares
outstanding 5,859,639 4,083,488 2,641,072
=========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</Table>

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<Page>
<Table>
<Caption>
UNITED MORTGAGE TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001

Cumulative
Shares of Additional Advisor's Distributions
Beneficial Interest Paid-in Reimburse- in Excess of Treasury
Shares Amount Capital ment Earnings Stock Total
---------------------------------------------------------------------------------------------

Balance at December 31, 2000 1,884,043 $18,840 $ 33,541,746 $397,588 $ (363,933) $ -- $ 33,594,241

Proceeds from shares issued 1,448,118 14,482 24,810,430 -- -- -- 24,824,912
Purchase of treasury stock -- -- -- -- -- (749,990) (749,990)
Distributions ($1.96 per share) -- -- -- -- (5,163,512) -- (5,163,512)
Net income -- -- -- -- 4,784,833 -- 4,784,833
--------- ------- ----------- -------- ----------- ----------- ------------
Balance at December 31, 2001 3,332,161 33,322 58,352,176 397,588 (742,612) (749,990) 57,290,484

Proceeds from shares issued 565,068 5,650 7,002,740 -- -- -- 7,008,390
Purchase of treasury stock -- -- -- -- -- (1,582,756) (1,582,756)
Distributions ($2.00 per share) -- -- -- -- (8,168,610) -- (8,168,610)
Net income -- -- -- -- 7,375,899 -- 7,375,899
--------- ------- ----------- -------- ----------- ----------- ------------
Balance at December 31, 2002 3,897,229 38,972 65,354,916 397,588 (1,535,323) (2,332,746) 61,923,407

Proceeds from shares issued 2,525,499 25,255 44,241,276 -- -- 44,266,531
Shares of beneficial interest
released from potential
redemption 1,048,144 10,481 20,943,729 -- -- -- 20,954,210
Purchase of treasury stock -- -- -- -- -- (6,460,302) (6,460,302)
Distributions ($1.84 per share) -- -- -- -- (10,782,292) -- (10,782,292)
Net income -- -- -- -- 8,589,119 -- 8,589,119
--------- ------- ------------ -------- ------------ ----------- ------------
Balance at December 31, 2003 7,470,872 $74,708 $130,539,921 $397,588 $ (3,728,496) $(8,793,048) $118,490,673
========= ======= ============ ======== ============ =========== ============
<FN>
See accompanying notes to financial statements.
</FN>
</Table>
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<Page>
<Table>
<Caption>
UNITED MORTGAGE TRUST
STATEMENTS OF CASH FLOWS

Year Ended December 31,
2003 2002 2001
-----------------------------------------

Cash flow from operating activities:
Net income $ 8,589,119 $ 7,375,899 $ 4,784,833
Adjustments to reconcile net income
to net cash provided by operating
activities:
Foreclosed properties loss 2,172,197 8,252 7,085
Depreciation and amortization 1,276 520 519
Net amortization of discount on
mortgage investments (22,281) (15,548) (9,506)
Changes in assets and liabilities:
Accrued interest receivable (1,536,736) (687,728) (561,847)
Other assets (627,759) (92,302) (134,754)
Accounts payable and accrued
liabilities (398,705) 409,156 138,117
Net cash provided by ------------ ----------- -----------
operating activities: 8,177,111 6,998,249 4,224,447
------------ ----------- -----------
Cash flow from investing activities:
Investment in residential mortgages and
contracts for deed (1,364,900) (3,849,140) (9,167,898)
Principal receipts on residential
mortgages and contracts for deed 5,314,398 4,563,908 2,906,477
Investment in interim mortgages (99,815,148) (63,724,041) (24,227,491)
Principal receipts on interim
mortgages 76,240,927 32,117,618 13,150,704
Line-of-credit receivable, affiliate (6,093,493) -- --
Purchase of equipment -- (21,144) --
Net cash used in investing ------------- ----------- -----------
activities: (25,718,216) (30,912,799) (17,338,208)
------------- ----------- -----------
Cash flow from financing activities:
Proceeds from issuance of shares of
beneficial interest 44,266,530 28,574,571 24,824,912
Net borrowings on line-of-credit
payable (6,245,000) 5,435,000 (6,190,000)
Receivable from affiliate 50,477 6,336 (10,165)
Purchase of treasury stock (6,460,302) (1,582,756) (749,990)
Distributions (10,517,715) (7,905,600) (4,928,339)
Net cash provided by ------------ ----------- -----------
financing activities: 21,093,990 24,527,551 12,946,418
------------ ----------- -----------
Net increase (decrease) in cash 3,552,885 613,001 (167,343)

Cash and cash equivalents at
beginning of year 646,570 33,569 200,912
------------ ----------- -----------
Cash and cash equivalents at
end of year $ 4,199,455 $ 646,570 $ 33,569
============ =========== ===========
Supplemental cash flow information:
Interest paid $ 146,196 $ 111,631 $ 397,362
============ =========== ===========
<FN>
See accompanying note to financial statements.
</FN>
</Table>
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<Page>

UNITED MORTGAGE TRUST
Notes to Financial Statements
December 31, 2003

A. NATURE OF BUSINESS

THE COMPANY

United Mortgage Trust (the "Company") is a Maryland real estate investment
trust which qualifies as a real estate investment trust (a "REIT") under
federal income tax laws. The Company invests exclusively in first lien,
fixed rate mortgages secured by single-family residential property
throughout the United States ("Mortgage Investments"). Such loans are
originated by others to the Company's specifications or to specifications
approved by the Company. Most, if not all, of such loans are not insured
or guaranteed by a federally owned or guaranteed mortgage agency.

The Company has no employees. It pays its Advisor a monthly trust
administration fee for the services relating to the Company's daily
operations which the Advisor uses to pay its employees who are directly and
indirectly involved in the day-to-day management of the Company. The
Company's Advisor and affiliated companies offices are located in Dallas,
Texas.

THE ADVISOR

The Company uses the services of UMT Advisors, Inc. ("UMTA") to manage its
day-to-day activities and to select the investments it purchases. The
Company's President, Cricket Griffin, is an employee of the Advisor, for
which she serves as President. The Advisor is owned and controlled by
Todd F. Etter and Timothy J. Kopacka. Mr. Etter is the owner of South
Central Mortgage, Inc. ("SCMI"), a Texas corporation that sells Mortgage
Investments to the Company, of Prospect Service Corp. ("PSC"), a Texas
corporation that services the Company's residential mortgages and contracts
for deed, of Capital Reserve Corporation ("CRC") and Ready America Funding
Corp. ("RAFC"), both Texas corporations that sell interim mortgages to the
Company, of UMTH Lending, L.P. ("UMTHL") a Delaware limited partnership
that sells interim mortgages to the Company and of United Development
Funding, L.P. ("UDF") a Nevada limited partnership for which the Company
has provided a line-of-credit.

ADVISORY AGREEMENT

UMTA has the responsibility of the day-to-day operations of the Company and
for seeking out, underwriting and presenting Mortgage Investments to the
Company for consideration and purchase as well as being responsible for all
facets of the Company's business operations under the guidance of the
Company's Trustees. In that regard it employs the requisite number of staff
to accomplish these tasks, leases its own office space and pays its own
overhead. The Company pays a trust administration fee for services rendered
by the Advisor.

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<Page>
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements is as
follows:

BASIS OF ACCOUNTING

The accounts are maintained and the financial statements have been prepared
using the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts in the financial statements and accompanying notes. Actual results
could differ from these estimates and assumptions.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
2003 and 2002, the Company had $3,801,631 and $646,574, respectively,
investments included in cash and cash equivalents.

RESIDENTIAL MORTGAGES, CONTRACTS FOR DEED AND INTERIM MORTGAGES

Residential mortgages, contracts for deed and interim mortgages are
recorded at the lower of cost or estimated net realizable value, net of
discounts and including loan acquisition costs paid to the Advisor. The
Mortgage Investments are collateralized by real property owned by the
borrowers.

The loan acquisition fees and discounts on the notes are amortized using
the interest method over the estimated life of the mortgages (5 and 1/2
years). The unamortized discount amounted to $378,938 and $599,595 at
December 31, 2003 and 2002, respectively. The unamortized loan acquisition
costs amounted to $466,912 and $665,289, respectively.

The majority of residential mortgages and contracts for deed are 360 months
real estate lien notes that are purchased by the Company from several
sources, including SCMI, an affiliate. Interim mortgages are real estate
lien notes purchased by the Company from various sources including CRC and
RAFC, affiliates of the Company. Interim mortgages have terms of 12 months
or less. The Company is not a loan originator nor does it purchase Mortgage
Investments for resale. The Company intends to hold Mortgage Investments
for their lives.

As of December 31, 2003, interim mortgage had an average interest rate of
13.66%. average annual yield of 13.80%, average loan-to-value ratio of
66.75%, average unpaid principal balance of $63,000 and a remaining term of
under 12 months. As of December 31, 2003, residential mortgages and
contracts for deed has an average interest rate of 11.76%, average yield of
12.03%, average loan-to-value ratio of 84.60%, average unpaid principal
balance of $46,000 and a remaining term of 334 months.

Generally, the Company does not retain servicing rights on its Mortgage
Investments. Although it is not prohibited from doing so under the terms of
its loan purchase negotiations or of its Declaration of Trust, the Company
relies on various servicing sources, including affiliated companies, to
service its Mortgage Investments.

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<Page>
INTEREST INCOME ACCRUAL

Interest income is received by the Company from its portfolio of
residential mortgages, contracts for deed and interim mortgages. The
Company does not receive interest income on defaulted loans that are not
covered under a recourse agreement. The Company requires that interest be
advanced by note sellers on all recoursed loans (loans that have active
recourse agreements). The Company monitors each loan in its portfolio on a
monthly basis to track pay histories and performance. On a quarterly basis
it determines whether to accrue income on a given loan that is delinquent
based on the borrower's performance in past periods and based on
discussions with the collection staff of its loan servicer, relying on
their contact with a delinquent homeowner to determine the likelihood that
a borrower will continue to make the mortgage payments. The Company does
not accrue income on all loans but makes a loan-by-loan determination
whether to recognize interest income for the quarter. There is no assurance
that the interest income recognized by the Company will be paid by a
borrower thus requiring an adjustment in the following quarter thereby
effectively reducing net income.

ACCOUNTING FOR AND DISPOSITION OF FORECLOSED PROPERTIES

When the Company takes possession of real estate through foreclosure it
attempts to resell the property to recover all costs associated with the
default, including legal fees, transaction costs, and repair expenses.
Repair costs are capitalized. Upon sale of the property, a gain or loss is
recorded. Net gains are taxable and, if material, are distributed to
shareholders as capital gains. Losses are expensed. The Company has
elected to treat property acquired through foreclosure as "foreclosure
property" and has reported it as such in the Company's informational
federal tax filings. In the event that a foreclosed property is sold for
less than the recoursed value associated therewith, the Company realizes
the loss and classifies any recourse value received in excess of the
Company's basis as a capital contribution. In addition, recourse amounts
are paid in installments by a note seller and the recognition of the
capital contribution will be at a date later than the corresponding
mortgage loss is realized.

MORTGAGE INVESTMENT LOSS RESERVES

Through 2002 the Company had not established mortgage investment loss
reserves because management believed its exposure to losses at that date
was nominal based on historical experience. Mortgage investment losses are
estimated to be the difference between the outstanding loan balance at the
time of foreclosure less any value to be realized from the disposition of
the underlying collateral. The Company annually adjusts to current market
value the foreclosed collateral and the difference between the estimated
market value and the outstanding loan balance creates a mortgage investment
loss reserve. During 2002 the Company realized an insignificant loss on the
disposition of foreclosed properties as well as an insignificant loss from
the sale of foreclosed property in 2001. During 2003 the Company
experienced significant mortgage investment losses as management
aggressively pursued the sale of non-income producing, foreclosed
properties that had been on the Company's books an average of 657 days. The
properties were sold at a discount of 39%. Additionally, in the fourth
quarter of 2003, the Company recorded a mortgage investment loss reserve of
$350,000, and will continue to reserve for mortgage investment losses

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<Page>
monthly during 2004 by reviewing its portfolio monthly and estimating the
proceeds from the sale of foreclosed properties based on management's best
estimates.

EQUIPMENT

Equipment is recorded at cost and depreciated by the straight-line method
over the five-year expected useful lives of the assets. Expenditures for
normal maintenance and repairs are charged to expense as incurred, and
significant improvements are capitalized.

INCOME TAXES

The Company intends to continue to qualify as a REIT under the Internal
Revenue Code of 1986 the ("Code") as amended. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
('Taxable Income'), which is distributed to its shareholders provided that
at least 90% of Taxable Income is distributed. No provision for taxes have
been made in the financial statements, as the Company believes it is in
compliance with the Code. Dividends paid to shareholders are considered
ordinary income for income tax purposes.

EARNINGS PER SHARE

The Company has adopted Statement of Financial Accounting Standard ('SFAS')
No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to shareholders by
the weighted average number of shares outstanding for the period. Dilutive
earnings per share reflects the potential dilution of securities that could
share in the earnings of the Company. Because the Company's potential
dilutive securities are not dilutive, the accompanying presentation is only
of basic earnings per share.

DISTRIBUTION POLICY AND DISTRIBUTIONS DECLARED

The Company will make distributions each year (not including return of
capital for federal income tax purposes) equal to at least 90% of the
REIT's taxable income. Since September 1997 the Company has made monthly
distributions to its shareholders and intends to continue doing so. The
Trustees declare the distribution rate quarterly and make the distribution
monthly for shareholders of record as of the 15th of the following month at
the end of the following month. Although the Company does not intend to
make distributions in excess of earnings, it has done so in each of the
three years ended December 31, 2003.

SHARES OF BENEFICIAL INTEREST OPTIONS

At December 31, 2003, 2002 and 2001, the Company had shares of beneficial
interest options outstanding, which are described more fully in Note D. The
Company accounts for its shares of beneficial interest options under the
recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The pro forma effect on net income if the Company
had applied the fair value of recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation as of the years ended December 31, 2003, 2002 and 2001 was
nominal and hence not disclosed.

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<Page>
FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the reporting requirements of SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, the Company calculates the fair
value of its assets and liabilities which qualify as financial instruments
under this statement and includes this additional information in the notes
to the financial statements when the fair value is different than the
carrying value of those financial instruments. The estimated fair value of
cash equivalents, accrued interest receivable, receivable from affiliate,
accounts payable and accrued liabilities approximate the carry amounts due
to the relatively short maturity of these instruments. The carrying value
of residential mortgages and contracts for deed, interim mortgages, line-
of-credit receivable from affiliate and the Company's line-of-credit
payable also approximate fair value since these instruments bear market
rates of interest. None of these instruments are held for trading purposes.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. SFAS No. 150 requires that certain
financial instruments, which under previous guidance could be accounted for
as equity, be classified as liabilities in statements of financial
position. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. Adoption of SFAS No. 150 did not have a
significant impact on the Company's results of operations or financial
condition.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation No. 45 is effective for guarantees
issued or modified after December 31, 2002 and the disclosure requirements
in this interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. Adoption of Interpretation
No. 45 did not have a significant impact on the Company's results of
operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities-an interpretation of ARB No. 51, which provides
guidance on the identification of and reporting for variable interest
entities. Interpretation No. 46 expands the criteria for consideration in
determining whether a variable interest entity should be consolidated.
Interpretation No. 46 is effective immediately for variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. Adoption of
Interpretation No. 46 did not have a significant impact on the Company's
results of operations or financial condition.

RECLASSIFICATIONS

Certain prior year's amounts have been reclassified to conform with the
current year presentation.

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C. LINE-OF-CREDIT PAYABLE

On July 11, 2003 the Company extended its line-of-credit for 12 months
under the same terms as those in 2002. The line-of-credit is collateralized
with the assignment of certain residential mortgages. At December 31, 2003
and 2002 the outstanding balances were zero and $6,245,000, respectively,
with interest at 5.25% at December 31, 2003. Interest paid during the three
years ended December 31, 2003 was $146,196, $111,631 and $397,362,
respectively.

D. SHARES OF BENEFICIAL INTEREST OPTIONS

For each year in which an Independent Trustee of the Company serves, the
Trustee receives 5-year options vested upon grant to purchase 2,500 shares
of Company stock at $20 per share.

Following is a summary of the options transactions:

2003 2002 2001
---------------------------
Outstanding at beginning of year 47,500 47,500 40,000
Granted 7,500 7,500 7,500
Expired (10,000) (7,500) --
Exercised -- -- --
------ ------ ------
Outstanding at end of year 45,000 47,500 47,500
------ ------ ------
Exercisable at end of year 45,000 47,500 47,500
------ ------ ------

Exercise price per share $20.00 $20.00 $20.00
------ ------ ------

E. RELATED PARTY TRANSACTIONS

1). Fees paid to the Advisor, a related party: On January 1, 2001, the
Company entered into an Advisory Agreement with UMTA whereby the Advisor
provides the Company with day-to-day management and administrative services
subject to the supervision and review by the Trustees. In consideration for
the services, the Company paid the Advisors a trust administration fee of
$729,935, $444,509 and $249,298 for the years ended December 31, 2003, 2002
and 2001, respectively. The fee was calculated as 1/12th of 1/2 of 1% paid
monthly of the first $50,000,000 of income producing assets and 1/12th of
1% of income producing assets in excess of $50,000,000, paid monthly. The
terms of the Advisory Agreement calculates the Acquisition Fee (paid for
sourcing suitable investments) as 3% of net offering proceeds (net offering
proceeds are gross offering proceeds less commissions and marketing
reallowances). The acquisition fees paid in 2003, 2002 and 2001 totaled
$1,248,175, $828,729 and $765,333, respectively.

On January 1, 2001, the employees of the Company became employees of the
Advisor. The Advisor pays their salaries and wages and maintains office
space initially under lease by the Company, and now under lease by the
Advisor. The Advisor is in the business of managing various businesses
including the Company's. The Advisor's employees have various areas of
responsibilities outside of management of the Company.

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<Page>
2). Rent paid and received between related parties: As of January 1, 2001
the Company's obligation under the terms of its lease agreement with SCMI
was assumed by its Advisor and no rent has been paid by the Company since
2000. For the years ended December 31, 2003, 2002 and 2001, rent expenses
paid by the Advisor and included as part of the trust administration fee
was $35,000, $61,000 and $61,000, respectively, with offsetting sublease
income in 2002 and 2001 of $44,000 and $42,000, respectively.

3). Loan servicing fees paid to an affiliate: Under the terms of a Mortgage
Servicing Agreement with PSC, the Company incurred loan servicing fees of
$145,904, $196,661 and $185,366 for years 2003, 2002 and 2001,
respectively. The Company does not normally retain the servicing rights to
the loans it purchases, however it is not prohibited from servicing its
loans.

4). Purchasing Mortgage Investments from affiliates: The Company has
purchased residential mortgages and contracts for deed from SCMI. To date
the aggregate amount is approximately $18,000,000. Below is a table of
interim mortgages purchased from affiliates with outstanding balances of
loans:

Affiliated Company 2003 2002 2001
- --------------------- ----------- ----------- -----------
Capital Reserve Corp. $ 9,194,000 $19,209,000 $14,919,000
Ready America Funding $14,565,000 $ 9,424,000 --
REO Property Company $ 1,735,000 -- --
Ready Mortgage Corp. $ 6,346,000 $ 6,091,000 --
South Central Mortgage $ 306,000 $ 929,000 $ 929,000
United Development Funding $ 6,093,000 -- --
UMTH Lending $13,713,000 -- --

5). Salaries and wages now paid by the Advisor: Payroll expenses, although
paid by the Advisor and construed to be part of the trust administration
fees in 2003, 2002 and 2001, were approximately $305,000, $265,000 and
$189,000, respectively.

6). SCMI Recourse Agreement: SCMI has agreed that, if the obligor on any
Residential Mortgage or Contract for Deed sold to the Company by SCMI or its
Affiliates, and that has had less than 12 payments made on it, defaults in
the making of any payment or other obligation thereon during the period
ending before the 12th payment after the Company bought that Residential
Mortgage or Contract for Deed, then SCMI shall buy that Mortgage Investment
from the Company or its assignee at a price equal to the total unpaid
principal balance due thereon, plus accrued interest to the date of the
purchase, plus insurance premiums, taxes and any other amounts that the
Company spent in the maintenance, protection or defense of its interest
therein or in the real property, including reasonable attorneys' fees.
SCMI may satisfy its obligations under the foregoing purchase or repurchase
requirement by either:

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<Page>
be computed by it in accordance with its then applicable pricing schedule
for acquisition of such residential mortgages or contracts for deed, giving
due regard to principal balance, interest rate, term, amortization and other
general factors used by it for acquisition of residential mortgages at that
time; or

(b) Payment by SCMI to the Company, on a month to month basis, of all lost
interest, tax and insurance escrow payments, as well as any costs incurred
by it related to curing the default or obtaining title to and possession of
the property securing the defaulted obligation, including but not limited to
foreclosure, deed in lieu of foreclosure, bankruptcy claims or motions,
evictions, maintaining and/or securing the property and remarketing costs
less any additional down payments or settlements received by the Company.

In all cases to date SCMI has elected option "b" of the agreement.

7.) Line-of-Credit Receivable, Affiliate: The Company extended a revolving
line-of-credit ("LOC") to an affiliate, United Development Funding, L.P.,
which is collateralized by the affiliate's real estate assets. Accrued
interest on the LOC is payable monthly to the Company with the principal
balance being due one year after the LOC agreement originated, on September 1,
2003. The Company has the ability, but not an obligation, to renew the
affiliate's LOC agreement on an annual basis. The Company monitors the LOC for
collectibility on a continuing basis based on the affiliate's payment history.
No valuation allowance or charge to earnings was recorded for the year ended
December 31, 2003 based on the Company's evaluation.

F. MERGER PROPOSAL

In November 2003, the Company received a merger proposal from an
entity organized by persons that include officers and owners of the
Company and its advisor. The proposal by UMT Holdings, LP, a Delaware
limited partnership and real estate finance company based in Dallas,
Texas ("UMTH"), provides that the Company would be merged into UMTH. As
currently proposed, each holder of the Company's shares of beneficial
interest at the time of the closing of the merger would receive a 10-year
senior subordinated note having an original principal amount of $21 for
each share owned by such holder and an annual interest rate of 9.5%,
which interest shall be payable monthly. The proposal contains other
terms and may be amended or modified at any time.

In response to the proposal, the Company's Board of Trustees formed
a special committee comprised of Richard D. O'Connor, Jr., Paul R.
Guernsey and Douglas R. Evans, each an independent and disinterested
trustee. The special committee retained legal and financial experts to
assist it in evaluating the proposal. The special committee has been
charged with negotiating the final terms of any transaction with UMTH on
behalf of the Company, evaluating the fairness of the terms to the
Company's shareholders who are not affiliated with UMTH, and making a
recommendation to the full Board of Trustees with respect to the
transaction. In addition, the special committee may entertain other
unsolicited inquiries from any other parties interested in the possible
acquisition of the Company's outstanding shares of beneficial interest
and, as appropriate, provide information, enter into discussions and
negotiate with such parties in connection with any such inquiries. As of
March 1, 2004, there have been no inquiries from other sources.

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<Page>
UMTH's proposal is contingent upon, among other things, (i) the
negotiation, execution and delivery of a definitive agreement, (ii)
approval of the transaction by the special committee, the Company's full
Board of Trustees and the Company's shareholders, (iii) the special
committee's receipt of a fairness opinion from its financial advisor,
(iv) the effectiveness of a registration statement with the Securities
and Exchange Commission to permit the submission of the merger to a vote
of the Company's shareholders and to register the notes, (v) applicable
regulatory approvals, (vi) obtaining any necessary third-party consents
or waivers, and (vii) certain other conditions including UMTH's
satisfaction with the results of its due diligence investigation.

The Company believes that negotiations for a definitive agreement will
commence in mid-March 2004.

G. COMMITMENTS AND CONTINGENCIES

CONCENTRATION OF CREDIT

Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily temporary cash investments,
mortgage notes receivable and line-of-credit receivable, affiliate. The
Company maintains deposits primarily in three financial institutions. The
deposits may at times exceed amounts covered by insurance provided by the
U.S. Federal Deposit Insurance Corporation ("FDIC"). At December 31 ,2003
and 2002, the Company had balances exceeding the FDIC insurance limits by
approximately $4,148,000 and $1,101,000, respectively.

The majority of all first lien mortgage notes receivable are 'sub-Prime, B,
C and D Grade' notes secured by single family homes, principally in the
Dallas/Fort Worth, Houston and San Antonio Metropolitan areas. The line-of-
credit receivable, affiliate is monitored by the Company for
collectibility, and the Company believes the amount will be fully
collectable.

RIGHT OF RESCISSION

The Company faced a contingent liability to those investors who purchased
shares after April 30, 2002 and until the effectiveness of the post-effective
amendment No. 1 filed with the SEC on November 4, 2002 as a result of the
failure to file an amendment within the time period specified. On December 17,
2003, the Company filed a registration statement to register 1,078,309 shares
on Form S-11 in order to offer rescission in the approximate amount of $22
million plus interest and less dividends paid to those persons who purchased
our shares between May 1, 2002 and October 31, 2002. The offer was commenced
on December 29, 2003 and was concluded on January 28, 2004. Twenty-one
shareholders, holding an aggregate of 30,165 shares, accepted the offer.

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<Page>

The rescission offer was intended to address federal and state compliance
issues by allowing holders of shares covered by the rescission offer to sell
those shares back to the Company and to reduce its contingent liability with
respect to those shares. In each state where the offer was made, the right to
sue is lost except, with respect to Texas, the right is not lost if a
purchaser rejected in writing the offer and expressly reserved the right to
sue. No such reservations were received by the Company. Further, the statute
of limitations for noncompliance with the requirement to register securities
under the Securities Act of 1933, as amended (the 'securities Act") is one
year, while under the various state securities laws in which the rescission
offer was made, the statute of limitation ranges from one to four years from
the date of the transaction. The periods set forth in the statutes of
limitations provided for in the Securities Act and in most of the states in
which the offer was made have expired.

Notwithstanding the foregoing, the rescission offer does not necessarily
relieve the Company of its contingent liability for fines or penalties under
state securities laws or for civil liability that arises as a result of having
failed to make the rescission offer in compliance with applicable laws and
rules, but no claims have been made to date.

H. QUALIFICATION AS A REIT

On June 30, 2003, the Company received a closing agreement from the Internal
Revenue Service wherein the IRS confirmed the Company's status as a REIT and
levied no taxes or penalties. The Company requested a closing agreement
because its 2001 federal tax return characterized certain amounts that, if
given effect, would mean that it did not meet one of the requirements for
classification as a REIT. The Company also recorded an inter-company
transaction with the Advisor for the 2002 taxable year that was reversed prior
to the filing of the Company's 2002 federal income tax return and was
therefore not reported on that tax return. That 2002 transaction, if given
effect, could have meant that the Company did not meet one of the requirements
for classification as a REIT.

I. QUARTERLY FINANCIAL DATA (UNAUDITED)

We present below selected financial data (unaudited) for the years ended
December 31, 2003 and 2002:

Net Income (Loss) Weighted
Per Share Average Shares
2003 Revenues Net Income Basic/Diluted Outstanding
- -------------- ----------- ----------- ----------------- --------------

First quarter $ 2,776,386 $ 2,285,236 $ 0.46 4,921,402
Second quarter 2,949,163 2,559,914 0.46 5,510,048
Third quarter 3,088,519 2,765,232 0.45 6,124,492
Fourth quarter 3,262,273 978,737 0.14 6,882,614

For the year $12,076,341 $ 8,589,119 $ 1.47 5,859,639
</Table>

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<Page>
<Table>
<Caption>
Net Income (Loss) Weighted
Per Share Average Shares
2002 Revenues Net Income Basic/Diluted Outstanding
- -------------- ----------- ----------- ----------------- --------------

First quarter $ 1,681,170 $ 1,483,340 $ 0.43 3,452,353
Second quarter 1,997,755 1,810,138 0.47 3,865,715
Third quarter 2,154,337 1,925,549 0.45 4,288,840
Fourth quarter 2,444,480 2,156,872 0.46 4,727,610

For the year $ 8,277,742 $ 7,375,899 $ 1.81 4,083,488
<FN>
The Company's shares are not traded on an exchange, but have been offered
at $20 per share by the Company throughout 2003 and 2002.
</FN>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that
information disclosed in our annual and periodic reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. In addition, we
designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to our management, including
our chief executive officer (our "CEO") and chief financial officer (our
"CFO"), to allow timely decisions regarding required disclosure. SEC rules
require that we disclose the conclusions of our CEO and CFO about the
effectiveness of our disclosure controls and procedures.

We do not expect that our disclosure controls and procedures will
prevent all error or fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In addition, the design of
disclosure controls and procedures must reflect the fact that there are
resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitation in a cost-
effective control system, misstatements due to error or fraud could occur
and not be detected.

We evaluate the effectiveness of our disclosure controls and
procedures as of the end of each fiscal quarter. Based on our most recent
evaluation, our CEO and CFO believe, and have certified, that our
disclosure controls and procedures are effective to (1) ensure that
material information relating to us and our consolidated subsidiaries is
made known to management, including the CEO and CFO, particularly during
the period when our periodic reports are being prepared, and (2) provide
reasonable assurance that our financial statements fairly present in all
material respects our financial condition and results of operations.

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<Page>
Since the date of this most recent evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect the internal controls subsequent to the date we
completed our evaluation.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Trustees are responsible for the overall management and control of
our business. Our President, who is an employee of the Advisor, manages the
day-to-day operations and we have retained the Advisor to use its best
efforts to seek out and present to us suitable and a sufficient number of
investment opportunities that are consistent with our investment policies
and objectives. We acquire mortgage investments from SCMI, among others,
and utilize the services of SCMI to service some or all of our Mortgages
Investments.

Our Declaration of Trust provides for not less than three nor more than
nine Trustees, a majority of whom must be Independent Trustees, except for a
period of 60 days after the death, removal or resignation of an Independent
Trustee. Each Trustee serves for a one-year term. There are currently five
Trustees, three of whom are Independent Trustees.

OUR TRUSTEES AND OFFICERS

Our Trustees and officers are as follows:

<Table>
<Caption>
Name Age Offices Held
------------------------ --- ------------------------------

Christine Griffin 51 Trustee, Chairman of the Board
and President
Richard D. O'Connor, Jr. 49 Independent Trustee
Paul R. Guernsey 53 Independent Trustee
Douglas R. Evans 58 Independent Trustee
Michele A. Cadwell 51 Trustee
</Table>

Christine Griffin has been our President and a Trustee since July
1996. Ms Griffin also serves as President of our Advisor, UMT Advisors,
Inc., since its inception. From June 1995 until July 1996, Ms. Griffin
served as Chief Financial Officer of SCMI, a Texas based mortgage banking
firm that is an Affiliate of the Advisor and that sells Mortgages and
provides mortgage servicing services to us. Her responsibilities at SCMI
included day-to-day bookkeeping through financial statement preparation,
mortgage warehouse lines administration, and investor communications and
reporting. Additionally, Ms. Griffin was responsible for researching and
implementing a note servicing system for SCMI and its subservicer. Before
joining SCMI, Ms. Griffin was Vice President of Woodbine Petroleum, Inc., a
publicly traded oil and gas company for 10 years, during which time her

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responsibilities included regulatory reporting, shareholder relations, and
supervision. Ms. Griffin is a 1978 graduate of George Mason University,
Virginia with a Bachelor of Arts degree, summa cum laude, in Politics and
Government.

Richard D. O'Connor, Jr. is one of our Independent Trustees. He has
been a Trustee since July 1996. In 2000 Mr. O'Connor became a partner of
O'Connor & Jones, L.L.P., a Dallas law firm. From 1998 to 2000 Mr. O'Connor
was a shareholder of Stollenwerck, Moore & Silverberg, P.C., a Dallas law
firm. From 1993 to 1998, Mr. O'Connor practiced law as a sole practitioner
specializing in the areas of real estate, business and contract law.
Between 1985 and 1993, Mr. O'Connor was a partner with the Dallas law firm
of Scoggins, O'Connor and Blanscet. Between 1989 and 1993, Mr. O'Connor
was an attorney in the real estate department of J.C. Penney Company. Mr.
O'Connor received a Bachelor of Business Administration degree from the
University of Texas at Austin in 1976, and a J.D. degree from the
University of Houston in 1978. Mr. O'Connor has been Board Certified in
Commercial Real Estate law by the Texas Board of Legal Specialization since
1987.

Paul R. Guernsey has been one of our Independent Trustees since July
1996. Since 1993 Mr. Guernsey has been a Partner and Chief Financial
Officer of The Hartnett Group, Ltd. and related companies. These companies
invest primarily in the financial markets, income and non-income producing
real estate, real estate development, and residential mortgage loans. From
1991 through 1993 Mr. Guernsey was Chief Financial Officer of American
Financial Network, Inc. a public company that operated a computerized loan
origination network, seven residential mortgage brokerage companies, and a
wholesale mortgage brokerage operation. From 1987 through 1991, he was
Chief Financial Officer and then Vice President of Operations for Discovery
Learning Centers, Inc., a chain of childcare centers. From 1986 to 1987,
he worked with James Grant & Associates, a Dallas based merchant banking
firm. From 1973 through 1985, he served in the audit, tax and management
services departments of both a regional CPA firm, and as a partner of a
local firm in Michigan. Mr. Guernsey graduated with a Bachelors Degree in
Business (Accounting) from Ferris State University, Michigan in 1973 and is
a member of the American Institute of CPA's.

Douglas R. Evans has been one of our Independent Trustees since July
1996. Since February 1995, Mr. Evans has been a Principal of PetroCap,
Inc., a firm that provides investment and merchant banking services to a
variety of clients active in the oil and gas industry. From 1986 until
February 1995, Mr. Evans was President and Chief Executive Officer of
Woodbine Petroleum, Inc., which was a publicly traded oil and gas company
until it was taken private through a merger in September 1992. As part of
his responsibilities at Woodbine, Mr. Evans managed and negotiated the sale
of the parent company's REIT portfolio including mortgages and real
property. Mr. Evans has been a licensed real estate broker in Texas since
1979 and a licensed real estate agent since 1976. Mr. Evans received an MBA
from Southern Methodist University in 1972 and a Bachelors of Arts degree
from the University of North Carolina in 1967.

Michele A. Cadwell has been one of our Trustees since August 1997. At
present she is a fee attorney for Commonwealth Land Title of Dallas, Texas.
From 1998 to 1999, Ms. Cadwell was Manager-Onshore Land Operations with
EEX Corp. Her primary responsibilities include drafting and negotiating
exploration and marketing agreements, analysis of legislation and
regulatory proposals, researching complex mineral titles, organization and

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<Page>
management of non-core property divestitures, settlement of land owner
disputes and advising and testifying on matters before the Oklahoma
Corporation Commission. From 1980 until 1998 she was employed with Enserch
Exploration, Inc. as Senior Land Representative. Ms. Cadwell is a 1974
graduate of the University of Oklahoma with a Bachelors of Arts Degree in
English and a Juris Doctor Degree in 1978. She is admitted to both the
Oklahoma and Texas bars.

THE ADVISOR

We use the services of UMT Advisors, Inc., whom we refer to as our
"Advisor", to manage our affairs and to select the investments we purchase. Our
President, Cricket Griffin, is an employee of our Advisor. The Advisor is owned
and controlled by Todd F. Etter and Timothy J. Kopacka. Mr. Etter is an
Affiliate of South Central Mortgage, Inc. ("SCMI"), a Texas corporation that
sells mortgage investments to us and services some of our residential
mortgages. Mr. Etter is also an Affiliate of Capital Reserve Corp. ("CRC"),and
through SCMI, Ready America Funding ("RAFC"), UMTH Lending LP ("UMTH") both
Texas corporations that sell interim mortgages to us and service those interim
mortgages for us. We entered into the Advisory Agreement with our Advisor
effective on January 1, 2001.

The directors and officers of UMT Advisors, Inc. are set forth below.
These officers of the Advisor may also provide services to us on behalf of
the Advisor.
<Table>
<Caption>
Name Age Offices Held
- ------------------ --- ------------------------

Todd Etter 53 Chairman
Christine "Cricket" Griffin 51 President
Timothy J. Kopacka 44 Executive Vice President/Secretary
Melvin E. Horton, Jr. 58 Executive Vice President/Marketing
</Table>

Todd Etter has been Chairman of UMT Advisors, Inc. since its formation in
2000. He was President of Mortgage Trust Advisors, Inc., our former Advisor
since 1996. Mr. Etter is 50% owner and a director of CRC. In addition, Mr.
Etter, through SCMI, is a 50% owner of RAFC. Since 1997, Mr. Etter has been a
registered representative of First Financial United Investments Limited, which
is one of our Participating Dealers for this offering. In 1992 he formed and
since that date has served as President of SCMI. In 1982 he formed South
Central Financial Group, Inc., a Dallas, Texas based investment-banking firm
and continues to serve as its President. From 1980 through 1987 Mr. Etter
served as a Principal of South Central Securities, a NASD member firm. During
the period 1980-1992 he sourced over $37 million in capital for cable
television, real estate and child care center investments. From 1974 through
1981, he was Vice President of Crawford, Etter and Associates, a residential
development, marketing, finance and construction company. In total, Crawford,
Etter and Associates developed over 1,000 residential lots, marketed over 800
single-family homes and constructed over 400 homes. Mr. Etter received a
Bachelors of Arts degree from Michigan State University in 1972.

Christine "Cricket" Griffin. Ms. Griffin has served as President of UMT
Advisors, Inc. since its inception. For Ms. Griffin's biographical
information, please see above under "Trustees and Officers".

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Timothy J. Kopacka has served as Vice-President of UMT Advisors, Inc.
since its formation in 2000. Since 1996, Mr. Kopacka has served as Vice
President of Mortgage Trust Advisors, Inc., the Company's former Advisor. Since
1984, he has been President of Kopacka & Associates, Inc., dba Grosse Pointe
Financial, a financial advisory firm. From 1987 to 1990, he served as Vice
President of Marketing and Operations for Kemper Financial Services in their
retirement plans division. From 1980 to 1983, he was employed with Deloitte,
Haskins & Sells, an international accounting and consulting firm. From 1983
through 1986, Mr. Kopacka was Chief Financial Officer for Federal Tax
Workshops, Inc., an educational and consulting firm for CPA's. Mr. Kopacka, a
Certified Public Accountant, received a Bachelors of Arts degree in Accounting
and Finance from Michigan State University. He is a member of the Michigan
Association of CPA's, the Hawaii Association of Public Accountants and the
American Institute of CPA's.

Melvin E. Horton, Jr. has served as a Vice President of UMT Advisors,
Inc. since its inception. Since January 2000, Mr. Horton has been President of
AML Advisors, a firm engaged in providing consulting, sales, and marketing
advice to institutional and individual investors. From January 2000 to Decemb
er 2003, Mr. Horton was a registered representative with IMS Securities, Inc.
which was one of our Participating Dealers in our prior offering. Since January
2004, he has been a registered representive with Williams Financial Group,
Inc., who was also a Participating Dealer in our prior offering. From January
1997 to January 2000 he was Senior Vice President and Managing Director of the
Private Client Group of Southwest Securities, Inc. (NYSE). Mr. Horton managed
The Horton Company, a Registered Investment Advisor from January 1996 to
January 1997. Between August 1982 and December 1988 and between May 1992 and
January 1996, he acted in sales and management positions for Salomon Smith
Barney and its predecessor firms including Shearson Lehman Brothers and EF
Hutton. He served as President of MBI Financial from January 1989 to May 1992.
Mr. Horton received a Bachelor's degree in Accounting and Finance in 1968 from
Southern Methodist University and an MBA from the Cox School at SMU in 1971.

SUMMARY OF THE ADVISORY AGREEMENT

With the approval of our Trustees, including all of the Independent
Trustees, we entered into a contract with the Advisor (the "Advisory
Agreement") effective on January 1, 2001, under which the Advisor provides us
with our day-to-day administrative services. In addition, the Advisor is
obligated to use its best efforts to develop and present to us, whether through
its own efforts or those of third parties retained by it, a sufficient number
of suitable investment opportunities that are consistent with our investment
policies and objectives and also consistent with any investment programs that
the Trustees may adopt from time to time in conformity with the Declaration of
Trust.

Although our Trustees retain exclusive authority over our management, the
conduct of our affairs and the management and disposition of our assets, the
Trustees have initially delegated to the Advisor, subject to the supervision
and review of the Trustees and consistent with the provisions of our
Declaration of Trust, the following responsibilities:

develop underwriting criteria and a model for our investment portfolio;

acquire, retain or sell our mortgage investments;

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seek out, present and recommend investment opportunities consistent with our
investment policies and objectives, and negotiate on our behalf with respect
to potential investments or the disposition thereof;

pay our debts and fulfill our obligations, and handle, prosecute and settle
any of our claims, including foreclosing and otherwise enforcing mortgages
and other liens securing investments;

obtain such services as may be required by us for mortgage brokerage and
servicing and other activities relating to our investment portfolio;

evaluate, structure and negotiate prepayments or sales of mortgage
investments;

manage the structuring and registration of additional shares for our
offering;

develop our administrative budget;

administer our day-to-day operations;

coordinate marketing and sales of our shares;

develop and maintain our web site;

administer our Share Repurchase and Dividend Reinvestment Programs;

coordinate engagement of market makers and listing of our shares at the
appropriate time;

develop institutional and retail secondary market interest for our shares;

arrange our note warehousing credit facility and provide required financial
guarantees;

negotiate our loan purchases;

develop and monitor our investment policies;

develop high yield loan acquisition program;

oversee loan servicing for our portfolio;

oversee acquisition and disposition of our investments;

manage our assets; andfrom time to time, or as requested by the Trustees,
make reports to us regarding the Advisor's performance of the foregoing
services.

The Advisory Agreement had an initial term of one year, which has been
renewed annually, subject to an evaluation of the performance of the Advisor by
the Trustees. The Advisory Agreement may be terminated (1) without cause by
the Advisor or (2) with or without cause by a majority of the Independent
Trustees. Termination under either of those provisions may be made without
penalty and upon 60 days' prior written notice to the non-terminating party.

The Advisor may engage in other business activities related to real
estate, mortgage investments or other investments whether similar or dissimilar

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to those made by us or act as advisor to any other person or entity having
investment policies whether similar or dissimilar to ours (including other
REITs). However, except for the allocation of investments between us and other
Affiliated Programs as described under the caption "Conflicts of Interest -
Competition with Affiliates for the Purchase and Sale of mortgage investments"
or except for the operations of SCMI or CRC, before the Advisor, the officers
and directors of the Advisor and all persons controlled by the Advisor and its
officers and directors may take advantage of an opportunity for their own
account or present or recommend it to others, they are obligated to present an
investment opportunity to us if (1) that opportunity is of a character which
could be taken by us, (2) that opportunity is compatible with our investment
objectives and policies and (3) we have the financial resources to take
advantage of that opportunity. SCMI is currently in the business of
purchasing, selling and servicing mortgages and CRC is currently in the
business of financing home purchases and renovations by investors. SCMI and
CRC will each continue in their business. However, SCMI and CRC have each
agreed that, if it has any loans that it desires to sell, it will give us the
right of first refusal to purchase that loan if (1) it is of a character which
could be bought by us, (2) it is compatible with our investment objectives and
policies and (3) we have the financial resources to purchase it.

The Declaration of Trust provides that the Independent Trustees are
to determine, at least annually, that the amount of compensation we pay the
Advisor is reasonable in relation to the nature and quality of the services
performed, based on the factors set forth in the Declaration of Trust and such
other factors as they deem relevant, including the size of the fee in relation
to the size, composition and profitability of our investment portfolio, the
success of the Advisor in generating opportunities that meet our investment
objectives, the rates charged to other REITs and to investors other than REITs
by advisors performing similar services, the amount of additional revenues
realized by the Advisor and its Affiliates for other services performed for us,
the quality and extent of service and advice furnished by the Advisor, the
performance of our investment portfolio and the quality of our investment
portfolio in relationship to the investments generated by the Advisor for its
own account.

The Advisory Agreement provides for the Advisor to pay all of our
expenses and for us to reimburse the Advisor for any third-party expenses
that should have been paid by us but which were instead paid by the Advisor.
However, the Advisor remains obligated to pay: (1) the employment expenses
of its employees, (2) its rent, utilities and other office expenses (except
those relating to office space occupied by the Advisor that is maintained by
us) and (3) the cost of other items that generally fall under the category
of the Advisor's overhead that is directly related to the performance of
services for which it is otherwise receiving fees from us.

Audit Committee Financial Experts

The members of our Audit Committee are our President, Cricket Griffin,
and one of our Independent Trustees, Paul Guernsey. Our Board of Trustees
has determined that Ms. Griffin and Mr. Guernsey qualify as "audit
committee financial experts" as defined by SEC regulations. Ms. Griffin's
and Mr. Guernsey's relevant experience is described above in the
biographical information for each.

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<Page>
Code of Ethics

Our Board of Trustees has adopted a Code of Conduct and Business
Ethics that is applicable to all trustees, officers and employees of the
company. You may obtain a copy of this document free of charge by mailing a
written request to: Investor Relations, United Mortgage Trust, 5740
Prospect Avenue, Suite 1000, Dallas TX 75206, or by sending an email
request to: griffin@unitedmortgagetrust.com.

ITEM 11. EXECUTIVE COMPENSATION.

We have no employees. Effective January 1, 2001 our President became
an employee of the Advisor; she is therefore no longer paid by us nor does
she have an employment agreement with us.

COMPENSATION OF TRUSTEES

Trustees who are not Independent Trustees do not receive any
compensation for acting as Trustees. Independent Trustees are entitled to
receive the greater of $1,000 per meeting or $4,000 per year. For each year
in which they serve, each Independent Trustee shall also receive 5-year
options to purchase 2,500 shares at an exercise price of $20 per share (not
to exceed 12,500 shares per Trustee). During 2003, 2002 and 2001, the
Independent Trustees each received $3,000 each and waived their rights to
additional fees and each Independent Trustee who served during all of 2003
and 2002 also received 5-year stock options to purchase 2,500 shares at an
exercise price of $20 per share.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information as of March 3, 2004
by each person who is known to us to be the beneficial owner of more than
5% of our shares and the beneficial ownership of all Trustees and officers
as a group as of such date.
<Table>
<Caption>
Number of Percent
Name and Address Shares (1) of Class
- ---------------- ---------- --------

Christine Griffin (2) 5,000(3) 0.07%
Richard D. O'Connor, Jr. (2) 12,500(3) 0.18%
Paul R. Guernsey (2) 19,100(3) 0.27%
Douglas R. Evans (2) 12,500(3) 0.18%
Michele A. Cadwell (2)(5) 2,500(3) 0.04%
All Trustees and
Executive Officers as a
Group (5 persons) 51,600(4) 0.73%
<FN>

(1) For purposes of this table, shares indicated as being owned
beneficially include shares not presently outstanding but which are subject
to exercise within 60 days through options, warrants, rights or conversion
privileges. For the purpose of computing the percentage of the outstanding
shares owned by a shareholder, shares subject to that exercise are deemed

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to be outstanding securities of the class owned by that shareholder but are
not deemed to be outstanding for the purpose of computing the percentage by
any other person.

(2) A trustee and/or executive officer of our Company. The address of all
trustees and officers is c/o United Mortgage Trust, 5740 Prospect Avenue,
Suite 1000, Dallas, Texas 75206.

(3) Includes shares issuable upon the exercise of stock options at an
exercise price of $20.00 per share.

(4) Includes the shares described in footnote (3) above.

(5) Ms. Cadwell ceased receiving options as of January 1, 2000, when she
began providing services to us in her capacity as a fee agent with a title
company. As a result of those services, she is no longer considered an
Independent Trustee.
</FN>
</Table>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Capital Reserve Corp. ("CRC") is a Texas corporation that is 50% owned
by Todd Etter, an officer and principal shareholder of the Advisor. CRC is
in the business of financing home purchases and renovations by real estate
investors. We have and will continue to purchase interim mortgages from CRC.
We do not pay fees to CRC.

Ready America Funding ("RAFC") is a Texas corporation that is 50% owned by
SCMI, which is owned by Todd Etter, who is Chairman of the Advisor. RAFC is in
the business of financing interim mortgages for the purchase of land and the
construction of modular and manufactured single-family homes placed on the land
by real estate investors.

UMT Holdings, L.P. ("UMTH") is a Delaware limited partnership which is in
the real estate finance business. UMTH has presented our independent trustees
with a merger proposal. Christine Griffin, our President, Todd Etter and Tim
Kopacka, who own 100% of our Advisor, Craig Pettit, who owns 100% of Ready
Mortgage Corp., which in turn owns 50% of RAFC, Mel Horton, who is an officer
of our Advisor and William Lowe, who owns 50% of CRC, are partners in UMTH.

UMTH Lending, L.P. ("UMTL") is a Delaware limited partnership owned by
UMTH. UMTL is the result of a merger between CRC, RMC, SCMI and another
unaffiliated company. We purchased mortgage investments from UMTHL.

REO Property Company ("REO PC") is a Texas limited partnership owned by
UMTH manages and sells our REO properties for which it receives a fee.

Ready Mortgage Corp., ("RMC") a Texas based real estate finance company is
owned by Craig Pettit, who is a partner of UMTH. We purchased mortgage
investments from RMC.

United Development Funding, L.P. ("UDF") a Nevada real estate finance
company and affiliated through its ownership. Cricket Griffin, Todd Etter,
Melvin Horton, Tim Kopacka and Craig Pettit are limited partners of UDF. On
September 1, 2003 with Trustee approval we extended a secured line-of-credit to
UDF in the amount of $7,000,000 with which they have funded real estate
developers. The balance at December 31, 2003 is $6,093,493.

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South Central Mortgage, Inc. ('sCMI") is a Texas based mortgage bank
of which the sole beneficial shareholder is Todd Etter, an officer and
principal shareholder of the Advisor. Christine Griffin, our President and
one of our Trustees, was previously the Chief Financial Officer of SCMI. We
acquire mortgage investments from SCMI, among others.

We have purchased residential mortgages and contracts for deed from
SCMI. To date the aggregate amount is approximately $18,000,000. Below is a
table of affiliated interim mortgages purchased from affiliates, with
outstanding balances of loans:

Affiliated Company 2003 2002 2001
- --------------------- ----------- ----------- -----------
Capital Reserve Corp. $ 9,194,000 $19,209,000 $14,919,000
Ready America Funding $14,565,000 $ 9,424,000 --
REO Property Company $ 1,735,000 -- --
Ready Mortgage Corp. $ 6,346,000 $ 6,091,000 --
South Central Mortgage $ 306,000 $ 929,000 $ 929,000
United Development Funding $ 6,093,000 -- --
UMTH Lending $13,713,000 -- --

We have an Advisory Agreement with UMT Advisors, Inc. ("UMTA"). Under
that agreement a monthly trust administration fee is paid to UMTA for a
greatly expanded management role, which includes absorbing general and
administrative expenses (for a more lengthy discussion of that role see
'summary of the Advisory Agreement"). The fee is calculated monthly as 1/12
of 1/2 of 1% of the first $50,000,000 in income producing assets and 1/12 of
1% of assets exceeding $50,000,000. During 2003, 2002 and 2001 the fees paid
were approximately $730,000, $445,000 and $249,000, respectively.

The terms of the UMTA Advisory Agreement calculates the acquisition
fee (paid for sourcing suitable investments) as 3% of net offering proceeds
(net offering proceeds are gross offering proceeds less commissions and
marketing reallowances.) The acquisition fees paid in 2003, 2002 and 2001
totaled approximately $1,248,000, $829,000 and $765,000, respectively.

Since our organization in July 1996, we have issued an aggregate of
62,500 five-year options to purchase our shares at $20 per share to our
Independent Trustees.

We pay loan servicing fees to PSC, an Affiliate, under the terms of a
Mortgage Servicing Agreement. We incurred loan servicing fees of
approximately $146,000, $197,000 and $185,000 during 2003, 2002 and 2001,
respectively. The Company does not normally retain the servicing rights to
the loans it purchases, however it is not prohibited from servicing its
loans.

Rent expense are paid by the Advisor and included as part of the trust
administration fee. They were $35,000, $17,000 and $19,000 for 2003, 2002, and
2001, respectively. The increase in 2003 was due to additional office space
leased by our Advisor.

Payroll expense is paid by the Advisor and is construed to be part of
the trust administration fee. In 2003, 2002 and 2001, payroll was
approximately $305,000, $265,000 and $189,000, respectively.

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SCMI has agreed that, if the obligor on any Residential Mortgage or
Contract for Deed sold to the Company by SCMI or its Affiliates, and that
has had less than 12 payments made on it, defaults in the making of any
payment or other obligation thereon during the period ending before the
12th payment after the Company bought that Residential Mortgage or Contract
for Deed, then SCMI shall buy that Mortgage Investment from the Company or
its assignee at a price equal to the total unpaid principal balance due
thereon, plus accrued interest to the date of the purchase, plus insurance
premiums, taxes and any other amounts that the Company spent in the
maintenance, protection or defense of its interest therein or in the real
property, including reasonable attorneys' fees. SCMI may satisfy its
obligations under the foregoing purchase or repurchase requirement by
either:

(a) Assigning and transferring to the Company a replacement Residential
Mortgage or Contract for Deed (the "Replacement Mortgage Investment"),
provided: (i) the real property securing the Replacement Mortgage
Investment, the creditworthiness of the obligor on the Replacement
Residential Mortgage Investment and other general underwriting criteria are
reasonably acceptable to the Company; and (ii) the value of the Replacement
Residential Mortgage Investment at the date of transfer to the Company shall
be computed by it in accordance with its then applicable pricing schedule
for acquisition of such residential mortgages or contracts for deed, giving
due regard to principal balance, interest rate, term, amortization and other
general factors used by it for acquisition of residential mortgages at that
time; or

In all cases to date SCMI has elected option "b" of the agreement.

We extended a revolving line-of-credit ("LOC") to an affiliate, United
Development Funding, L.P., which is collateralized by the affiliate's real
estate assets. Accrued interest on the LOC is payable monthly to the Company
with the principal balance being due one year after the LOC agreement
originated, on September 1, 2003. We have the ability, but not an obligation,
to renew the affiliate's LOC agreement on an annual basis. We monitor the LOC
for collectibility on a continuing basis based on the affiliate's payment
history. No valuation allowance or charge to earnings was recorded for the
year ended December 31, 2003 based on our evaluation.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Whitley Penn has served as our principal accountant and
independent auditor since July 2002, when Jackson Rhodes, P.C., our prior
auditors, was merged into Whitley Penn.

The Board of Trustees, upon the recommendation of the Audit
Committee, engaged Whitley Penn to serve as our independent auditors for the
fiscal years ending December 31, 2003 and 2002. The Audit Committee also
approves in advance all engagements of Whitley Penn for audit-related, tax and
other services.

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The following table reflects fees billed by Whitley Penn for
services rendered to us in 2003 and 2002:

Nature of Services 2003 2002
- ------------------------------ ------------- ------------
Audit fees - $50,879 $28,505
For audit of our annual financial statements, review of
Quarterly financial statements included in our Forms 10-Q and review of
other SEC filings

Tax fees - $7,065 $4,025
For preparation of tax returns and tax compliance

All other fees - -- --

Item 14(5)(i) - The Audit Committee accepts proposals from potential audit
firms during the first quarter of each year and before the annual proxy
statement is prepared. The Audit Committee reviews proposals and fees and
makes its recommendation to shareholders in the annual proxy.

Item 14(5)(ii) - The Audit Committee approves 100% of the fees charged by
auditors and tax preparers.

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ITEM 15. EXHIBITS

(a) List of documents filed:

(1) Report of Independent Public Accountant are included in Item 8.
(2) Financial Statements of the Company are included in Item 8.
(3) Financial Statement Schedules - all schedules have been omitted because the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the financial states or the notes thereto included in Item 8.

(b) Reports on Form 8-K: the following reports on Form 8-K were filed during
the final report of the period by this Annual report:

(1) Report on Form 8-K filed November 11, 2003 - Item 5.
(2) Report on Form 8-K filed December 5, 2003 - Item 5.

<Table>
<Caption>
Exhibit
NUMBER DESCRIPTION PAGE

3.1 Form of Second Amended Restated Declaration of Trust *

3.2 Bylaws of the Company *

4.1 Form of certificate representing the shares *

4.2 Dividend Reinvestment Plan (incorporated by reference
from the prospectus to the Company's
Registration Statement on Form S-3(File no. 333-110488), **
that became effective November 14, 2003)

4.3 Instruments defining the rights of
security holders (See Exhibits 3.1, 3.2 and 4.1) *

10.1 Advisory Agreement dated January 1, 2001 between
the Company and UMT Advisors, Inc. ***

10.4 Note Sale, Recourse and Remarketing Agreement
dated August 6, 1996 between the Company and
South Central Mortgage, Inc. *

10.5 Form of Mortgage Servicing Agreement to be entered
into between the Company and South Central Mortgage, Inc. *

10.6 $10,000,000 Revolving Loan Agreement dated
July 11, 2001 between the Company and
First State Bank of Texas NA #

10.7 Share Repurchase Plan (incorporated by reference
the from Form 8-K filed December 5, 2003)

31 Certification pursuant to Section 302
of the Sarbanes-Oxley Act (filed herewith)

32 Certification pursuant to Section 906
of the Sarbanes-Oxley Act (filed herewith)

</Table>

The exhibits marked with "*" are incorporated by reference from the
Company's Registration Statement on Form S-11 (File No. 333-10109) that was
declared effective on March 5, 1997. The exhibit marked with "**" is
incorporated by reference from the Company's registration statement on Form S-
11 (File No. 333-56520) that was declared effective on June 4, 2001. The
exhibit marked "***" is incorporated by reference from our Form 10-K for the
period ending December 31, 2000. The exhibit marked "#" is incorporated by
reference from the Company Form 10-K for the period ending June 30, 2001.

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SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on March 15, 2004.

UNITED MORTGAGE TRUST

By: /S/CHRISTINE A. GRIFFIN
Christine A. Griffin, President

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

Signature Title Date

Principal Executive Officer:

/S/ CHRISTINE A. GRIFFIN Trustee, Chairman
Christine A. Griffin of the Board 15-Mar-2004
and President

Principal Financial and
Accounting Officer:

/S/CHRISTINE A. GRIFFIN Trustee, Chairman
Christine A. Griffin of the Board 15-Mar-2004
and President

/S/PAUL R. GUERNSEY Trustee 15-Mar-2004
Paul R. Guernsey

/S/DOUGLAS R. EVANS Trustee 15-Mar-2004
Douglas R. Evans

/S/RICHARD D. O'CONNOR, JR. Trustee 15-Mar-2004
Richard D. O'Connor, Jr.

/S/MICHELE A. CADWELL Trustee 15-Mar-2004
Michele A. Cadwell

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EXHIBITS

Exhibit 31. Certification pursuant to Section 302 of the Sarbanes-Oxley Act

I, Christine A. Griffin, certify that:

1. I have reviewed this annual report on Form 10-K of United Mortgage Trust;

2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:

(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and

(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee
of the registrant's board of trustees:

(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.

March 15, 2004 /s/ Christine Griffin
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Christine Griffin
President and Chief Executive Officer

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Exhibit 32. Certification pursuant to Section 906 of the Sarbanes-Oxley Act

I, Christine A. Griffin, Chief Executive Officer and Chief Financial Officer
of United Mortgage Trust (the "registrant"), have executed this certification
for furnishing to the Securities and Exchange Commission in connection with
the filing with the Commission of the registrant's Annual Report on Form 10-K
for the period ended December 31, 2003 (the "Report"). I hereby certify that:

(1) the Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the of the registrant as of and for the
end of that period.

March 15, 2004

/s/ Christine A Griffin
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Christine A Griffin
Chief Executive Officer/Chief Financial Officer

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