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, 2004.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from _______________ to
_______________.

Commission File Number 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, 2004 computed by reference to
the price at which the common equity was last sold was $141,321,160.

As of March 4, 2005, 7,039,079 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 Registrant's Common Equity and
Related Stockholder Matters..................................5

Item 6. Selected Financial Data. ....................................8

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation of the Company...........9

Item 7A. Quantitative and Qualitative Disclosures
About Market Risk..........................................32

Item 8. Consolidated Financial Statements and
Supplementary Data..........................................33

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................55

Item 9A. Controls and Procedures....................................55

Item 9B. Other Information..........................................55

PART III

Item 10. Directors and Executive Officers of the Registrant.........55

Item 11. Executive Compensation.....................................61

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............62

Item 13. Certain Relationships and Related Transactions.............63

Item 14. Principal Accountant Fees and Services.....................66

Item 15. Exhibits and Financial Statement Schedules.................66

-i-

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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); (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); and (4) secured loans to
affiliated partnerships that (a) originate and acquire loans for the
acquisition and development of single-family home lots, which we refer to as
land development loans, and (b) enter into participation agreements with
single-family residential real estate developers under which they receive a
preferred portion of the gain, if any, upon the sale of lots to home builders,
which we refer to as equity participations. Currently we have one such $30
million line-of-credit loan to United Development Funding ("UDF") an entity
that is affiliated with our Advisor. The portion of our portfolio constituting
loans to such affiliated partnership has been increasing in the past two years
and now represents approximately 25% of our entire investment portfolio.

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 UDF $30 million line-of-credit has a 5 year term. 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.

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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 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.

We acquire mortgage investments from several sources, including from
affiliates of our Advisor. The amount of mortgage investments to be
acquired from such sources cannot be determined at this time and will
depend upon the mortgage investments that are available from them or from
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

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(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 (2) the seller's
unencumbered interest in fixed rate contracts for deed for the sale of single-
family residential property throughout the United States; (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; and (4) loans to affiliated partnerships secured by the pledge of
mortgages and equity participations.

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.

UDF may use the loan proceeds from us to finance either: (a)
indebtedness associated with any real estate development project upon which
the borrower has a first priority lien to the extent such indebtedness,
financed by funds advanced from any source, exceeds 85% of the appraised value
of such real estate development project; or (b) indebtedness associated with
any real estate development project upon which the borrower has a junior
priority lien to the extent all indebtedness thereon exceeds 80% of 85% of the
appraised value of such real estate development project.

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Sixty-two percent of our income producing assets is comprised of interim
mortgages and twenty-three percent is the UDF line-of-credit. We have been
shifting to a portfolio that is more heavily weighted to interim mortgages and
loans to UDF because 1) to date we have experienced limited loss from defaults
with interim mortgages and no losses with UDF, and 2) blended yields for
interim mortgages and from loans to UDF have been higher than those of the
other mortgage investments. We expect to continue our concentration on interim
loans and loans to affiliated partnerships 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
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 however our Advisor has a staff of five
employees including our president.

ITEM 2. DESCRIPTION OF PROPERTY.

OFFICE LEASE

We do not maintain any physical properties however our Advisor has
an office lease with an affiliate.

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
shareholders representing 0.4% of our shares outstanding accepted the offer,
which resulted in repurchase of 29,952 shares.

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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.

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

Our 2003 annual meeting was held in June 2004. Shareholders voted by
proxy and in person to re-elect our trustees and to reaffirm Whitely Penn as
our independent registered public accounting firm.

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 is 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.

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The following table summarizes the share repurchases made by us under
our share redemption plan in 2004:
<Table>
<Caption>
Total number of Average Price Total number of shares
shares purchased per share purchased as part of
publicly announced plan
- --------------------------------------------------------------------------

Jan 2,162 $18.00 2,162
Feb 15,434 19.40 15,434
Mar 15,542 20.00 15,542
Apr 3,941 18.95 3,941
May 8,391 18.48 8,391
Jun 31,724 19.87 31,724
Jul 19,532 19.90 19,532
Aug 30,546 19.95 30,546
Sep 16,940 19.90 16,940
Oct 21,008 19.93 21,008
Nov 16,291 19.66 16,291
Dec 18,030 19.87 18,030

Totals 199,541 19.49 199,541
</Table>

As of December 31, 2004, we had 7,040,743 shares outstanding
compared to 7,028,106 and 4,856,489 shares outstanding at December 31,
2003 and 2002, respectively. The shares were held by 2,858, 2,898, and
1,909 beneficial owners and by 2,533, 2,588, and 1,671 shareholders of
record in 2004, 2003 and 2002, 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 accounting principles generally accepted in the United
States) 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.

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

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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 2004 we had paid 88 consecutive monthly dividends. Distributions for
the year ended December 31, 2004, 2003 and 2002 were made at a rate of 8.6%
($1.72), 9.2% ($1.84) and 10% ($2.00), respectively. The dividend portion
of the distribution was $1.34, $1.47, and $1.81 per weighted share for
2004, 2003 and 2002, respectively.

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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.

<Table>
<Caption>
December 31,
2004 2003 2002 2001 2000
--------------------------------------------------------------------

OPERATING DATA
Total revenues $13,889,448 $12,076,341 $8,277,742 $5,679,657 $3,857,612
Total expenses $ 4,420,440 $ 3,487,222 $ 901,843 $ 894,824 $1,129,230
Net income $ 9,466,008 $ 8,589,119 $7,375,899 $4,784,833 $2,728,382
Net income per share $1.34 $1.47 $1.81 $1.81 $1.80
Weighted average
shares outstanding 7,051,313 5,859,639 4,083,488 2,641,072 1,514,014
</Table>
<Table>
<Caption>
December 31,
2004 2003 2002 2001 2000
---------------------------------------------------------------------

BALANCE SHEET DATA
Cash $ 1,331,798 $ 4,199,455 $ 646,570 $ 33,569 $ 200,912
Residential mortgages and
contracts for deed $ -- $ 29,780,352 $35,299,701 $37,182,782 $31,906,587
Investment in trusts,
Receivable $ 17,749,231 -- -- -- --
Foreclosed residential
mortgages and contracts
for deed $ 867,591 $ 3,346,004 $ 3,676,070 $ 2,500,461 $ 1,512,812
Interim Mortgages $ 73,747,536 $ 71,547,192 $49,136,321 $17,529,898 $ 6,453,111
Foreclosed interim mortgages $ 2,025,830 $ 1,263,350 -- -- --
Reserve for loan losses $ (921,500) $ (350,000) -- -- --
Line-of-credit
receivable, affiliate $ 28,721,639 $ 6,093,493 -- -- --
Other assets $ 5,676,136 $ 4,445,972 $ 2,333,229 $ 1,538,911 $ 832,664
Total assets $129,198,261 $120,325,818 $91,091,891 $58,785,621 $40,906,086

Line-of-credit payable $ 12,030,000 $ -- $ 6,245,000 $ 810,000 $ 7,000,000
Other liabilities $ 1,012,944 $ 1,835,145 $ 1,357,303 $ 685,137 $ 311,845
Total Liabilities $ 13,042,944 $ 1,835,145 $ 7,602,303 $ 1,495,137 $ 7,311,845
Total temporary equity -- -- $21,566,181 -- --
Total shareholders' equity $116,155,317 $118,490,673 $61,923,407 $57,290,484 $33,594,241
Total liabilities and
shareholders' equity $129,198,261 $120,325,818 $91,091,891 $58,785,621 $40,906,086
</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 litigation against us, each of which are discussed herein under
the caption "Factors that may Affect Future Results."

GENERAL

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. We acquire what we consider to be "B", "C" and
"D" grade mortgage loans. The great majority of our investments are
concentrated in Texas. Increasingly we have emphasized investments in interim
mortgages and in secured loans to affiliate partnerships that are themselves
lenders to real estate developers. Currently we have made only one such loan,
a $30 million line-of-credit loan to United Development Funding ("UDF") an
entity that is affiliated with our Advisor. The portion of our portfolio
constituting loans to affiliated partnerships has been increasing in the past
two years and now represents approximately 25% of our entire investment
portfolio. We have increased our investments in interim loan and affiliated
partnership developer loans in favor of investments in longer-term residential
mortgages and contracts for deed based upon a higher yield to us from interim
mortgages and from third party developer loans, both of which carry higher
interest rates. At the end of 2004, our mortgage portfolio totaled
approximately $123,111,000.

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,
2004 2003 2002
-----------------------------------------

RESIDENTIAL MORTGAGES
Purchase price $ 597,000 $ 1,078,000 $ 3,544,000
Total number 11 20 70
Number purchased from affiliates 0 0 0
Number purchased from other sources 11 20 70
Blended interest rate 11.61% 12.44% 12.86%
Aggregate principal balance $ 597,000 $ 1,079,000 $ 3,548,000
Average principal balance $54,000 $54,000 $51,000
Remaining term in months (1) 311 314 325
Current yield (1) 11.61% 12.50% 12.87%
Investment-to-value ratio (1)(2) 85.51% 83.39% 81.21%

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

INTERIM MORTGAGES
Portfolio beginning balance at Jan 1 $72,811,000 $49,136,000 $17,500,000
Portfolio ending balance at Dec 31 $75,773,000 $72,811,000 $49,136,000
Net increase in portfolio
from prior period $ 2,962,000 $23,675,000 $31,636,000
Total number new loans funded
during period 938 2,216 1,653
Number purchased from affiliates 558 2,000 993
Number purchased from other sources 380 216 660
Average interim mortgage $80,000 $45,000 $39,000
Blended interest rate 13.45% 13.66% 13.58%
Remaining term in months: less than 12 months 12 months 12 months
Current yield at year-end (1) 13.57% 13.80% 13.77%
Investment-to-value ratio (1)(2) 68.44% 66.75% 62.00%

<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>

RECENT DEVELOPMENTS

In November 2003, we 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 Class A Debenture
having an original principal amount of $20 for each share owned by such
holder and an annual interest rate of 8.5%, which interest shall be
payable monthly. The proposal contains other terms and may be amended or
modified at any time.

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In response to the proposal, our 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 negotiating the
final terms of any transaction with UMTH on behalf of the Company and
evaluating the fairness of the terms to our shareholders who are not
affiliated with UMTH. At the conclusion of its negotiations and
deliberations, the special committee will make 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 the date of this report 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.

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.

Based upon the status of negotiations and discussions with UMTH, we
believe that it is likely that the independent committee will recommend the
merger and that the agreement will be announced in the second quarter of
2005.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

As of December 31, 2004, our mortgage portfolio consisted of 545
residential mortgages, 9 contracts for deed and 945 interim mortgages. The
portfolio had an unpaid principal balance ("UPB") of approximately
$94,390,000. The average loan in the portfolio had a blended interest rate of
13.11%, a current annual yield of 13.24%, an investment-to-value ratio of
71.17%, an average UPB of $63,000, and a term remaining of 333 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. The average
construction loan has a term of 9 months, the average rehabilitation loan has
a term of 6 months.

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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. One of our interim mortgage
sources, Capital Reserve Corporation ("CRC"), an affiliated company, which
represented 12% of our interim mortgages at year end, reported 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.

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

at 12-31-2004 at 12-31-2003 at 12-31-2002
------------- ------------- -------------

Residential Mortgages 545 557 608
Contracts for Deed 9 65 219
Interim Mortgages 945 1,136 827
Unpaid Principal Balance $ 94,390,000 $105,937,000 $88,112,000
Blended Interest Rate 13.11% 13.12% 12.92%
Annual Yield 13.24% 12.44% 13.04%
Investment-to-Value Ratio 71.17% 70.34% 69.66%
Average Loan UPB $63,000 $60,000 $53,000
</Table>

At year end 2004 approximately 80% our loans were located in Texas, 5%
were in Florida, 3% in Georgia, 2% each in California, Illinois and North
Carolina, 1% each in Tennessee, Indiana, Colorado and Missouri, and less than
1% each in Pennsylvania, Kentucky, Louisiana, Oklahoma, South Carolina, Ohio,
Kansas, Mississippi, Alabama, Minnesota and Michigan. At year end 2003 and
2002 the vast majority of loans were located in Texas. We expect to continue
broadening making loans in states other than Texas in order to reduce our
geographic exposure to Texas. The increasing number loans outside of Texas
have been acquired from Ready America Funding, an affiliate, UMTH Lending, an
affiliate, and HomeVestors Investments, Inc., unaffiliated, all three of which
plan to continue to pursue borrowers in population centers of 300,000 or more
people.

Page 12

<Page>
During 2004 we developed a more significant relationship with UDF, a
partnership that is affiliated with our Advisor, to whom we had extended a $7
million line-of-credit in 2003. As UDF began to expand its client base, our
trustees approved the investment of a greater percentage of our assets in UDF
loans, resulting in our increasing our loans to UDF in 2004. On January 1,
2005, and effective September 30, 2004, we entered into a First Amended and
Restated Secured Line of Credit Promissory Note and an Amended and Restated
Security Agreement (collectively, the "Amendment") with UDF. The Amendment
amended the existing revolving line of credit facility ("Loan") to extend the
term an additional five years and to increase the line of credit to $30
million. The purpose of the Loan is to finance UDF's investments in real
estate development projects. The Amendment has two components: the Long Term
Investment portion ("LTI") and the Bridge-Loan Investment portion ("BLI").

The Loan is secured by the pledge of all of UDF's land development loans
and equity investments. Those UDF loans may be first lien loans or
subordinate loans. The LTI portion may not exceed $12,000,000 and bears
interest at an annualized percentage rate of 15% with interest payable
monthly. The BLI portion may not exceed $18,000,000 and is secured by the
assignment of first lien loans made by UDF to developers for the acquisition
of pre-development residential real estate. The BLI portion is additionally
secured by the pledge of all of UDF's land development loans and equity
investments. The BLI portion bears interest at an annualized percentage rate
of 13.5% with interest payable monthly.

The Loan is subordinate to UDF Senior Debt which consists of a loan
guaranty to Colonial Bank in the amount of approximately $8,750,000 and a
$10,000,000 line of credit provided by Coppermark Bank.

UDF may use the Loan proceeds to finance either: (a) indebtedness
associated with any real estate development project upon which Borrower has a
first priority lien to the extent such indebtedness, including indebtedness
financed by funds advanced hereunder and indebtedness financed by funds
advanced from any other source, including without limitation Senior Debt,
exceeds 85% of the appraised value of such real estate development project; or
(b) indebtedness associated with any real estate development project upon
which Borrower's has a junior priority lien to the extent such indebtedness,
including indebtedness financed by funds advanced hereunder and indebtedness
financed by funds advanced from any other source, including without limitation
Senior Debt, exceeds 80% of 85% of the appraised value of such real estate
development project.

The Amendment represents a further increase in the Company's loans to UDF
and in the land development loans made by UDF representing approximately 25%
of the Company's entire portfolio. The Company's Trustees have approved this
change in the Company's investment policy represented by the increase in the
Loan based upon the changed interest rate environment which has resulted in
lower yields from the Company's traditional mortgage investments as well as
experience to date with loans made to UDF.

The Company monitors the line-of-credit 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,
2004 and 2003 based on the Company's evaluation. Outstanding balances were
$28,721,639 and $6,093,493 at year end 2004 and 2003.

Page 13

<Page>
Since its formation in 2003 UDF has made approximately $76,044,000 of
loans and had $26,135,000 of loans payoff.

Each of the properties serving as security for our loans 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 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, 2004, 2003 and 2002 interest income
was approximately $13,889,000, $12,076,000, and $8,278,000, respectively, 15%,
46% and 46% increases, respectively. In 2004, the increase was attributed to
use of our line of credit to purchase mortgage investments. In the prior
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.

Total expenses were approximately $4,423,000, $3,487,000, and $902,000,
respectively, 27% and 287% and 1% increases, respectively. Below listed are
the significant expense accounts and explanations of change:

RESERVE FOR AND SALES OF FORECLOSED PROPERTIES: increased 28% and 26,223%
between 2004 and 2003

During 2004 and 2003 we sold a significant number of properties at a loss of
$0.43 and $0.39 on the dollar, respectively, continuing our aggressive program
of liquidation of non-incoming producing assets. In 2002, we sustained an
insignificant loss on the sale of properties. Realized losses in 2004, 2003
and 2002 respectively were approximately $1,867,000, $1,822,000 and $8,252, 2%
and 21,979% increases between periods. Loss reserves increase by 163% and 100%
between 2004, 2003 and 2002, respectively. No reserve was recorded in 2002.
Because we did not anticipate the extent of loan losses in 2004 we refined our
loss analysis method and have reserved what we believe is an adequate amount
to cover losses. In addition we will continue to reserve loss reserves during
2005 at a rate of 1% of the balance of each interim mortgage loans acquired and
assume that we will experience losses on approximately one residential
mortgage per month at $0.40 loss rate per dollar.

INTEREST EXPENSE: increased 23% in 2004 and 87% in 2003

We use our credit facility to purchase loans in advance of receiving net
proceeds from the sale of our shares or payments of mortgages. 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.

Page 14

<Page>
LOAN SERVICING FEES: decreased 25% in 2004 and 26% in 2003

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

TRUST ADMINISTRATION FEES: increased 29% in 2004 and 64% in 2003

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. Payroll expenses are paid by the Advisor and
included as part of the trust administration fees. Payroll expenses decreased
10% in 2004 and increased 15% and 40% in 2003 and 2002, respectively. They
were $273,000, $305,000 and $265,000, for the comparable periods. The decrease
in the current period is due to attrition. Rent expense is paid by the Advisor
and included as part of the trust administration fee. Rent expenses decreased
37% in 2004, increased 106% in 2003 and decreased 11% in 2002. They were
$22,000, $35,000 and $17,000, respectively. The decrease in 2004 was due to an
adjustment in the amount of office space UMTA leased. The increase in 2003 was
due to additional office space leased by our Advisor. That space was
relinquished in 2004.

GENERAL AND ADMINISTRATIVE EXPENSES: increased 37% in 2004 and 68% in 2003

General and administrative fees include transfer agent fees, legal fees,
printing and reproduction, accounting and audit fees, recording fees, trustees
fees and insurance fees to name the major categories. The largest increase in
2004 was transactional legal fees associated with bank lines and
securitizations, and other agreements entered into during the year. The
largest increase in 2003 were accounting services relating to the post
effective amendments files in 2003 and transfer agent fees as our shareholder
base grew.

Operating expense as a percentage of interest income (not including
interest expense) was 30.55%, 27.67%, and 9.95%, respectively. Operating
expense as a percentage of average invested assets was 3.74%, 3.35% and 1.13%
during the years, respectively. In both categories the 2004 and 2003 amount
exceeds our limitation on operating expenses as outlined in our Declaration of
Trust. Our trustees have agreed to make an exception in 2004 and 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 $9,466,000, $8,589,000 and $7,376,000 for
the three years, respectively, 10%, 16% and 54% increases. The smaller
increases in 2004 and 2003 was a result of loan losses realized and reserves
recognized, and the increase in 2002 was due to the purchase of additional
income producing assets. Earnings per share were $1.34, $1.47 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.

Page 15

<Page>
Our average daily outstanding balance on our line of credit during the
comparable years was approximately $2,390,000, $2,996,000 and $1,438,000,
respectively. Use of leverage can have a positive impact on earnings because
our cost of funds on leveraged dollars (weighted average interest paid of
4.86%, 4.88% and 5.44%, respectively) is lower than the rate at which we are
earning on the mortgage investments we purchase with those dollars (a yield of
13.24%, 12.44% and 13.04%, respectively). 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 $0.925 to invest in 2004 compared to $0.87 on each dollar from
offering proceeds.

In addition, during 2004 and 2003 we carried higher cash balances in the
bank. The average daily cash balance was approximately $4,518,000 and
$4,758,000 compared to $405,000 during 2002. 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 8.60% dividend on those funds. Higher cash balances in the bank
had a negative impact on earnings.

Average interest receivable outstanding increased by 16%, 80% and 56%,
respectively. 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.

Twenty-nine of 554 residential mortgages and contracts for deed were
covered by a recourse agreement between South Central Mortgage, Inc. ("SCMI"),
an affiliate. SCMI has agreed that if any residential mortgage or contract for
deed we acquire 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

Page 16

<Page>
(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
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 2004, 2003 and 2002 with 72, 78 and 54 residential mortgage
and contracts for deed defaulted and foreclosed an additional 50, 83 and 67
loans during the respective years. We sold 98, 89 and 43, respectively
leaving 24, 72 and 78 foreclosed properties at the end of 2004, 2003 and
2002, respectively. The first interim mortgages defaulted and foreclosed in
2003 when we foreclosed 25 properties. In 2004 we foreclosed 19 additional
properties and sold 21 leaving 23 interim foreclosures at year end.
Defaults as a percentage of total income producing properties at respective
year ends 3.20%, 4.22% and 4.17%, respectively.

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
11.73%, 11.74% and 11.82% blended rates, respectively), with higher yield
interim mortgages (at year end a blended rate of 13.45%, 13.12% and 13.77%,
respectively) and the UDF line-of-credit (between 12% and 15%) 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 interim loans. Beginning in 2003, we began to make
loans to UDF. Those loans, which are secured by UDF's interest in mortgages
and equity participations that it receives from its developer borrowers, also
carry a higher interest rate than long-term mortgage loans. We intend to
continue investing in interim mortgages and secured loans to UDF and other
affiliated partnerships to real estate developers almost exclusively.

Funds invested in residential mortgages and contracts for deed in 2004
and 2003 decreased by 44% and 15%, respectively and increased by less than 1%
in 2002. The significant decrease is 2004 is a result of the securitization of
certain loans that were sold to a third party. The decrease in 2003 was due to
prepaid loans. Our interim mortgage portfolio grew approximately 4%, 48% and
180% between years, respectively. Our investment in UDF began in 2003 and then
increased by 371% in 2004.

Below is a chart comparing our four 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 and loans to UDF for a number of reasons, the most compelling of
which are: 1) to date they have had less risk and as a result we have not
experienced as significant losses due to default, because all of the loans are
subject to limited or full recourse, and 2) blended yields have been higher
than those of the other mortgage investments which will lead to potentially
higher earnings.

Page 17

<Page>
<Table>
<Caption>
2004 2003 2002
----------- ----------- ----------

RESIDENTIAL MORTGAGES $18,221,000 $28,487,000 $28,555,000
Percentage increase
over prior year (36%) (1%) 4%

CONTRACTS FOR DEED $396,000 $4,638,000 $11,285,000
Percentage increase
over prior year (91%) (59%) (7%)

INTERIM MORTGAGES $75,773,000 $72,811,000 $49,136,000
Percentage increase
over prior year 4% 48% 180%

Line-of-credit (UDF) $28,722,000 $6,093,000 --
receivable affiliate
over prior year 371% 100%
</Table>

It may be useful to also see how each category compares as a percentage
of the portfolio.

<Table>
<Caption>
2004 2003 2002
---- ---- ----

RESIDENTIAL MORTGAGES 15% 25% 32%
CONTRACTS FOR DEED 0% 4% 13%
INTERIM MORTGAGES 62% 65% 55%
Line-of-credit (UDF) 23% 6% --
</Table>

Distributions per share of beneficial interest for the years ended
December 31, 2004, 2003 and 2002 were $1.72, $1.84 and $2.00 per share,
respectively, on earnings of $1.34, $1.47 and $1.81, respectively.
Distributions declared by our Trustees during both comparable periods were at
a 8.6%, 9.2% and 10% 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 anticipated foreclosures from loans we will hold
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.
During 2004 and 2003 we experienced significant mortgage investment losses
as we aggressively pursued the sale of non-income producing investments.
These properties were sold at a discount of 43% and 38% in 2004 and 2003.
Additionally, at the end of the fourth quarter of 2004 we recorded a
mortgage investment loss reserve of $921,500 compared to $350,000 in 2003.
We will continue to reserve for mortgage investment losses during 2005 by
reviewing our portfolio and estimating the proceeds from the sale of
foreclosed properties based on management's best estimate. In addition we
will continue to reserve loss reserves during 2005 at a rate of 1% of the
balance of each interim mortgage loan acquired and assume that we will
experience losses on approximately one residential mortgage per month at
$0.40 loss rate per dollar.

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

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<Page>
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
and October 31, 2002. The offer commenced on December 29, 2003 and concluded
on January 28, 2004. Twenty shareholders representing 0.4% of the outstanding
shares accepted the offer, which represented 29,952 shares.

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.

ANNUAL VALUATION

LIQUIDITY AND CAPITAL RESOURCES FOR
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

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.)

Page 20

<Page>
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2004 2003 2002
--------------------------------------------

Shares issued 211,752 2,525,499 1,643,377
Number of new shareholders -- 989 628
Shares repurchased ("SRP") (199,541) (323,717) (80,002)
Gross offering proceeds $ 4,200,406 $50,510,000 $32,912,000
Net offering proceeds (after
deduction of selling
commissions and fees) $ 4,200,406 $44,267,000 $25,575,000
Share repurchase payments ($3,890,000) ($6,460,000) ($1,583,000)
Principal receipts from
Residential Mortgages and
Contracts for Deed $ 6,045,000 $ 8,421,000 $4,564,000
Principal receipts from
Interim Mortgages $74,032,000 $76,241,000 $32,118,000
Net borrowing - credit line $12,030,000 $(6,245,000) $5,435,000
</Table>

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 our 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 issuable under our Reinvestment Plan. On December 5,
2003 we filed a report on Form 8-K with the SEC describing our Share
Repurchase Program which is intended to provide our shareholders with limited
liquidity.

The aggregate number of shares issued as of December 31, 2004 was
7,683,050, with 642,307 retired to treasury, (29,952 have been rescinded and
are no longer included in issued) leaving 7,040,743 outstanding, representing
gross proceeds of approximately $153,382,000. No commissions were paid after
2003. Shares issued under our Dividend Reinvestment Plan are sold without
commissions.

The aggregate number of shares issued by us during our initial and
subsequent offerings as of December 31, 2003, was 7,470,872, with 442,766
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

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<Page>
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%).

We utilized bank lines-of-credit to acquire and warehouse mortgage
investments as they become available. Effective July 11, 2004 the Company's
line-of-credit payable was extended for twelve months and modified setting the
new borrowing limit to $6,500,000. The line-of-credit payable was
collateralized by certain residential mortgages. Interest on the outstanding
balance accrues at prime plus 0.5% per annum. The outstanding balance of the
line-of-credit was reduced as we received loan principal receipts. The balance
on the line of credit was $1,530,000 at year end 2004, zero at year end 2003
and $6,245,000 at year end 2002.

On November 8, 2004 with trustee approval we entered into a three year
loan agreement to replace the $6,500,000 line-of-credit with a $15 million
revolving credit facility with another bank. The line-of-credit payable was
collateralized by certain interim mortgages. Interest on the outstanding
balance accrues at prime plus 0.5% per annum. The outstanding balance on the
line-of-credit was $10,500,000 at year end 2004.

Under the terms of our Declaration of Trust we may borrow an amount up to
50% of our Net Assets (total assets less liabilities). The percentage
outstanding at the end of the comparable years was approximately 10.4%, zero
and 7.5% 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. We used our lines of credit extensively in the last quarter
of 2004 as our excess cash was rapidly invested, and in the first half of 2003
before we 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.

As of December 31, 2004, we had purchased in the aggregate approximately
$289,370,000 of interim mortgages from various sources, and $56,627,000
aggregate invested with UDF. We funded approximately $77,449,000 of interim
mortgages and $48,856,000 of UDF in 2004, $99,800,000 and $7,771,000,
respectively in 2003 and $64,000,000 of interim mortgages in 2002. The
following table sets forth, as a percentage of the whole, the amount funded
with affiliates during 2004, 2003 and 2002.

Affiliated Company 2004 2003 2002
- --------------------- ---- ---- ----
Capital Reserve Corp. 2% 13% 41%
Ready America Funding 26% 23% 18%
REO Property Company 1% 2% 0%
Ready Mortgage Corp. 1% 13% 15%
South Central Mortgage 0% 0% 1%
UMTH Lending 18% 7% 0%
Line-of-credit (UDF) 52% 17% 0%

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Outstanding balances for interim mortgages at December 31, 2004, 2003 and
2002 purchased from affiliates were:

Affiliated Company 2004 2003 2002
- --------------------- ----------- ----------- -----------
Capital Reserve Corp. $ 4,793,000 $ 9,194,000 $19,209,000
Ready America Funding $25,011,000 $14,565,000 $ 9,424,000
REO Property Company $ 1,910,000 $ 1,735,000 --
Ready Mortgage Corp. $ 2,338,000 $ 6,346,000 $ 6,091,000
South Central Mortgage $ 150,000 $ 306,000 $ 929,000
UMTH Lending $11,399,000 $13,713,000 --
Line-of-credit (UDF) $28,722,000 $ 6,093,000 --

Residential mortgages and contacts for deed have been purchased from
various sources. At December 31, 2004, of the $53,500,000 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
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.

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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 in the past three years:
<Table>
<Caption>
Type of Fee Payee 2004 2003 2002
- ------------------------ ---------- ---------- ---------- ----------

Trust Management Fees UMTA $945,000 $ 730,000 $445,000
Acquisition Fees UMTA -- $1,248,000 $829,000
Marketing and Wholesaling
Allowance UMTA -- $ 932,000 $641,000
Bayview Securitization Fee UMTA $188,000 -- --
Stock Options UMTA -- -- --
Loan Servicing Fees PSC $109,000 $ 146,000 $197,000
Property Management Fees REOPC $ 23,000 $ 26,000 --
- ------------------------------------------------------------------------------
</table>

<Page>
OFF BALANCE SHEET TRANSACTIONS

We have recently started using off balance sheet securitization of our
mortgage investments as a means of providing funding. We receive the proceeds
from third party investors for securities issued from our securitization
vehicles which are collateralized by transferred mortgage investments from our
portfolio.

In April 2004, but effective January 1, 2004, we transferred our
residential mortgages and contracts for deed to a wholly-owned special purpose
entity called UMT LT Trust ('UMTLT'), a Maryland real estate investment trust.

On April 13, 2004, we, through UMTLT ('Seller') and another newly
created, wholly-owned subsidiary, UMT Funding Trust as the 'Depositor', a
Maryland real estate investment trust, completed a securitization of
$12,593,587 principal amount of mortgage loans through the private issuance of
$9,455,520 in 9.25% Class A Notes ('Notes'). The Notes, together with
$3,138,067 in Class B Certificates (the 'Certificates'), collectively referred
to as the 'Securities' were issued by Wachovia Bank as Trustee pursuant to a
Trust Agreement dated as of April 1, 2004 between the Bank and the Depositor.
The Class A Notes were then sold by the Depositor to Bayview Financial Trading
Group, L.P. ('Bayview'), pursuant to a Purchase Agreement dated as April 13,
2004 (the 'Note Purchase Agreement') between Bayview, the Depositor and United
Mortgage Trust. The Notes were sold pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended.

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Mortgage Trust transferred the Mortgage Loans to the Seller as a capital
contribution and the Seller sold the Mortgage Loans to the Depositor pursuant
to a Mortgage Loan Sale Agreement dated as of April 1, 2004. The Mortgage Loan
Sale Agreement includes a right on the part of the Depositor to require the
Seller to repurchase certain Mortgage Loans upon the Seller's breach of a
representation or warranty with respect to certain characteristics of the
Mortgage Loans. United Mortgage Trust has agreed to guarantee the obligations
of the Seller under the Mortgage Loan Sale Agreement, including the obligation
of the Seller to repurchase Mortgage Loans as to which the Seller has breached
a representation or warranty. The Class B Certificates give the Depositor the
right to receive all remaining monthly interest after all payments due on the
Class A Notes and all principal and interest on the Mortgage Loans after
retirement of the Class A Notes. The Class B certificates were retained by the
Depositor.

Simultaneously with the Depositor's conveyance of the Mortgage Loans to
the Trustee and pursuant to the terms of a Servicing Rights Transfer
Agreement dated as of April 1, 2004 by and between Prospect Service Corp., as
owner of the servicing rights to the Mortgage Loans, and Bayview, United
Mortgage Trust transferred the servicing rights to the Mortgage Loans to
Bayview.

The purpose for the securitization was to 1) increase the yield on the
residential mortgages and 2) free up cash to invest in interim mortgages and
UDF.

OFF BALANCE SHEET TRANSACTION - SUBSEQUENT EVENT

On January 28, 2005, United Mortgage Trust and two of its wholly-owned
subsidiaries, UMT LT Trust as the "Seller" and UMT Funding Trust as the
"Depositor," both Maryland real estate investment trusts, simultaneously
entered into agreements described below for the securitization of
$9,700,797.12 principal amount of United Mortgage Trust mortgage loans through
the private issuance of $ 7,275,598 in 9.25% Class A Notes ("Notes"). The
Notes, together with $2,425,199 in Class B Certificates (the "Certificates"),
collectively referred to as the "Securities" were issued by Wachovia Bank as
Trustee pursuant to a Trust Agreement dated as of January 1, 2005 between the
Bank and the Depositor. The Class A Notes were then sold by the Depositor to
Bayview Financial, L.P. ("Bayview"), pursuant to a Purchase Agreement dated as
of January 26, 2005 (the "Note Purchase Agreement") between Bayview, the
Depositor and United Mortgage Trust. The Notes were sold pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended.

The Securities evidence the entire beneficial ownership interest in a
Trust Fund created under the Trust Agreement, which consists of a pool of
performing first lien residential mortgage loans and contracts for deed (the
"Mortgage Loans") with an aggregate principal balance of $9,700,797.12 as of
January 1, 2005. United Mortgage Trust transferred the Mortgage Loans
(excluding the servicing rights) to the Seller as a capital contribution and
the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage
Loan Sale Agreement dated as of January 1, 2005. The Mortgage Loan Sale
Agreement includes a right on the part of the Depositor to require the Seller
to repurchase certain Mortgage Loans upon the Seller's breach of a
representation or warranty with respect to certain characteristics of the
Mortgage Loans. United Mortgage Trust has agreed to guarantee the obligations

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of the Seller under the Mortgage Loan Sale Agreement, including the obligation
of the Seller to repurchase Mortgage Loans as to which the Seller has breached
a representation or warranty. The Class B Certificates give the Depositor the
right to receipt all remaining monthly interest after all payments due on the
Class A Notes and all principal and interest on the Mortgage Loans after
retirement of the Class A Notes. The Class B Certificates will be retained by
the Depositor.

Simultaneously with the Depositor's conveyance of the Mortgage Loans to
the Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement
dated as of January 1, 2005 United Mortgage Trust, as owner of the servicing
rights to the Mortgage Loans, transferred the servicing rights to the Mortgage
Loans to Bayview and, pursuant to a SubServicing Agreement dated as of
January 1, 2005 Prospect Service Corp agreed with Bayview to act as sub-
servicer of the Mortgage Loans.

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, 2004.

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

Line of credit $1,530,000 $10,500,000 -- --

At December 31, 2004 the outstanding balance on our lines-of-credit was
$12,030,000.

DIVIDENDS DECLARED AND DISTRIBUTIONS MADE

During the year ended December 31, 2004, we declared dividends and made
distributions on a monthly basis as shown below. Although last year we
declared distributions at a rate of 8.6% and 9.2% the year before, we are
under no obligation to continue to do so.

For the Years Ended
December 31,
2004 2003 2002
------- ------- --------
Monthly distribution rate $0.1433 $0.1533 $0.1667
Total distribution per share $1.72 $1.84 $2.00
Amount in excess
of earnings per share $0.38 $0.37 $0.19

MERGER PROPOSAL

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having an original principal amount of $20 for each share owned by such
holder and an annual interest rate of 8.5%, 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 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 negotiating the
final terms of any transaction with UMTH on behalf of the Company and
evaluating the fairness of the terms to our shareholders who are not
affiliated with UMTH. At the conclusion of its negotiations and
deliberations, the special committee will make 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 the date of this report there have been no
inquiries from other sources.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our dividend can fluctuate because it is based on earnings.

As reflected on our 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. Our Trustees determined that
we would not pay dividends in excess of earnings from 2003 forward, we did not
do so in 2004 and 2003 as we aggressively sold foreclosed properties. We sold
those properties for $0.57 and $0.61 on the dollar; the loss is recorded as an
expense and thus reduced our earnings. We reserved an additional $921,500 for
loan losses at year end as we have several REO properties yet to sell and for

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management's best estimate of losses from loans outstanding as of December 31,
2004. We will continue to reserve for loan losses as necessary. Our trustees
will make the determination regarding distributions in 2005 based on 2004
earnings and projected earnings in 2005.

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, including our loans to UDF, 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. In addition, our loans to UDF are secured by UDF's interest
in mortgages and equity participations that it has obtained to secure its loans
to real estate developers. Some of those mortgages are junior mortgages.
Accordingly, we face the risk of loss due to defaults by the real estate
developers and the potential inability to recover the outstanding loan balance
on foreclosure of our security interests.

We 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 have recently increased the level
of investments acquired from affiliates in the form of our $30 million line of
credit to UDF to fund real estate development loans. Accordingly our exposure
to affiliated party investments has increased significantly.

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.

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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
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, employment conditions, 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

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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

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

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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 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.

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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
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. During the negotiations for our
$15 million credit facility, the interest rate was negotiated. A higher
interest rate may have a negative impact on earnings, but we do not
anticipate a significant increase during 2005.

We have no long-term borrowings.

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ITEM 8. FINANCIAL STATEMENTS.

UNITED MORTGAGE TRUST

INDEX TO FINANCIAL STATEMENTS

Page

Management's Report on Internal Control over Financial Reporting 34

Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting 35

Report of Independent Registered Public Accounting Firm 37

Consolidated Balance Sheets as of December 31, 2004 and 2003 38

Consolidated Statements of Income for the
Years Ended December 31, 2004, 2003 and 2002 39

Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2004, 2003 and 2002 40

Consolidated Statements of Cash Flows for the
Years Ended December 31, 2004, 2003 and 2002 41

Notes to Consolidated Financial Statements 42

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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and
maintaining effective internal control over financial reporting as defined
in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company's
internal control over financial reporting is designed to provide reasonable
assurance to the Company's management and Board of Trustees regarding the
preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004 and this assessment
identified material weaknesses in the Company's internal control. A material
weakness is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements may not be detected.

Our first weakness is that we do not have sufficient staff to segregate
duties and therefore must rely on the integrity of our president, who also
functions as chief accounting officer to ensure that the Company's assets
are not misappropriated. Second, we lack written policies and procedures
which could result in a lack of control over financial reporting. In
addition, our Advisor lacks personnel with significant accounting and
financial reporting knowledge and experience, which could result in
inappropriate accounting and financial reporting. Last, we did not properly
analyze and record loan loss reserves, which could result in understated
reserves throughout the year.

In making this assessment management used the criteria set forth by the
Committee of Sponsoring Organization of the Treadway Commission (COSO) in
Internal Control - Integrated Framework. Based on management's assessment,
management concluded that, as of December 31, 2004, the Company's internal
control over financial reporting was not effective based on those criteria.

Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004, has been audited by Whitley
Penn, the independent registered public accounting firm who also audited the
Company's consolidated financial statements. Whitley Penn's attestation
report on management's assessment of the Company's internal control over
financial reporting appears on page 35 hereof.

Page 34

<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

To the Board of Trustees and Shareholders of
United Mortgage Trust

We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls Over Financial Reporting, that
United Mortgage Trust did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of
control weaknesses discussed below, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria).
United Mortgage Trust's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and trustees of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

Page 35

<Page>
Material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weaknesses have been
identified and included in management's assessment as of December 31, 2004:

- -The Company lacked segregation of duties, primarily a result of
the Advisor having one individual serving the Company,
which could result in misappropriation of assets.

- -The Company did not have documented policies and procedures for
aspects of financial reporting, which could result in a lack of
internal control over financial reporting.

- -The Company does not have personnel with significant accounting
and financial reporting knowledge and experience, which could
result in inappropriate accounting and financial reporting.

- -The Company did not properly analyze and record loan loss
reserves, which could result in understated reserves throughout
the year.

These material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2004
consolidated financial statements, and this report does not affect our
report dated February 25, 2005 on those consolidated financial statements.

In our opinion, management's assessment that United Mortgage Trust did not
maintain effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
control criteria. Also, in our opinion, because of the effect of the
material weaknesses described above on the achievement of the objectives of
the control criteria, United Mortgage Trust has not maintained effective
internal control over financial reporting as of December 31, 2004, based on
the COSO control criteria.

/s/ Whitley Penn

Dallas, Texas
February 25, 2005

Page 36

<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of
United Mortgage Trust

We have audited the accompanying consolidated balance sheets of United
Mortgage Trust as of December 31, 2004 and 2003, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. 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 of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of United Mortgage Trust at December 31, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

We also have audited, in accordance with the standards of Public Company
Accounting Oversight Board (United States), the effectiveness of United
Mortgage Trust internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 25, 2005 expressed an unqualified opinion on
management's assessment and an adverse opinion on the effectiveness of
internal control over financial reporting.

/s/ Whitley Penn

Dallas, Texas
February 25, 2005

Page 37

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

<Caption>
December 31,
2004 2003
----------------------------

ASSETS

Cash and Cash Equivalents $ 1,331,798 $ 4,199,455

Mortgage investments:
Residential mortgages
and contracts for deed -- 29,780,352
Investment in trust receivables 17,749,231 --
Residential mortgages and contracts
for deed foreclosed 867,591 3,346,004
Interim mortgages 73,747,536 71,547,192
Interim mortgages foreclosed 2,025,830 1,263,350
Reserve for loan losses (921,500) (350,000)
----------- -----------
Total mortgage investments, net 93,468,688 105,586,898

Line-of-credit receivable, affiliate 28,721,639 6,093,493
Accrued interest receivable 630,531 628,975
Accrued interest receivable, affiliate 3,375,970 2,824,849
Receivable from affiliate 379,298 59,117
Equipment, less accumulated depreciation
of $8,156 and $4,612, respectively 17,700 21,245
Other assets 1,272,637 911,786
------------ ------------
Total Assets $129,198,261 $120,325,818
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Line-of-credit, payable $ 12,030,000 $ --
Distributions payable 937,846 1,071,000
Accounts payable and accrued
liabilities 75,098 152,175
Amounts due for redemption of
beneficial interest -- 611,970
----------- ------------
Total Liabilities 13,042,944 1,835,145
----------- ------------

Commitments and contingencies -- --

Shareholders' equity:
Shares of beneficial interest; $.01 par
value; 100,000,000 shares authorized;
7,683,050 and 7,470,872 shares
issued; 7,040,743 and 7,028,106
outstanding, respectively 76,831 74,708
Additional paid-in capital 134,750,434 130,539,921
Advisor's reimbursement 397,588 397,588
Cumulative distributions in excess
of earnings (6,386,352) (3,728,496)
----------- ------------
128,838,501 127,283,721
Less treasury stock, 642,307 and
442,766 shares, respectively,
at cost (12,683,184) (8,793,048)
----------- ------------

Total Shareholders' Equity 116,155,317 118,490,673
------------ ------------
Total Liabilities and Shareholders'
Equity $129,198,261 $120,325,818
------------ ------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</Table>

Page 38

<Page>
<Table>
UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF INCOME
<Caption>
Year Ended December 31,
2004 2003 2002
--------------------------------------

Revenues:
Interest income $13,889,448 $12,076,341 $8,277,742

Expenses:
Reserve for and loss from sales
of foreclosed properties 2,788,116 2,172,197 8,252
Interest expense 179,609 146,196 78,203
Loan servicing fees 109,245 145,904 196,661
Trust administration fee 945,005 729,935 444,509
General and administrative 401,465 292,990 174,218
----------- ---------- ----------
4,423,440 3,487,222 901,843
----------- ---------- ----------

Net income $ 9,466,008 $ 8,589,119 $7,375,899
=========== =========== ==========

Earnings per share of
beneficial interest $1.34 $1.47 $1.81
=========== =========== ==========
Weighted average shares
outstanding 7,051,313 5,859,639 4,083,488
=========== =========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</Table>

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<Page>
<Table>
UNITED MORTGAGE TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
<Caption>
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, 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

Proceeds from shares issued 211,752 2,118 4,198,288 -- -- -- 4,200,406
Shares and adjustments not
redeemed 426 5 12,225 -- -- -- 12,230
Purchase of treasury stock -- -- -- -- -- (3,890,136) (3,890,136)
Distributions ($1.72 per share) -- -- -- -- (12,123,864) -- (12,123,864)
Net income -- -- -- -- 9,466,008 -- 9,466,008
--------- ------- ------------ -------- ------------ ------------ ------------
Balance at December 31, 2004 7,683,050 $76,831 $134,750,434 $397,588 $ (6,386,352) $(12,683,184) $116,155,317
========= ======= ============ ======== ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</Table>

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<Page>
<Table>
UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Caption>

Year Ended December 31,
2004 2003 2002
-----------------------------------------

Cash flow from operating activities:
Net income $ 9,466,008 $ 8,589,119 $ 7,375,899
Adjustments to reconcile net income
to net cash provided by operating
activities:
Reserve for and loss from sales
of foreclosed properties 2,788,116 2,172,197 8,252
Depreciation 3,544 1,276 520
Net amortization of discount on
mortgage investments 16,136 (22,281) (15,548)
Changes in assets and liabilities:
Accrued interest receivable (552,677) (1,536,736) (687,728)
Other assets (360,851) (627,759) (92,302)
Accounts payable and accrued
liabilities (77,077) (398,705) 409,156
Net cash provided by ------------ ----------- -----------
operating activities: 11,283,199 8,177,111 6,998,249
------------ ----------- -----------
Cash flow from investing activities:
Investment in residential mortgages and
contracts for deed (2,769,918) (1,364,900) (3,849,140)
Principal receipts on residential
mortgages and contracts for deed 6,044,912 5,314,398 4,563,908
Proceeds from the sale of mortgage loans,
securitization 9,455,520 -- --
Investment in interim mortgages (77,448,678) (99,815,148) (63,724,041)
Principal receipts on interim
mortgages 74,032,123 76,240,927 32,117,618
Line-of-credit receivable, affiliate (22,628,146) (6,093,493) --
Receivable from affiliate (320,181) 50,477 6,336
Purchase of equipment -- -- (21,144)
Net cash used in investing ------------- ----------- -----------
activities: (13,634,368) (25,667,739) (30,906,463)
------------- ----------- -----------
Cash flow from financing activities:
Proceeds from issuance of shares of
beneficial interest 4,212,636 44,266,530 28,574,571
Net borrowings (payments) on
lines-of-credit, payable 12,030,000 (6,245,000) 5,435,000
Purchase of treasury stock (3,890,136) (6,460,302) (1,582,756)
Shares of beneficial interest redeemed (611,970) -- --
Distributions (12,257,018) (10,517,715) (7,905,600)
Net cash provided by (used in) ------------ ----------- -----------
financing activities: (516,488) 21,043,513 24,521,215
------------ ----------- -----------
Net increase (decrease) in cash (2,867,657) 3,552,885 613,001

Cash and cash equivalents at
beginning of year 4,199,455 646,570 33,569
------------ ----------- -----------
Cash and cash equivalents at
end of year $ 1,331,798 $ 4,199,455 $ 646,570
============ =========== ===========
Supplemental cash flow information:
Interest paid $ 130,974 $ 146,196 $ 111,631
============ =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</Table>

Page 41

<Page>

UNITED MORTGAGE TRUST
Notes to Consolidated Financial Statements
December 31, 2004

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") and in secured loans
to affiliated partnerships that (a) originate and acquire loans for the
acquisition and development of single-family home lots, which we refer to
as land development loans, and (b) enter into participation agreements with
single-family residential real estate developers which we refer to as
equity participations. 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.

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<Page>
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.

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.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

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,
2004 and 2003, the Company had $1,331,798 and $4,199,455, 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 effective interest method over the estimated life of the mortgages (5
and 1/2 years). The unamortized discount amounted to $327,049 and $378,938
at December 31, 2004 and 2003, respectively. The unamortized loan
acquisition costs amounted to $398,888 and $466,912, respectively.

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<Page>
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, 2004, interim mortgages had an average interest rate of
13.45%, an average annual yield of 13.57%, average loan-to-value ratio of
68.44%, average unpaid principal balance of $80,000 and a remaining term of
under 12 months. As of December 31, 2004, residential mortgages and
contracts for deed has an average interest rate of 11.74%, average yield of
11.88%, average loan-to-value ratio of 84.97%, average unpaid principal
balance of $45,000 and a remaining term of 333 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.

INTEREST INCOME ACCRUAL

Interest income is received by the Company from its portfolio of
residential mortgages, contracts for deed, interim mortgages and line-of-
credit, affiliate. 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

Page 44

<Page>
ss 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 2004 and 2003 the Company
experienced significant mortgage investment losses as management
aggressively pursued the sale of non-income producing, foreclosed
properties. The properties were sold at a discount of 43% and 39%,
respectively. Additionally, as of December 31, 2004 and 2003, the Company
had recorded mortgage investment loss reserves of $921,500 and $350,000. In
addition we will continue to reserve loss reserves during 2005 at a rate of
1% of the balance of each interim mortgage loan acquired and assume that we
will experience losses on approximately one residential mortgage per month
at $0.40 loss rate per dollar.

EQUIPMENT

Equipment is recorded at cost and depreciated using 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.

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<Page>
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
four years ended December 31, 2004.

SHARES OF BENEFICIAL INTEREST OPTIONS

At December 31, 2004, 2003 and 2002, 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, 2004, 2003 and 2002 was
nominal and hence not disclosed.

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 December 2004, the FASB issued SFAS 123R, "Share-Based Payment," which is a
revision of SFAS 123 "Accounting for Stock-Based Compensation" and supersedes
APB Opinion 25, "Accounting for Stock Issued to Employees". SFAS 123R focuses
primarily on share-based payments for employee services, requiring these
payments to be recorded using a fair-value-based method. The use of APB 25's
intrinsic value method of accounting for employee stock options has been
eliminated. As a result, the fair value of stock options granted to employees
in the future will be required to be expensed. The impact on the results of
operations of the Company will be dependent on the number of options granted
and the fair value of those options. FASB 123R will be effective for the
Company in 2005, but historically options granted by the Company have been
nominal and hence the Company does not believe this will have a significant
impact on results of operations.

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<Page>
RECLASSIFICATIONS

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

C. LINE-OF-CREDIT PAYABLE

Effective July 11, 2004 the Company's line-of-credit payable was extended for
twelve months and modified setting the new borrowing limit to $6,500,000. The
line-of-credit payable was collateralized by certain residential mortgages.
Interest on the outstanding balance accrues at prime plus 0.5% per annum
(5.75% at December 31, 2004). The outstanding balance of the line-of-credit
was reduced as we received loan principal receipts. The balance on the line of
credit was $1,530,000 at year end 2004 and zero at year end 2003.

On November 8, 2004, with trustee approval, the Company entered into a three
year loan agreement to replace the $6,500,000 line-of-credit with a $15
million revolving credit facility with another bank. The line-of-credit
payable was collateralized by certain interim mortgages. Interest on the
outstanding balance accrues at prime plus 0.5% per annum (5.75% at December
31, 2004). The outstanding balance on the line-of-credit was $10,500,000 at
year end 2004.

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:

2004 2003 2002
---------------------------
Outstanding at beginning of year 45,000 47,500 47,500
Granted 7,500 7,500 7,500
Expired (12,500) (10,000) (7,500)
Exercised -- -- --
------ ------ ------
Outstanding at end of year 40,000 45,000 47,500
------ ------ ------
Exercisable at end of year 40,000 45,000 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, which has been renewed
annually, 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 $945,005, $729,935 and $444,509
for the years ended December 31, 2004, 2003 and 2002, 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

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<Page>
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). No
acquisition fees were paid in 2004. Acquisition fees paid in 2003 and 2002
totaled $1,248,175 and $828,729, 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.

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, 2004, 2003 and 2002, rent expenses
paid by the Advisor and included as part of the trust administration fee
was $22,000, $35,000 and $61,000, respectively, with offsetting sublease
income in 2002 of $44,000.

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
$109,245, $145,904 and $196,661 for years 2004, 2003 and 2002,
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 and the line-of-credit issued
to an affiliate with outstanding balances of loans:

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 2004, 2003 and 2002, were approximately $273,000, $305,000 and
$265,000, 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

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<Page>
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

(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: On January 1, 2005, but effective
September 30, 2004, the Company entered into a First Amended and Restated
Secured Line of Credit Promissory Note and an Amended and Restated Security
Agreement (collectively, the "Amendment") with UDF. The Amendment amended the
existing revolving line of credit facility ("Loan") to extend the term an
additional five years and to increase the line of credit to $30 million. The
purpose of the Loan is to finance UDF's investments in real estate development
projects. The Amendment has two components: the Long Term Investment portion
("LTI") and the Bridge-Loan Investment portion ("BLI").

The Loan is secured by the pledge of all of UDF's land development loans and
equity investments. Those UDF loans may be first lien loans or subordinate
loans. The LTI portion may not exceed $12,000,000 and bears interest at an
annualized percentage rate of 15% with interest payable monthly. The BLI
portion may not exceed $18,000,000 and is secured by the assignment of first
lien loans made by UDF to developers for the acquisition of pre-development
residential real estate. The BLI portion is additionally secured by the
pledge of all of UDF's land development loans and equity investments. The BLI
portion bears interest at an annualized percentage rate of 13.5% with interest
payable monthly.

The Loan is subordinate to UDF Senior Debt which consists of a loan guaranty
to Colonial Bank in the amount of approximately $8,750,000 and a $10,000,000
line of credit provided by Coppermark Bank.

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<Page>
UDF may use the Loan proceeds to finance either: (a) indebtedness associated
with any real estate development project upon which Borrower has a first
priority lien to the extent such indebtedness, including indebtedness financed
by funds advanced hereunder and indebtedness financed by funds advanced from
any other source, including without limitation Senior Debt, exceeds 85% of the
appraised value of such real estate development project; or (b) indebtedness
associated with any real estate development project upon which Borrower has a
junior priority lien to the extent such indebtedness, including indebtedness
financed by funds advanced hereunder and indebtedness financed by funds
advanced from any other source, including without limitation Senior Debt,
exceeds 80% of 85% of the appraised value of such real estate development
project.

The Amendment represents a further increase in the Company's loans to UDF and
in the land development loans made or to be made by UDF representing
approximately 25% of the Company's entire portfolio. The Company's Trustees
have approved this change in the Company's investment policy represented by
the increase in the Loan based upon the changed interest rate environment
which has resulted in lower yields from the Company's traditional mortgage
investments as well as experience to date with loans made to UDF.

The Company monitors the line-of-credit for collectibility on a continuing
basis based on the affiliate's payment history. No valuation allowance or
charge to earnings was recorded for the years ended December 31, 2004 and 2003
based on the Company's evaluation. Outstanding balances were $28,721,639 and
$6,093,493 at year end 2004 and 2003.

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 Class A
Debenture having an original principal amount of $20 for each share owned
by such holder and an annual interest rate of 8.5%, 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, 2005, 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.

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.

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 ,2004
and 2003, the Company had balances exceeding the FDIC insurance limits by
approximately $1,479,000 and $4,188,000, 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
shareholders, holding an aggregate of 29,952 shares, accepted the offer for
repurchase.

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

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<Page>
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 and hence no reserve has been
recorded.

H. QUARTERLY FINANCIAL DATA (UNAUDITED)

We present below selected financial data (unaudited) for the years ended
December 31, 2004 and 2003:

Net Income (Loss) Weighted
Per Share Average Shares
2004 Revenues Net Income Basic/Diluted Outstanding
- -------------- ----------- ----------- ----------------- --------------

First quarter $ 3,304,618 $ 2,655,566 $ 0.38 7,039,222
Second quarter 3,190,536 2,471,506 0.35 7,064,757
Third quarter 3,404,317 2,462,450 0.35 7,049,777
Fourth quarter 3,989,977 1,876,486 0.26 7,051,494

For the year $13,889,448 $ 9,466,008 $ 1.34 7,051,313
</Table>

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
<FN>
The Company's shares are not traded on an exchange, but have been offered
at $20 per share by the Company throughout 2004 and 2003.
</FN>

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<Page>
I. Investment in Trust, Receivable

Prior to the Bayview securitization, all residential mortgages and contracts
for deed were transferred to a qualified special purpose entity, wholly-owned
by the Company.

J. Bayview Securitization

On April 13, 2004, the Company, through two newly created qualifying special
purpose entities, completed a securitization of approximately $12.6 million in
principal amount of mortgage loans carrying a weighted average interest rate
of 11.66% and sold approximately $9.5 million of such securitized loans to
Bayview Financial Trading Group, L.P. ("Investor"). In connection with the
securitization, the Company retained servicing responsibilities and a $3.1
million subordinated interest. The Company will receive annual servicing fees
of 0.5 percent of the outstanding balance, which the Company has assigned to
PSC, a related party of the Company, which will receive the 0.5 percent
servicing fees. The Company has rights to future cash flows arising after the
Investor in the securitization trust has received the return for which they
are contracted, 9.25 percent. The Investor and the securitization trust have
no recourse to the Company's other assets for failure of debtors to pay when
due. The Company's retained interests are subordinate to the Investor's
interests. The value of the transferred mortgage loans is subject to credit
and prepayment risks.

The Company did not record a servicing asset or liability for the servicing
rights retained as the fees that will be received will fairly compensate the
assigned servicer for costs to be incurred with such service, and the Company
will pay all associated fees directly to PSC.

Gain or loss on the sale of the mortgage loans depends in part on the previous
carrying value of the loans involved in the transfer, allocated between the
assets sold and the retained interests based on their relative fair market
value at the date of transfer. To obtain fair values, quoted market prices
are used if available. However, quotes were not available for the Company's
retained interests, so the Company estimated fair value based on the present
value of future expected cash flows using management's best estimate of the
key assumptions: credit losses, prepayment speeds and discount rates
commensurate with the risks involved. The Company used an expected weighted-
average life of 5.5 years. Based on expected credit losses of 1.5%,
prepayment speed of 18.2% and a discount rate of 11.0%, no gain or loss was
recognized related to the sale of these mortgage loans as the carrying value
approximated the fair value at the date of the securitization.

The sensitivity to an immediate 10% and 20% adverse change in the assumptions
used to measure fair value of the securitized mortgage loans is as follows:

Prepayment speed assumption (annual rate):

Impact on fair value of 10% adverse change
$ 9,000
Impact on fair value of 20% adverse change
18,000

Expected credit losses (over remaining life of
loans):

Impact on fair value of 10% adverse change
11,000
Impact on fair value of 20% adverse change
23,000

Residual cash flows discount rate (annual):

Impact on fair value of 10% adverse change
213,000
Impact on fair value of 20% adverse change
$418,000

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<Page>
These sensitivities are hypothetical and should be used with caution. Changes
in fair value based on a 10 percent variation in assumptions generally cannot
be extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption; in reality,
changes in one factor may result in changes in another (for example, increases
in market interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.

K. SUBSEQUENT EVENT
On January 28, 2005, United Mortgage Trust and two of its wholly-owned
subsidiaries, UMT LT Trust as the "Seller" and UMT Funding Trust as the
"Depositor," both Maryland real estate investment trusts, simultaneously
entered into agreements described below for the securitization of
$9,700,797.12 principal amount of United Mortgage Trust mortgage loans through
the private issuance of $ 7,275,598 in 9.25% Class A Notes ("Notes"). The
Notes, together with $2,425,199 in Class B Certificates (the "Certificates"),
collectively referred to as the "Securities" were issued by Wachovia Bank as
Trustee pursuant to a Trust Agreement dated as of January 1, 2005 between the
Bank and the Depositor. The Class A Notes were then sold by the Depositor to
Bayview Financial, L.P. ("Bayview"), pursuant to a Purchase Agreement dated as
of January 26, 2005 (the "Note Purchase Agreement") between Bayview, the
Depositor and United Mortgage Trust. The Notes were sold pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended.
The Securities evidence the entire beneficial ownership interest in a Trust
Fund created under the Trust Agreement, which consists of a pool of performing
first lien residential mortgage loans and contracts for deed (the "Mortgage
Loans") with an aggregate principal balance of $9,700,797.12 as of January 1,
2005. United Mortgage Trust transferred the Mortgage Loans (excluding the
servicing rights) to the Seller as a capital contribution and the Seller sold
the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement
dated as of January 1, 2005. The Mortgage Loan Sale Agreement includes a right
on the part of the Depositor to require the Seller to repurchase certain
Mortgage Loans upon the Seller's breach of a representation or warranty with
respect to certain characteristics of the Mortgage Loans. United Mortgage
Trust has agreed to guarantee the obligations of the Seller under the Mortgage
Loan Sale Agreement, including the obligation of the Seller to repurchase
Mortgage Loans as to which the Seller has breached a representation or
warranty. The Class B Certificates give the Depositor the right to receipt all
remaining monthly interest after all payments due on the Class A Notes and all
principal and interest on the Mortgage Loans after retirement of the Class A
Notes. The Class B Certificates will be retained by the Depositor.
Simultaneously with the Depositor's conveyance of the Mortgage Loans to the
Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement
dated as of January 1, 2005 United Mortgage Trust, as owner of the servicing
rights to the Mortgage Loans, transferred the servicing rights to the Mortgage
Loans to Bayview and, pursuant to a SubServicing Agreement dated as of
January 1, 2005 Prospect Service Corp agreed with Bayview to act as sub-
servicer of the Mortgage Loans.
United Mortgage Trust intends to use the proceeds from this securitization for
general corporate purposes.
Page 54

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company's
financial reports and to other members of senior management and the Board
of Trustees.

Based on their evaluation as of December 31, 2004, the principal
executive officer and principal financial officer of the Company have
concluded that, due to the material weaknesses discussed in Management's
Report on Internal Control Over Financial Reporting on page 34 hereof, the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) were not effective
to ensure that the information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.

Management's Report On Internal Control Over Financial Reporting

Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 and its
attestation report of Whitley Penn on management's assessment of the
Company's internal control over financial reporting are contained on page
35, respectively, of this report.

Change in Internal Control Over Financial Reporting

There are no changes in the Company's control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected or are reasonably likely to materially affect the Company's
internal control over financial reporting.

Item 9B. Other Information.

None.

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.

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<Page>
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 52 Trustee, Chairman of the Board
and President
Richard D. O'Connor, Jr. 50 Independent Trustee
Paul R. Guernsey 54 Independent Trustee
Douglas R. Evans 59 Independent Trustee
Michele A. Cadwell 52 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. In addition, since 2003 Ms. Griffin has been a
limited partner of UMT Holdings, L.P. from whom the Company has received a
merger proposal. 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
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.

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<Page>
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
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

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<Page>
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 54 Chairman
Christine "Cricket" Griffin 52 President
Timothy J. Kopacka 45 Executive Vice President/Secretary
Melvin E. Horton, Jr. 59 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 2003 Mr. Etter has been a
limited partner of UMT Holdings, L.P. from which the Company has received a
merger proposal. Since 1997, Mr. Etter has been a registered representative of
First Financial United Investments Limited, which is one of our Participating
Dealers for our share offerings. 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".

Timothy J. Kopacka has served as Vice-President of UMT Advisors, Inc.
since its formation in 2000. In addition, since 2003 Mr. Kopacka has been a
limited partner of UMT Holdings, L.P. from which the Company has received a
merger proposal. 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.

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Melvin E. Horton, Jr. has served as a Vice President of UMT Advisors,
Inc. since its inception. In addition, since 2003 Mr. Horton has been a
limited partner of UMT Holdings, L.P. from which the Company has received a
merger proposal. 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 December 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 representative 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;

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;

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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; and from 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
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 in related party transactions 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

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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.

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.

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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). In addition, our independent trustees
have received compensation for their activities as part of the Independent
Committee formed to evaluate and negotiate the proposed merger. The
Independent Trustees waived their regular meeting compensation during 2004.
During 2004 each of the three independent Trustees received $51,000 as
Independent Committee compensation. During 2003 and 2002, the Independent
Trustees each received $3,000 each and waived their rights to additional
fees and each Independent Trustee who served during all of 2004, 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) 2,500(3) 0.04%
Richard D. O'Connor, Jr. (2) 12,500(3) 0.18%
Paul R. Guernsey (2) 12,500(3) 0.18%
Douglas R. Evans (2) 12,500(3) 0.18%
Michele A. Cadwell (2)(5) -- --
All Trustees and
Executive Officers as a
Group (5 persons) 40,000(4) 0.57%
<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
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.

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(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. Before its merger into UMT Lending, L.P. ("UMTHL"), we purchased
loans from CRC. The unpaid principal balances of the remaining loans at year
end 2004 was approximately $4,793,000.

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. We have and will continue to purchase
loans from RAFC. The unpaid principal balances of the loans at year end 2004
was approximately $25,011,000.

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 owns 100% of UMTHL, REO Property Company ("REO PC") and has a 50% carried
interest in UDF through another wholly owned subsidiary, United Land
Development, L.P.

UMTH Lending, L.P. 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. The
unpaid principal balances of the loans at year end 2004 was approximately
$11,399,000.

REO Property Company is a Texas limited partnership owned by UMTH. Its
mission is to manage and sell REO properties, including ours, for which it
receives a fee. UMT has funded the purchase of REO properties from other
affiliates through REO PC for which we are paid monthly interest. The unpaid
principal balances of the loans at year end 2004 was approximately
$1,910,000.

Ready Mortgage Corp., ("RMC") a Texas based real estate finance company is
owned by Craig Pettit, who is a partner of UMTH. Before its merger into UMT
Lending, L.P. ("UMTHL"), we purchased loans from RMC. The unpaid principal
balances of the remaining loans at year end 2004 was approximately $2,338,000.

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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
January 1, 2005, effective September 30, 2004, with Trustee approval we
extended a secured line-of-credit to UDF in the amount of $30,000,000 with
which they have funded real estate developers. The balance at December 31, 2004
was approximately $28,722,000.

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. Before its
merger into UMT Lending, L.P. ("UMTHL"), we purchased loans from SCMI. The
unpaid principal balances of the remaining loans at year end 2004 was
approximately $150,000.

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

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 2004, 2003 and 2002 the fees paid
were approximately $945,000, $730,000 and $445,000, respectively. We also
paid a "securitization fee" related to the Bayview transaction of $188,000
to UMTA.

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.) No acquisition fees paid were paid in 2004 and in
2003 and 2002 fees totaled approximately $1,248,000 and $829,000,
respectively.

Since our organization in July 1996, we have issued an aggregate of
70,000 five-year options to purchase our shares at $20 per share to our
Independent Trustees, none of which have been exercised.

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We pay loan servicing fees to PSC, an Affiliate, under the terms of a
Mortgage Servicing Agreement. We incurred loan servicing fees of
approximately $109,000, $146,000 and $197,000 during 2004, 2003 and 2002,
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 $22,000, $35,000 and $17,000 in 2004, 2003 and
2002, 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 2004, 2003 and 2002, payroll was
approximately $273,000, $305,000 and $265,000, respectively.

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:

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

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Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Whitley Penn has served as our principal accountant and
independent registered public accounting firm 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, 2004, 2003 and 2002. The Audit Committee also
approves in advance all engagements of Whitley Penn for audit-related, tax and
other services.

The following table reflects fees billed by Whitley Penn for
services rendered to us in 2004 and 2003:

Nature of Services 2004 2003
- ------------------------------ ------------- ------------
Audit fees - $61,000 $ $50,879
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 - $5,026 $7,065
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.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed:

(1) Financial Statements of the Company are included in Item 8.
(2) 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.
(3) Exhibits. See the Exhibit Index following for a list of the exhibits that
are filed as part of this report.

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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 16, 2005.

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 16-Mar-2005
and President

Principal Financial and
Accounting Officer:

/S/CHRISTINE A. GRIFFIN Trustee, Chairman
Christine A. Griffin of the Board 16-Mar-2005
and President

/S/PAUL R. GUERNSEY Trustee 16-Mar-2005
Paul R. Guernsey

/S/DOUGLAS R. EVANS Trustee 16-Mar-2005
Douglas R. Evans

/S/RICHARD D. O'CONNOR, JR. Trustee 16-Mar-2005
Richard D. O'Connor, Jr.

/S/MICHELE A. CADWELL Trustee 16-Mar-2005
Michele A. Cadwell

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EXHIBIT INDEX

<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
from Form 8-K filed December 5, 2003)

10.8 Secured Line of Credit Promissory Note and Security
Agreement between the Company and United Development
Funding dated January 1, 2005. (incorporated by reference
from Form 8-K filed February 2, 2005)

21 Subsidiaries of the Registrant (filed herewith)

23 Consent of Independent Registered Public
Accounting Firm (filed herewith)

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>

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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 Report on Form 10-K
for the period ending December 31, 2000. The exhibit marked "#" is incorporated
by reference from the Company's Report on Form 10-K for the period ending June
30, 2001.

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EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT

UMT LT Trust, a Maryland real estate investment trust
UMT Funding Trust, a Maryland real estate investment trust

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EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report on Form 10-
K of United Mortgage Trust of our reports dated February 25, 2005, with
respect to the consolidated financial statements of United Mortgage Trust,
United Mortgage Trust management's assessment of the effectiveness of internal
control over financial reporting, and the effectiveness of internal control
over financial reporting of United Mortgage Trust, included in the 2004 Annual
Report to Stockholders of United Mortgage Trust.

We also consent to the incorporation by reference in the following
registration statements, and in the related prospectuses thereto, of our
reports dated February 25, 2005 with respect to the consolidated financial
statements of United Mortgage Trust, United Mortgage Trust management's
assessment of the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial reporting of United
Mortgage Trust, included in or incorporated by reference in this Annual Report
on Form 10-K for the year ended December 31, 2004: Registration Statement
(Forms S-3) No.333-110488.

/s/ Whitley Penn

Dallas, Texas
March 15, 2005

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EXHIBIT 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

Certification for Annual Report on Form 10-K 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)and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f))) 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) Designed such internal control over financial reporting, or caused
such internal controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the liability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.

(c) 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

(d) 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

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(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 16, 2005 /s/ Christine Griffin
---------------------------------------
Christine Griffin
President, Chief Executive Officer and
Chief Financial Officer

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EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

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 "Company"), 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, 2004 (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 Company as of and for the end
of that period.

March 16, 2005

/s/ Christine A Griffin
-----------------------
President, Chief Executive Officer and
Chief Financial Officer

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