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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 Or [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Transition Period From ______________ To ______________ COMMISSION FILE NUMBER333-105017 VESTIN FUND III, LLC  NEVADA
    
    87-0693972(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 2901 EL CAMINO AVENUE, SUITE 206, LAS VEGAS, NEVADA 89102
(Address of Principal Executive Offices) (Zip Code) Registrants Telephone Number: 702.227.0965 Indicate by check 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
[   ] As of April 30, 2004 the Issuer had 1,247,642 of its Units outstanding. Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act.) Yes [   ] No [X]




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TABLE OF CONTENTS PAGEPART I FINANCIAL INFORMATIONItem 1. Financial StatementsBalance sheets as of March 31, 2004 (unaudited), and December 31, 2003
    
    
    3Statements of income for the three months ended March 31, 2004 (unaudited)
    
    
    4Statement of members equity for the three months ended March 31, 2004 (unaudited)
    
    
    5Statements of cash flows for the three months ended March 31, 2004 (unaudited)
    
    
    6Condensed
Notes to financial statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 2. Changes in Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
Other Information
    
    
    19Item 6. Exhibits and Reports on Form 8-K
    
    
    19SIGNATURES
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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Vestin Fund III, LLC 
 BALANCE SHEETS MARCH 31, 2004
    
    DECEMBER 31, 2003(UNAUDITED)ASSETSCash
    
    $
    6,604,289
    
    
    $
    4,952Interest and other receivables
    
    
    47,028
    
    
    
    Investment in mortgage loans
    
    
    5,000,000
    
    
    
    Assets under secured borrowings
    
    
    5,029,851
    
    
    
    Deferred offering costs
    
    
    849,347
    
    
    
    667,437$
    17,530,515
    
    
    $
    672,389LIABILITIES AND MEMBERS EQUITYLiabilitiesDue to Manager
    
    $
    853,971
    
    
    $
    673,088Due to Vestin Group
    
    
    6,021
    
    
    
    Secured borrowings
    
    
    5,029,851
    
    
    
    Total liabilities
    
    
    5,889,843
    
    
    
    673,088Members equity  at $10 per unit, minimum 1,000,000
units maximum 12,000,000 units, 1,151,170 units issued
    
    
    11,640,672
    
    
    
    (699
    )Total members equity
    
    
    11,640,672
    
    
    
    (699
    )Total liabilities and members equity
    
    $
    17,530,515
    
    
    $
    672,389
 The accompanying notes are
an integral part of this statements. 3




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Vestin Fund III, LLC 
 STATEMENT OF INCOME (unaudited) For the threemonths endedMarch 31,2004RevenuesInterest income from investment in
mortgage loans
    
    $
    298,558Other income
    
    
    5,780Total revenues
    
    
    304,338Operating expensesManagement fees to Manager
    
    
    2,493Interest expense
    
    
    117,363Other
    
    
    2,595Total operating expenses
    
    
    122,451NET INCOME
    
    $
    181,887Net income allocated to members
    
    $
    181,887Net income allocated to members per
weighted average membership units
    
    $
    0.17Weighted average membership units
    
    
    1,093,043
 The accompanying notes are
an integral part of this statements. 4




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Vestin Fund III, LLC 
 STATEMENT OF MEMBERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2004 (unaudited) Units
    
    AmountMembers equity at 12/31/03
    
    
    
    
    
    $
    (699
    )Issuance of units
    
    
    1,148,959
    
    
    
    11,489,588Distributions
    
    
    
    
    
    
    (52,217
    )Reinvestments of distributions
    
    
    2,211
    
    
    
    22,113Net income
    
    
    
    
    
    
    181,887Members equity at 3/31/04
    
    
    1,151,170
    
    
    $
    11,640,672
 The accompanying notes are
an integral part of this statements. 5




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Vestin Fund III, LLC 
 STATEMENTS OF CASH FLOWS (unaudited) For the threemonths ended
    
    For the period fromMarch 31,
    
    April 16, 2003 (Inception)2004
    
    through December 31, 2003Cash flows from operating activities:Net income (loss)
    
    $
    181,887
    
    
    $
    (699
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Change in operating assets and liabilities:Interest and other receivables
    
    
    (47,028
    )
    
    
    Due to Manager
    
    
    
    
    
    
    5,651Due to Vestin Group
    
    
    4,994
    

    
    
    Net cash provided (used) by operating activities
    
    
    139,853
    
    
    
    4,952Cash flows from investing activities:Proceeds received from sale of mortgage loan
    
    
    6,000,000
    
    
    
    Proceeds from secured borrowings
    
    
    5,029,851
    
    
    
    Purchase of investments in mortgage loans
    
    
    (16,029,851
    )
    
    
    Net cash used by investing activities
    
    
    (5,000,000
    )
    
    
    Cash flows from financing activities:Proceeds from issuance of member units
    
    
    11,966,601
    
    
    
    Members redemptions
    
    
    (477,013
    )
    
    
    Reinvestments of distributions
    
    
    22,113
    
    
    
    Distributions
    
    
    (52,217
    )
    
    
    Net cash provided by financing activities
    
    
    11,459,484
    
    
    
    NET CHANGE IN CASH
    
    
    6,599,337
    
    
    
    4,952Cash, beginning
    
    
    4,952
    
    
    
    Cash, ending
    
    $
    6,604,289
    
    
    $
    4,952Non-cash financing activities:Offering costs paid by Vestin Mortgage, Inc. and
Vestin Group, Inc. recorded as deferred offering
costs and due to manager on the accompanying balance sheet.
    
    $
    181,910
    
    
    $
    667,437Interest paid during the period
    
    $
    117,363
    
    
    $
    
 The accompanying notes are
an integral part of this statements. 6




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VESTIN FUND III, LLC 
 CONDENSED NOTES TO FINANCIAL STATEMENTS MARCH 31, 2004 (Unaudited) NOTE A  ORGANIZATION Vestin Fund III, LLC, a
Nevada limited liability company (the Company), is
primarily engaged in the business of investing in mortgage loans, where
collateral is real property, and intends to invest in income-producing real
property such as office, industrial and retail properties, multifamily
residential units, and assisted living facilities. The Company was organized on
April 16, 2003 and will continue until December 31, 2023 unless dissolved or
extended under the provisions of the Companys operating agreement. As a
company investing in mortgage loans and raising funds through a public
offering, the Company is subject to the North American Securities
Administration Act Mortgage Program Guidelines (the NASAA Guidelines)
promulgated by the state securities administrators. The manager of the Company is Vestin Mortgage, Inc. (the Manager), a Nevada
corporation engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property. The Manager is a wholly owned
subsidiary of Vestin Group, Inc. (Vestin Group), a Delaware corporation,
whose common stock is publicly held and traded on the Nasdaq National Market
under the symbol VSTN. Vestin Group has received notice from Nasdaq that it
no longer meets the minimum value of publicly held shares and
shareholders
equity required for inclusion on the Nasdaq National Market. Vestin Group has
applied for transfer to the Nasdaq Small Cap Market. Through its subsidiaries,
Vestin Group is engaged in asset management, real estate lending and other
financial services and has originated over $1.7 billion in real estate loans.
The operating agreement provides that the Manager controls the daily operating
activities of the Company; including the power to assign duties, to determine
how to invest the Companys assets, to sign bills of sale, title documents,
leases, notes, security agreements, mortgage investments and contracts, and to
assume direction of the business operations. As a result, the operating
results of the Company are dependent on the Managers ability and intent to
continue to service the Companys assets. The operating agreement also
provides that the members have certain rights, including the right to terminate
the Manager subject to a majority vote of the members. Vestin Mortgage, Inc. is also the Manager of Vestin Fund I, LLC, (Fund I),
Vestin Fund II, LLC (Fund II) and inVestin Nevada, Inc., entities in similar
businesses as the Company. The financial statements have been prepared in accordance with Securities and
Exchange Commission requirements for interim financial statements. Therefore,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Companys annual report
on Form 10-K for the year ended December 31, 2003. The results of operations for
the interim periods shown in this report are not necessarily indicative of
results to be expected for the full year. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operation. All such adjustments are of a normal recurring nature. 7




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NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. 2. INVESTMENTS IN MORTGAGE LOANS Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of the Companys mortgage loans require interest only payments
with a balloon payment of the principal at maturity. The Company has both the
intent and ability to hold mortgage loans until maturity and therefore,
mortgage loans are classified and accounted for as held for investment and are
carried at amortized cost. Loans sold to or purchased from affiliates are
accounted for at the principal balance and no gain or loss is recognized by the
Company or any affiliate. Loan-to-value ratios are based on appraisals
obtained at the time of loan origination and may not reflect subsequent changes
in value estimates. Such appraisals, which may be commissioned by the
borrower, are generally dated within 12 months of the date of loan origination.
The appraisals may be for the current estimate of the as-if developed value
of the property, which approximates the post-construction value of the
collateralized property assuming that such property is developed. As-if
developed values on raw land loans or acquisition and development loans often
dramatically exceed the immediate sales value and may include anticipated
zoning changes and timely successful development by the purchaser. As most of
the appraisals will be prepared on an as-if developed basis, if a loan goes
into default prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As a result,
there may be less security than anticipated at the time the loan was originally
made. If there is less security and a default occurs, the Company may not
recover the full amount of the loan. 3. DEFERRED OFFERING COSTS Vestin Mortgage will be reimbursed by the Company for up to 2% of gross
proceeds of the offering. As of March 31, 2004, the Company had incurred
approximately $849,000 of offering costs paid by Vestin Mortgage on behalf of
the Company, which amounts were recorded as deferred offering costs. These
deferred offering costs, which are primarily legal, accounting and registration
fees, will be converted to membership units at a price of $10 per unit once the
Company receives sufficient gross proceeds to ensure the deferred offering
costs do not exceed 2% of the gross proceeds of the offering. Any additional
offering costs incurred by the Company will be converted to membership units in
the Company up to 2% of the gross proceeds of the offering and any additional
costs may be absorbed by Vestin Mortgage. 4. SECURED BORROWING As of March 31, 2004, the Company had secured borrowings of approximately $5
million related to intercreditor agreements. Loans that have been participated
to third party investors through intercreditor agreements (Agreements) are
accounted for as secured borrowings in accordance with SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities(SFAS No. 140). The Agreements provide the Company additional
funding sources for mortgage loans whereby a third party investor (the
Investor) may participate in certain mortgage loans with the Company, Vestin
Mortgage, Vestin Fund I, and/or Vestin Fund II (collectively the Lead
Lenders). In the event of borrower non-performance, the intercreditor
agreements provide that the Lead Lenders must repay the Investors investment
amount either by (i) continuing to remit to the Investor the interest due on
the participated loan amount; (ii) substituting an alternative loan acceptable
to the Investor; or (iii) repurchasing the participated loan amount from the
Investor for the outstanding balance plus accrued interest. Consequently, the
investor is in a priority lien position against the collateralized loans and
mortgage loan financing under the intercreditor arrangement is accounted for as
a secured borrowing in accordance with SFAS No. 140. 8




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NOTE C  INVESTMENTS IN MORTGAGE LOANS Investments in mortgage loans as of March 31, 2004 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    Of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance
    
    Interest Rate
    
    Percentage
    
    To Value*Acquisition
    
    
    1
    
    
    $
    1,000,000
    
    
    
    13.00
    %
    
    
    20.00
    %
    
    
    57.34
    %Bridge
    
    
    1
    
    
    
    4,000,000
    
    
    
    14.00
    %
    
    
    80.00
    %
    
    
    63.76
    %2
    
    
    $
    5,000,000
    
    
    
    13.80
    %
    
    
    100.00
    %
    
    
    62.48
    %
 *Loan to value ratios are based on appraisals obtained at the time of loan
origination and may not reflect subsequent changes in value estimates. Such
appraisals, which may be commissioned by the borrower, are generally dated no
greater than 12 months prior to the date of loan origination. The appraisals
may be for the current estimate of the as-if developed value of the property,
which approximates the post-construction value of the collateralized property
assuming that such property is developed. As-if developed values on raw land
loans or acquisition and development loans often dramatically exceed the
immediate sales value and may include anticipated zoning changes, selection by
a purchaser against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability of financing.
As most of the appraisals will be prepared on an as-if developed basis, if a
loan goes into default prior to any development of a project, the market value
of the property may be substantially less than the appraised value. As a
result, there may be less security than anticipated at the time the loan was
originally made. If there is less security and a default occurs, the Company
may not recover the full amount of the loan. 9




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March 31, 2004
    
    PortfolioLoan Type
    
    Balance
    
    PercentageFirst mortgages
    
    $
    5,000,000
    
    
    
    100.00
    %$
    5,000,000
    
    
    
    100.00
    %
 The following is a schedule of contractual maturities of investments in
mortgage loans as of March 31, 2004: 2004
    
    $
    4,000,0002005
    
    
    1,000,000$
    5,000,000
 The following is a schedule by geographic location of investments in mortgage
loans as of: March 31, 2004
    
    PortfolioBalance
    
    PercentageColorado
    
    $
    1,000,000
    
    
    
    20.00
    %Florida
    
    
    4,000,000
    
    
    
    80.00
    %$
    5,000,000
    
    
    
    100.00
    %
 The Company has six mortgage loan products consisting of bridge, commercial,
construction, acquisition and development, land, and residential loans. The
effective interest rates on all product categories range from 13% to 14%.
Revenue by product will fluctuate based upon relative balances during the
period. At March 31, 2004, all of the Companys loans were performing (less than 90
days past due on interest payments). The Companys Manager periodically
evaluates all loans and concluded the underlying collateral is sufficient to
protect the Company. Accordingly, no specific allowance for loan losses was
deemed necessary for these loans. As of March 31, 2004, the Companys Manager had not granted extensions to the
terms of the original loan agreements. Such extensions are generally provided
on loans where the original term was 12 months or less and where a borrower
requires additional time to complete a construction project or negotiate take
out financing. Decisions regarding an allowance for loan losses require managements judgment.
As a result, there is an inherent risk that such judgment will prove incorrect.
In such event, actual losses may exceed (or be less than) the amount of any
allowance. To the extent that the Company experiences losses greater than the
amount of its allowance, the Company may incur a charge to its earnings that
will adversely affect its operating results and the amount of any distributions
payable to its members. NOTE D  RELATED PARTY TRANSACTIONS For the three months ended March 31, 2004, the Company recorded management fees
to the Companys Manager of approximately $2,500. The Company also owes the
Companys Manager and Vestin Group for expenses of approximately $860,000
primarily related to deferred offering costs. NOTE E  SECURED BORROWINGS As of March 31, 2004, the Company had $5 million in secured borrowings pursuant
to intercreditor agreements with the related amounts
included in assets under secured borrowings. For the three-month periods ended
March 31, 2004, the Company recorded interest expense of approximately $117,000
related to the secured borrowings. 10




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NOTE F  RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the FASB revised Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). The Company has evaluated its
relationships and interest in entities that might be considered VIEs and
concluded that no prerequisite conditions exist. Accordingly, the adoption of
FIN 46 did not have an effect on the Companys financial statements. NOTE G  LITIGATION INVOLVING THE MANAGER Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly
owned by Michael Shustek, the largest shareholder and CEO of Vestin Group are
defendants in a civil action entitled Desert Land, L.L.C. et al. v. Owens
Financial Group, Inc. et al (the Action). The Action was initiated by Desert
Land, L.L.C. (Desert Land) on various loans arranged by Del Mar Mortgage,
Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District
Court for the District of Nevada (the Court) entered judgment jointly and
severally in favor of Desert Land against Vestin Group, Vestin Mortgage and Del
Mar Mortgage, Inc. Judgment was predicated upon the Courts finding that Del
Mar Mortgage, Inc. received an unlawful penalty fee from the plaintiffs. Defendants subsequently filed a motion for reconsideration. The Court denied
the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
and Del Mar Mortgage, Inc. are jointly and severally liable for the judgment in
the amount of $5,683,312 (which amount includes prejudgment interest and
attorneys fees). On August 27, 2003, the Court stayed execution of the
judgment against Vestin Group and Vestin Mortgage based upon the posting of a
bond in the amount of $5,830,000. The bond was arranged by Michael Shustek and
was posted without any cost or obligation to Vestin Group and Vestin Mortgage.
Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin
Mortgage for any losses and expenses in connection with the Action, and Mr.
Shustek has guaranteed the indemnification. On September 12, 2003, all of the
defendants held liable to Desert Land appealed the judgment to the Ninth
Circuit United States Court of Appeals. The Company is not a party to the
Action. NOTE H  LITIGATION INVOLVING THE COMPANY The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to the Company, Vestin Group, Vestin Fund I and Vestin Fund II. The
staff of the SEC has not identified the reasons for its inquiry, which remains
ongoing as of May 17, 2004. The Company believes that it has fully complied
with SEC disclosure requirements and is fully cooperating with the inquiry. The
Company cannot at this time predict the outcome of the inquiry. The Company believes that it is not a party to any pending legal or arbitration
proceedings that would have a material adverse effect on the Companys
financial condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a material impact
on the Companys net income in any particular period. 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following is a financial review and analysis of the Companys financial
condition and results of operations for the three-months ended March 31, 2004.
This discussion should be read in conjunction with the Companys financial
statements and accompanying notes and other detailed information regarding the
Company appearing elsewhere in this Form 10-Q and the Companys report on Form
10-K for the year ended December 31, 2003. BACKGROUND Vestin Fund III, LLC (the Company) was organized in April 2003 as a Nevada
limited liability company for the purpose of investing in mortgage loans
originated by the Companys manager, Vestin Mortgage, Inc. (the
Manager), a
licensed mortgage company in the State of Nevada. Vestin Mortgage is a
wholly-owned subsidiary of Vestin Group, Inc., a Delaware corporation
(Vestin Group), whose
common stock is traded on the Nasdaq National Market under the ticker symbol
VSTN. Vestin Group has received notice from Nasdaq that it no longer meets
the minimum value of publicly held shares and shareholders equity required for
inclusion on the Nasdaq National Market. Vestin Mortgage, Inc. is also the
manager of Vestin Fund I, LLC, Vestin Fund II, LLC and inVestin Nevada, Inc.
which are entities in similar businesses to Vestin Fund III, LLC. The loans
are secured by real estate through deeds of trust and mortgages. OVERVIEW On November 7, 2003, the Companys Registration Statement as filed with the
Securities and Exchange Commission became effective for the initial public
offering of up to 10,000,000 units at $10 per unit (Unit). The Company
commenced operations on February 12, 2004. By March 31, 2004, the Company had
sold 1,151,670 units. Members may participate in the Companys Distribution
Reinvestment Plan whereby the members distribution may be used to purchase
additional units at $10.00 per unit. As of March 31, 2004, an additional 2,211
units have been purchased under this plan. SUMMARY OF FINANCIAL RESULTS Three monthsended March 31,2004Total revenues
    
    $
    298,558Total expenses
    
    
    122,451Net income
    
    $
    181,887Net income allocated to members per
weighted average membership units
    
    $
    0.17Annualized rate of return to members (a)
    
    
    12.66
    %Weighted average membership units
    
    
    1,093,043
  (a)
    
    The annualized rate of return to members is calculated based upon the net
income allocated to members per weighted average units as of March 31,
2004 divided by the number of days during the period (49 days from
February 12, 2004 the day the minimum $10 million was achieved) and
multiplied by three hundred and sixty five (365) days, then divided by ten
(the $10 cost per unit). 12




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Net Income. Net income for the three months ended March 31, 2004 was derived
primarily from interest income on mortgage loans approximating $298,600, and
interest income of approximately $5,800, earned on cash and cash equivalents
held at bank institutions. Expenses. For the three months ended March 31, 2004, the Company recorded
management fees to Vestin Mortgage, the Companys manager, of approximately
$2,500. In addition, Vestin Mortgage will be reimbursed by the Company for up
to 2% of the gross proceeds of the offering. As of March 31, 2004, the Company
had incurred approximately $849,000 of offering costs paid by Vestin Mortgage
on behalf of the Company, which amounts were recorded as deferred offering
costs. These deferred offering costs, which are primarily legal, accounting and
registration fees, will be converted to membership units at a price of $10 per
unit once the Company receives sufficient gross proceeds to ensure that the
deferred offering costs do not exceed 2% of the gross proceeds of the offering.
Any additional offering costs incurred by the Company will be converted to
membership units in the Company up to 2% of the gross proceeds of the offering
and any additional costs may be absorbed by Vestin Mortgage. Distributions to Members. For the three month period ended March 31, 2004,
members received distributions totaling $52,217. The foregoing distributions
were paid entirely from Net Income Available for Distribution as defined in the
Companys Operating Agreement. Net Income Available for Distribution is based
upon cash flow from operations, less certain reserves, and may exceed net
income as calculated in accordance with GAAP. INVESTMENTS IN MORTGAGE LOANS SECURED BY REAL ESTATE PORTFOLIO As of March 31, 2004, the Company had investments in mortgage loans secured by
real estate totaling $5,000,000, including two loans of which all were secured
by first deeds of trust. If the Company holds a second mortgage, it is junior
to a first trust deed position also held by the Company. As of March 31, 2004, the weighted average contractual interest yield on the
Companys investment in mortgage loans is 13.80%. These mortgage loans have
contractual maturities within the next 24 months. Losses may occur from investing in mortgage loans. The amount of losses will
vary as the loan portfolio is affected by changing economic conditions, the
financial position of borrowers, and changes in collateral values from time of
loan origination. The conclusion that a mortgage loan is uncollectible or that collectibility is
doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates
the Companys mortgage loan portfolio for impairment. The fact that a loan is
temporarily past due does not necessarily mean that the loan is impaired.
Rather, all relevant circumstances are considered by the Manager to determine
impairment and the need for specific reserves. This evaluation considers among
other matters:  
    
    prevailing economic conditions;
    
    historical experience;
    
    the nature and volume of the loan portfolio;
    
    the borrowers financial condition and adverse situations that may affect the borrowers ability to pay;
    
    evaluation of industry trends;
    
    review and evaluation of loans identified as having loss potential; and
    
    estimated fair value of any underlying collateral. Based upon this evaluation the Companys Manager has not established an
allowance for loan losses in the accompanying balance sheet as of March 31,
2004. 13




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Decisions regarding an allowance for loan losses require judgment about the
probability of future events. As a result, there is an inherent risk that such
judgment will prove incorrect. In such event, actual losses may exceed (or be
less than) the amount of any allowance. To the extent that the Company
experiences losses greater than the amount of its allowance, the Company may
incur a charge to its earnings that will adversely affect its operating results
and the amount of any distributions payable to its members. CRITICAL ACCOUNTING ESTIMATES Revenue Recognition Interest income on loans is accrued by the effective interest method. The
Company does not recognize interest income from loans once they are determined
to be impaired. A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement or when the
payment of interest is 90 days past due. Investments in Mortgage Loans Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of the Companys mortgage loans require interest only payments
with a balloon payment of the principal at maturity. The Company has both the
intent and ability to hold mortgage loans until maturity and therefore,
mortgage loans are classified and accounted for as held for investment and are
carried at amortized cost. Loans sold to or purchased from affiliates are
accounted for at the principal balance and no gain or loss is recognized by the
Company or any affiliate. Loan to value ratios are based on appraisals
obtained at the time of loan origination and may not reflect subsequent changes
in value estimates. Such appraisals are generally dated within 12 months of the
date of loan origination and may be commissioned by the borrower. The
appraisals may be for the current estimate of the as-if developed value of
the property, which approximates the post-construction value of the
collateralized property assuming that such property is developed. As-if
developed values on raw land loans or acquisition and development loans often
dramatically exceed the immediate sales value and may include anticipated
zoning changes and timely successful development by the purchaser. As most of
the appraisals will be prepared on an as-if developed basis, if a loan goes
into default prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As a result,
there may be less security than anticipated at the time the loan was originally
made. If there is less security and a default occurs, the Company may not
recover the full amount of the loan. Allowance for Loan Losses The Company maintains an allowance for loan losses on its investment in
mortgage loans for estimated credit impairment in the Companys investment in
mortgage loans portfolio. The Managers estimate of losses is based on a number
of factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrowers ability to repay, prevailing
economic conditions and the underlying collateral securing the loan. Additions
to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors which may indicate estimated losses on the loans.
Actual losses on loans are recorded as a charge-off or a reduction to the
allowance for loan losses. Subsequent recoveries of amounts previously charged
off are added back to the allowance. Secured Borrowing Loans that have been participated to third party investors through
intercreditor agreements (Agreements) are accounted for as secured borrowings
in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities(SFAS No. 140). The
Agreements provide the Company additional funding sources for mortgage loans
whereby a third party investor (the Investor) may participate in certain
mortgage loans with the Company, Vestin Mortgage, Vestin Fund I, and/or Vestin
Fund II (collectively, the Lead Lenders). In the event of borrower
non-performance, the intercreditor agreements provides that the Lead Lenders
must repay the Investors investment amount either by (i) continuing to remit
to the Investor the interest due on the participated loan amount; (ii)
substituting an alternative loan acceptable to the Investor; or (iii)
repurchasing the participated loan amount from the Investor for the outstanding
balance plus accrued interest. Consequently, the 14




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investor is in a priority lien position against the collateralized loans and
mortgage loan financing under the intercreditor arrangement is accounted for as
a secured borrowing in accordance with SFAS No. 140. Pursuant to the participation agreements, the Investor may participate in
certain loans with the Lead Lenders. In the event of borrower non-performance,
the participation agreements gives the participant the right to require
substitution of its interest with another loan, or, if the right of
substitution is not exercised and the participant holds more than 50% of the
loan, the participant may request that the Lead Lender purchase a portion so
that the Lead Lender has at least a 50% pro rata share of the non-performing
loan. Consequently, mortgage loan financing under the participation
arrangement is accounted for as a secured borrowing in accordance with SFAS No.
140. CAPITAL AND LIQUIDITY Liquidity is a measure of a companys ability to meet potential cash
requirements, including ongoing commitments to fund lending activities and for
general operational purposes. The Company does not have any significant capital
expenditures. Accordingly, the Company believes that cash held at bank
institutions will be sufficient to meet the Companys capital requirements in
the next twelve months. The Company does not anticipate the need for hiring any
employees, acquiring fixed assets such as office equipment or furniture, or
incurring material office expenses during the next twelve months because the
Manager will continue to manage the Companys affairs. The Company is charged
by the Manager a monthly management fee of up to 0.25% of the Companys
aggregate capital contributions. Pursuant to the Companys operating agreement,
the Company recorded management fees to the Manager during the three months
ended March 31, 2004 of approximately $2,500. During the three months ended March 31, 2004, cash flows provided by operating
activities approximated $140,000. Investing activities consisted of cash
provided by loan sales and payoffs of approximately $6 million, cash used in
purchases of investments in mortgage loans approximating $16 million.
Financing activities consisted of members distributions of $30,000 (net of
reinvestments). As of March 31, 2004, members holding approximately 42% of our outstanding
units have elected to reinvest their dividends. The level of dividend
reinvestment will depend upon our performance as well as the number of our
members who prefer to reinvest rather than receive current distributions of
their income. Any significant level of defaults on our outstanding loans could reduce the
funds we have available for investment in new loans. Foreclosure proceedings
may not generate full repayment of our loans and may result in significant
delays in the return of invested funds. This would diminish our capital
resources and would impair our ability to invest in new loans. In addition,
any significant level of redemptions by our Members would reduce the capital we
have available for investment. Such redemptions are limited by the terms of
our operating agreement to not more than 10% per calendar year and are subject
to other conditions. The Company had no non-performing assets, which include loans on non-accrual
(discussed in Note C of the Companys financial statements). It is possible
that no earnings will be recognized from this classification of assets until
they are disposed of, or that no earnings will be recognized at all, and the
time it will take to dispose of these assets cannot be predicted. At March 31, 2004, the Company had $6.6 million in cash and $17.5 million in
total assets. It appears the Company has sufficient working capital to meet
its operating needs in the near term. As of March 31, 2004, the Company had secured borrowings of $5 million related
to intercreditor agreements. Loans that have been participated to third party
investors through intercreditor agreements (Agreements) are accounted for as
secured borrowings in accordance with SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities(SFAS No.
140). The Agreements provide the Company additional funding sources for
mortgage loans whereby a third party investor (the Investor) may participate
in certain mortgage loans with the Company, Vestin Mortgage, Vestin Fund I,
and/or Vestin Fund II (collectively the Lead Lenders). In the event of
borrower non-performance, the intercreditor agreements provide that the Lead
Lenders must repay the Investors investment amount either by (i) continuing to
remit to the Investor the interest due on the participated loan amount; (ii)
substituting an alternative loan acceptable to the Investor; or (iii)
repurchasing the participated loan amount from the Investor for the outstanding
balance plus accrued interest. Consequently, the 15




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investor is in a priority lien position against the collateralized loans and
mortgage loan financing under the intercreditor arrangement is accounted for as
a secured borrowing in accordance with SFAS No. 140. The Company maintains working capital reserves of approximately 3% of aggregate
members capital accounts in cash and cash equivalents, and certificates of
deposit. This reserve is available to pay expenses in excess of revenues,
satisfy obligations of underlying security properties, expend money to satisfy
unforeseen obligations and for other permitted uses of the working capital.
Working capital reserves of up to 3% are included in the funds committed to
loan investments in determining what proportion of the offering proceeds and
reinvested distributions have been invested in mortgage loans. FACTORS AFFECTING THE COMPANYS OPERATING RESULTS The Companys business is subject to numerous factors affecting its operating
results. In addition to the factors discussed above, the Companys operating
results may be affected by: Risks of Investing in Mortgage Loans  
    
    The Companys underwriting standards and procedures are more lenient
than conventional lenders in that the Company will invest in loans to
borrowers who will not be required to meet the credit standards of
conventional mortgage lenders.
    
    The Company approves mortgage loans more quickly than other mortgage
lenders. Due to the nature of loan approvals, there is a risk that the
credit inquiry the Companys Manager performs will not reveal all
material facts pertaining to the borrower and the security.
    
    Appraisals may be performed on an as-if developed basis, if a loan
goes into default prior to development of a project, the market value of
the property may be substantially less than the appraised value. As a
result, there may be less security than anticipated at the time the loan
was originally made. If there is less security and a default occurs,
the Company may not recover the full amount of the loan.
    
    The Companys results of operations will vary with changes in
interest rates and with the performance of the relevant real estate
markets.
    
    If the economy is healthy, the Company expects that more people will
be borrowing money to acquire, develop or renovate real property.
However, if the economy grows too fast, interest rates may increase too
much and the cost of borrowing may become too expensive. This could
result in a slowdown in real estate lending which may mean the Company
will have fewer loans to acquire, thus reducing the Companys revenues
and the distributions to members.
    
    If, at a time of relatively low interest rates, a borrower should
prepay obligations that have a higher interest rate from an earlier
period, investors will likely not be able to reinvest the funds in
mortgage loans earning that higher rate of interest. In the absence of a
prepayment fee, the investors will receive neither the anticipated
revenue stream at the higher rate nor any compensation for their loss.
This in turn could harm the Companys reputation and make it more
difficult for the Company to attract investors willing to acquire
interest in mortgage loans. Risk of Defaults The Companys performance will be directly impacted by any defaults on the
loans in its portfolio. As noted above, the Company may experience a higher
rate of defaults than conventional mortgage lenders. The Company seeks to
mitigate the risk by estimating the value of the underlying collateral and
insisting on low loan to value ratios. However, no assurance can be given that
these efforts will fully protect the Company against losses on defaulted loans.
Moreover, during the period of time when a defaulted loan is the subject of
foreclosure proceedings, it is likely that the Company will earn less (if any)
income from such loans, thereby reducing the Companys earnings. Competition for Borrowers 16




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The Company considers its competitors for borrowers to be the providers of
non-conventional mortgage loans, that is, lenders who offer short-term,
equity-based loans on an expedited basis for higher fees and rates than those
charged by conventional lenders and mortgage loans investors, such as
commercial banks, thrifts, conduit lenders, insurance companies, mortgage
brokers, pension funds and other financial institutions that offer conventional
mortgage loans. Many of the companies against which the Company competes have
substantially greater financial, technical and other resources than the Company
does. Competition in the Companys market niche depends upon a number of
factors including price and interest rates of the loan, speed of loan
processing, cost of capital, reliability, quality of service and support
services. Effect of Fluctuations in the Economy The Companys sole business, making loans secured by real estate, is
particularly vulnerable to changes in macroeconomic conditions. Any significant
decline in economic activity, particularly in the geographical markets in which
the Company concentrates its loans, could result in a decline in the demand for
real estate development loans. In order to stay fully invested during a period
of declining demand for real estate loans, the Company may be required to make
loans on terms less favorable to the Company or to make loans involving greater
risk to the Company. Declines in economic activity are often accompanied by a
decline in prevailing interest rates. Although the Companys lending rates are
not directly tied to the Federal Reserve Boards discount rate, a sustained and
widespread decline in interest rates will impact the interest the Company is
able to earn on its loans. Since the Companys loans generally do not have
prepayment penalties, declining interest rates may also cause the Companys
borrowers to prepay their loans and the Company may not be able to reinvest the
amounts prepaid in loans generating a comparable yield. Moreover, any
significant decline in economic activity could adversely impact the ability of
the Companys borrowers to complete their projects and obtain take out
financing. This in turn could increase the level of defaults the Company may
experience. FORWARD LOOKING STATEMENTS When used in this Quarterly Report on Form 10-Q the words or phrases will
likely result, are expected to, is anticipated, or similar expressions are
intended to identify forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties, including but not limited to changes in
interest rates, and fluctuations in operating results. Such factors which are
discussed in Managements Discussion and Analysis of Financial Condition and
Results of Operations, could affect the Companys financial performance and
could cause the Companys actual results for future periods to differ
materially from any opinion or statements expressed herein with respect to
future periods. As a result, the Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, primarily from changes in interest
rates. The Company does not have any assets or liabilities denominated in
foreign currencies nor does it own any options, futures or other derivative
instruments. Most of the Companys assets consist of mortgage loans, including those that
are financed under intercreditor agreements. At March 31, 2004, the Companys
aggregate investment in mortgage loans was $5 million with a weighted average
contractual yield of 13.80%. Loans financed under intercreditor and
participation agreements approximated $5 million at March 31, 2004 and are
classified as assets under secured borrowing. Such financing is at a weighted
average contractual interest rate of 12.00%. These mortgage loans mature
within the next 24 months. All of the outstanding mortgage loans at March 31,
2004 are fixed rate loans. All of the mortgage loans are held for investment
purposes and are held to their maturity date. None of the mortgage loans have
prepayment penalties. As of March 31, 2004, the Company had cash and investments in certificates of
deposit and other short-term deposit accounts totaling $6.6 million. The
Company anticipates that approximately 3% of its assets will be held in such
accounts as a cash reserves. Additional deposits in such accounts will be made
as funds are received by the Company from new investors and repayment of loans
pending the deployment of such funds in new mortgage loans. 17




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The Company believes that these financial assets do not give rise to
significant interest rate risk due to their short-term nature. 
 ITEM 4. CONTROLS AND PROCEDURES. The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of March 31, 2004 (the Evaluation
Date). Such evaluation was conducted under the supervision and with the
participation of the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO) of Vestin Mortgage, Inc., the Companys Manager, who function
as the equivalent of the CEO and CFO of the Company. Based upon such
evaluation, the Managers CEO and CFO have concluded that, as of the Evaluation
Date, the Companys disclosure controls and procedures were effective. There
have been no significant changes in the Companys internal controls over
financial reporting that occurred during the Companys most recent fiscal
quarter, that have materially affected, or are reasonable likely to materially
affect, the Companys internal controls over financial reporting. 18




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PART II OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to the Company, Vestin Group, Vestin Fund I and Vestin Fund II. The
staff of the SEC has not identified the reasons for its inquiry, which remains
ongoing as of May 17, 2004. The Company believes that it has fully complied
with SEC disclosure requirements and is fully cooperating with the inquiry. The
Company cannot at this time predict the outcome of the inquiry. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the first quarter ended March 31, 2004. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1(1)
    
    Articles of Organization (as amended)4.1(2)
    
    Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)4.2(2)
    
    Subscription Agreement and Power of Attorney (included as Exhibit B to the prospectus)4.3(1)
    
    Distribution Reinvestment Plan31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to U.S.C. 18 Section 1350
  (1)
    
    Incorporated herein by reference to our Pre-Effective Amendment No. 3 to Form S-11 Registration
Statement filed on September 2, 2003, File No. 333-105017.(2)
    
    Incorporated herein by reference to our Post-Effective Amendment No. 1 to Form S-11 Registration
Statement filed on April 29, 2004, File No. 333-105017. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission during the first quarter of 2004 on February 4, 2004,
which report the following items: (i) Items 4 and 7  Changes Regarding Certifying Accountants 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. VESTIN FUND III, LLC By: Vestin Mortgage, Inc., its sole manager By:
    /s/ Lance K. BradfordLance K. BradfordDirector, Secretary and Treasurer
(Chief Financial Officer of the Manager
and Duly Authorized Officer) Dated: May 17, 2004 20




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VESTIN FUND III, LLC A Nevada Limited Liability Company 
 INDEX TO EXHIBITS ExhibitNo.
    
    Description of Exhibits3.1(1)
    
    Articles of Organization (as amended)4.1(2)
    
    Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)4.2(2)
    
    Subscription Agreement and Power of Attorney (included as Exhibit B to the prospectus)4.3(1)
    
    Distribution Reinvestment Plan31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to U.S.C. 18 Section 1350
  (1)
    
    Incorporated herein by reference to our Pre-Effective Amendment No. 3 to Form S-11 Registration
Statement filed on September 2, 2003, File No. 333-105017.(2)
    
    Incorporated herein by reference to our Post-Effective Amendment No. 1 to Form S-11 Registration
Statement filed on April 29, 2004, File No. 333-105017. 21