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U.S. SECURITIES AND EXCHANGE COMMISSION  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 SEPTEMBER 30, 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 8379 WEST SUNSET BOULEVARD, LAS VEGAS, NEVADA 89113
(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  [   ] Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act.) Yes  [   ]   No  [X] As of October 31, 2004 the Issuer had 2,121,341 of its Units outstanding.




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TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance sheets as of September 30, 2004 (unaudited), and December 31, 2003
    
    
    3Consolidated Statements of income for the three and nine months ended September 30,
2004 and for the period from April 16, 2003 (inception) through September 30, 2003
(unaudited)
    
    
    4Consolidated Statement of members equity for the nine months ended September 30, 2004
(unaudited)
    
    
    5Consolidated Statements of cash flows for the nine months ended September 30, 2004 and
for the period from April 16, 2003 (inception) through September 30, 2003 (unaudited)
    
    
    6Condensed notes to consolidated financial statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART
II OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURES
    
    
    19EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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Vestin Fund III, LLC 
 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004
    
    DECEMBER 31, 2003(unaudited)ASSETSCash
    
    $
    3,463,399
    
    
    $
    4,952Interest receivable
    
    
    99,647
    
    
    
    Rents receivable from Manager
    
    
    71,645Investment in mortgage loans, net of allowance for
loan losses of $72,500 as of September 30, 2004
    
    
    10,052,319
    
    
    
    Investment in real property, net of accumulated
depreciation of $29,201
    
    
    9,770,799
    
    
    
    Capitalized loan fees, net of amortization of $1,366
    
    
    113,436Assets under secured borrowings
    
    
    4,133,575
    
    
    
    Deferred offering costs
    
    
    869,221
    
    
    
    667,437$
    28,574,041
    
    
    $
    672,389LIABILITIES AND MEMBERS EQUITYLiabilitiesDue to Manager
    
    $
    1,000,275
    
    
    $
    673,088Secured borrowings
    
    
    4,133,575
    
    
    
    Note payable
    
    
    4,950,000
    
    
    
    Total liabilities
    
    
    10,083,850
    
    
    
    673,088Members equity  Minimum 1,000,000 units, maximum 12,000,000
units issued at $10 per unit, 1,841,265 units outstanding at
September 30, 2004
    
    
    18,490,191
    
    
    
    (699
    )Total members equity
    
    
    18,490,191
    
    
    
    (699
    )Total liabilities and members equity
    
    $
    28,574,041
    
    
    $
    672,389
 The accompanying notes are an integral part of these statements. 3




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Vestin Fund III, LLC 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Period fromFor the Three
    
    For the Nine
    
    April 16, 2003 (date ofMonths Ended
    
    Months Ended
    
    inception) throughSeptember 30, 2004
    
    September 30, 2004
    
    September 30, 2003RevenuesInterest income from investments in
mortgage loans
    
    $
    580,546
    
    
    $
    1,506,621
    
    
    $
    Rental income
    
    
    101,690
    
    
    
    101,690Other
    
    
    4,003
    
    
    
    30,173
    
    
    
    Total revenues
    
    
    686,239
    
    
    
    1,638,484
    
    
    
    Operating expensesManagement fees
    
    
    10,763
    
    
    
    21,910
    
    
    
    Interest expense
    
    
    177,643
    
    
    
    537,458
    
    
    
    Provision for loan losses
    
    
    
    
    
    
    72,500
    
    
    
    Expenses related to investment in real property
    
    
    19,377
    
    
    
    21,876
    
    
    
    Depreciation and amortization
    
    
    30,567
    
    
    
    30,567
    
    
    
    Other
    
    
    14,637
    
    
    
    52,042
    
    
    
    381Total operating expenses
    
    
    252,987
    
    
    
    736,353
    
    
    
    381NET INCOME (LOSS)
    
    $
    433,252
    
    
    $
    902,131
    
    
    $
    (381
    )Net income (loss) allocated to members
    
    $
    433,252
    
    
    $
    902,131
    
    
    $
    (381
    )Net income (loss) allocated to members per
weighted average membership units
    
    $
    0.25
    
    
    $
    0.59
    
    
    $
    Weighted average membership units
    
    
    1,712,296
    
    
    
    1,519,198
    
    
    
    
 The accompanying notes are an integral part of these statements. 4




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Vestin Fund III, LLC 
 CONSOLIDATED STATEMENT OF MEMBERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (unaudited) Units
    
    AmountMembers equity at December 31, 2003
    
    
    
    
    
    $
    (699
    )Issuance of units
    
    
    1,812,255
    
    
    
    18,122,548Distributions
    
    
    
    
    
    
    (823,890
    )Reinvestments of distributions
    
    
    29,010
    
    
    
    290,101Net income
    
    
    
    
    
    
    902,131Members equity at September 30, 2004
    
    
    1,841,265
    
    
    $
    18,490,191
 The accompanying notes are an integral part of these statements. 5




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Vestin Fund III, LLC 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Nine
    
    For the period fromMonths Ended
    
    April 16, 2003 (Inception)September 30, 2004
    
    September 30, 2003Cash flows from operating activities:Net income (loss)
    
    $
    902,131
    
    
    $
    (381
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation
    
    
    29,201
    
    
    
    Amortization of capitalized loan fees
    
    
    1,366
    
    
    
    Provision for loan losses
    
    
    72,500
    
    
    
    Change in operating assets and liabilities:Interest receivable
    
    
    (99,647
    )
    
    
    Rents due from Manager
    
    
    (71,645
    )
    
    
    Capitalized loan fees
    
    
    (114,802
    )
    
    
    Due to Manager
    
    
    125,403
    
    
    
    5,381Net cash provided by operating activities
    
    
    844,507
    
    
    
    5,000Cash flows from investing activities:Investments in mortgage loans on real estate
    
    
    (16,802,481
    )
    
    
    Purchase of investments in mortgage loans from
Vestin Fund II, LLC
    
    
    (10,000,000
    )
    
    
    Proceeds received from sale of mortgage loans to
Vestin Fund II, LLC
    
    
    5,000,000
    
    
    
    Sale of mortgage loans
    
    
    2,113,791
    
    
    
    Proceeds from loan payoff
    
    
    9,563,871
    
    
    
    Purchase of investment in real property
    
    
    (4,850,000
    )
    
    
    Net cash used by investing activities
    
    
    (14,974,819
    )
    
    
    Cash flows from financing activities:Proceeds from issuance of member units
    
    
    18,122,548
    
    
    
    Distributions, net of reinvestments
    
    
    (533,789
    )
    
    
    Net cash provided by financing activities
    
    
    17,588,759
    
    
    
    NET CHANGE IN CASH
    
    
    3,458,447
    
    
    
    5,000Cash, beginning
    
    
    4,952
    
    
    
    Cash, ending
    
    $
    3,463,399
    
    
    $
    5,000Interest paid during the period
    
    $
    
    
    
    $
    Non-cash financing activities:Offering costs paid by Vestin Mortgage, Inc. recorded as deferred
offering costs and due to manager on the accompanying balance sheet.
    
    $
    201,784
    
    
    $
    129,526Change in loans funded through secured borrowing
    
    $
    4,133,575
    
    
    $
    Note payable related to acquisition of investment in real estate
    
    $
    4,950,000
    
    
    $
    
 The accompanying notes are an integral part of these statements. 6




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VESTIN FUND III, LLC 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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, invests in income-producing real property such as
office properties, and intends to invest in other income-producing real
property, such as 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 real estate and raising funds through a public
offering, the Company is subject to the North American Securities
Administration Act Mortgage Program Guidelines and Real Estate Guidelines
(collectively, 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., a Delaware corporation (Vestin Group),
whose common stock is publicly held and traded on the Nasdaq SmallCap Market
under the symbol VSTN. Through its subsidiaries, Vestin Group is engaged in
asset management, real estate lending and other financial services and has
originated over $1.8 billion in real estate loans. The operating agreement of
the Company 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. VF III HQ, LLC, a wholly owned subsidiary of the Company, is a single asset
limited liability company created for the purpose of owning real estate. The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with
Securities and Exchange Commission requirements for interim consolidated
financial statements. Therefore, they do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States (GAAP) for complete consolidated financial statements. The
consolidated financial statements should be read in conjunction with the
consolidated 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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Certain reclassifications have been made to the prior periods consolidated
financial statements to conform with current year presentation. NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with 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. INVESTMENTS IN REAL PROPERTY Real property is stated at cost, less accumulated depreciation. Amounts
capitalized to real estate assets consist of the cost of acquisition or
construction and any tenant improvements or major improvements that extend the
useful life of the related asset. All repairs and maintenance are expensed as
incurred. Real property is depreciated using the straight-line method over the useful
lives of the assets by class generally as follows: Building
    
    40 yearsBuilding improvements
    
    10-25 yearsLand improvements
    
    20-25 yearsTenant improvements
    
    Lease termIntangible lease assets
    
    Lease term
 The Companys Manager continually monitors events and changes in circumstances
that could indicate that carrying amounts of real estate and related intangible
assets may not be recoverable. When indicators of potential impairment are
present, management assesses the recoverability of the assets by determining
whether the carrying value of the real estate and related intangible assets
will be recovered through the undiscounted future cash flows expected from the
use and eventual disposition of the asset. In the event the expected
undiscounted future cash flows do not exceed the carrying value, management
adjusts the real estate and intangible assets to their fair value and
recognizes an impairment loss. Management has determined that there has been no
impairment in the carrying value of real property held by the Company during
the three or nine months ended September 30, 2004. 4. DEFERRED OFFERING COSTS 8




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Vestin Mortgage will be reimbursed by the Company for out of pocket offering
costs in an amount not to exceed 2% of the gross proceeds of the offering. As
of September 30, 2004, the Company had incurred approximately $869,000 of
offering costs paid by Vestin Mortgage to third parties on behalf of the
Company, which amounts were recorded as deferred offering costs. These deferred
offering costs, 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 future 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. Any additional costs exceeding the
2% will be absorbed by Vestin Mortgage. 5. ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses on its investment in
mortgage loans for estimated credit losses 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 or included in income when the asset is
disposed of. 6. SECURED BORROWINGS As of September 30, 2004, the Company had secured borrowings of $4.1 million
related to intercreditor agreements (Agreements) and certain participation
agreements with various loan participants (Investors). The Agreements
provide the Company with additional funding sources for mortgage loans whereby
the Investor may invest in certain loans with Vestin Mortgage, Fund I, Fund II
and the Company (collectively, the Lead Lenders). In the event of borrower
non-performance, the intercreditor agreements provide that the Lead Lenders
must repay the Investors loan 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
participation from the Investor for the outstanding balance of the
participation plus accrued interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. In the event of borrower non-performance,
the participation agreement allows the Investor to be repaid up to the amount
of the Investors investment prior to the Lead Lenders being repaid. Mortgage loan financing under the intercreditor and participation agreements
are accounted for as a secured borrowing in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. NOTE C  INVESTMENTS IN MORTGAGE LOANS Investments in mortgage loans as of September 30, 2004 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    Of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance**
    
    Interest Rate
    
    Percentage
    
    To Value*Acquisition and development
    
    
    2
    
    
    $
    2,236,463
    
    
    
    12.55
    %
    
    
    22.09
    %
    
    
    60.44
    %Bridge
    
    
    3
    
    
    
    5,434,968
    
    
    
    10.01
    %
    
    
    53.68
    %
    
    
    32.32
    %Commercial
    
    
    1
    
    
    
    815,106
    
    
    
    11.00
    %
    
    
    8.05
    %
    
    
    64.10
    %Construction
    
    
    1
    
    
    
    156,623
    
    
    
    11.00
    %
    
    
    1.55
    %
    
    
    63.02
    %Land
    
    
    2
    
    
    
    1,481,659
    
    
    
    12.27
    %
    
    
    14.63
    %
    
    
    55.71
    %9
    
    
    $
    10,124,819
    
    
    
    11.00
    %
    
    
    100.00
    %
    
    
    59.17
    %
 9




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*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. September 30,2004
    
    PortfolioLoan Type
    
    Balance**
    
    PercentageFirst mortgages
    
    $
    10,124,819
    
    
    
    100.00
    %Second mortgages
    
    
    
    
    
    
    0.00
    %$
    10,124,819
    
    
    
    100.00
    %
 The following is a schedule of contractual maturities of investments in
mortgage loans as of September 30, 2004: 2004
    
    $
    15,2372005
    
    
    4,689,8512006
    
    
    5,419,731$
    10,124,819
 The following is a schedule by geographic location of investments in mortgage
loans as of: September 30,2004
    
    PortfolioBalance**
    
    PercentageArizona
    
    $
    6,701,391
    
    
    
    66.19
    %California
    
    
    1,015,105
    
    
    
    10.02
    %Nevada
    
    
    1,408,323
    
    
    
    13.91
    %Oklahoma
    
    
    1,000,000
    
    
    
    9.88
    %$
    10,124,819
    
    
    
    100.00
    %
 ** The following table reconciles the balance of the loan portfolio to the
amount shown on the accompanying Balance Sheet. September 30,2004Balance per Loan Portfolio
    
    $
    10,124,819Less:Allowance for Loan Losses
    
    
    (72,500
    )Balance per Balance Sheet
    
    $
    10,052,319
 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 10% to 14%.
Revenue by product will fluctuate based upon relative balances during the
period. 10




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At September 30, 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 any loans in the portfolio. The Companys Manager has evaluated the collectibility of the loans in light of
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. The Companys Manager believes
that a general allowance for loan losses totaling $72,500 included in the
accompanying balance sheet as of September 30, 2004 is adequate to address
estimated credit losses in the Companys investment in mortgage loan portfolio
as of that date. Decisions regarding an allowance for loan losses requires 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. The following is a rollforward of the allowance for loan losses for the nine
months ended September 30, 2004: Balance atBalance at
    
    
    
    
    
    September 30,Description
    
    January 1, 2004
    
    Provisions
    
    2004General ValuationAllowance
    
    $
    
    
    
    $
    72,500
    
    
    $
    72,500
 NOTE D  INVESTMENT IN REAL PROPERTY During the three months ended September 30, 2004, the Company acquired an approximately 41,000
square foot office building located at 8379 West Sunset Blvd in Las Vegas,
Nevada. The purchase price and related closing costs was
approximately $9.8
million. As of September 30, 2004, the building was fully leased earning
rental revenues of $71,645 per month. The Company provided $4,850,000 of the
purchase price from its capital and borrowed $4,950,000 for the remainder of
the purchase price. The Company subsequently transferred the real property to its wholly-owned subsidiary. See Note F for further discussion. NOTE E  LEASING ACTIVITY Future minimum base rental income due under non-cancelable leases with
customers in effect as of September 30, 2004 is as follows: 2004
    
    $
    214,9352005
    
    
    859,7402006
    
    
    859,7402007
    
    
    859,7402008
    
    
    859,740Thereafter
    
    
    4,800,215$
    8,454,110
 NOTE F  RELATED PARTY TRANSACTIONS For the three and nine months ended September 30, 2004, the Company recorded
management fees to the Companys Manager of approximately $11,000 and $22,000,
respectively. Additionally, for the three and nine months ended September 30,
2004, the Company recorded pro rata distributions owed to the Companys Manager
of approximately $22,000 and $59,000, respectively. 11




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As of September 30, 2004, amounts due to the Manager and Vestin Group of
approximately $1.0 million are primarily related to deferred offering costs
paid on behalf of the Company as well as unpaid management fees and
distributions. During the three months ended September 30, 2004, the Company acquired an
office building (and subsequently transferred it to its wholly-owned subsidiary) located in Las Vegas, Nevada (the Property) for approximately
$9.8 million, which is inclusive of $200,000 paid to the
Manager for acquisition and advisory fees related to diligence and
other services provided in connection with the purchase of the
building.  On March 31, 2003, the Companys Manager had entered into a
ten-year lease agreement whereby the Manager will rent the entire building at a
rate of $71,645 per month, which shall increase by 4% each year. The Company
has obtained an analysis of the terms of such lease from an independent third
party, which confirms the lease rate represents a reasonable market rate
reasonable to both the Company and the Manager. The property underlying the building was originally purchased by an unrelated
party from a company wholly owned by the principal stockholder and Chief
Executive Officer of the Manager who has advised the Manager that he earned a
profit of approximately $1 million in connection with the sale. NOTE G  SECURED BORROWINGS As of September 30, 2004, the Company had $4.1 million in secured borrowings
pursuant to intercreditor and certain participation agreements with the related
amounts included in assets under secured borrowings. For the three and nine
month periods ended September 30, 2004, the Company recorded interest expense
of approximately $178,000 and $537,000, respectively, related to the secured
borrowings. NOTE H  NOTE PAYABLE Note payable consists of the following: Balance atSeptember 30,200410- year note payable to Morgan
Stanley Capital, Inc. secured by
real property, bearing interest at
5.6% per annum, payable in monthly
principal and interest installments
of $30,694
    
    $
    4,950,000
 As of September 30, 2004, the scheduled maturity of the note payable is as
follows: 2004
    
    $
    22,8872005
    
    
    94,8152006
    
    
    100,2632007
    
    
    106,0242008
    
    
    112,116Thereafter
    
    
    4,513,895$
    4,950,000
 NOTE I  RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board 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
consolidated financial statements. NOTE J  LEGAL MATTERS 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 12




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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. Mr. Shustek personally posted a cash bond
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 with his cash bond. 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. The Companys Manager is involved in a number of legal proceedings concerning
matters arising in connection with the conduct of its business activities. The
Manager believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. The Manager believes that it is not a party
to any pending legal or arbitration proceedings that would have a material
adverse effect on the Manager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 Managers net income in any particular
period. NOTE K  LEGAL MATTERS 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, Fund I and Fund II. The
staff of the SEC has not identified the reasons for its inquiry, which remains
ongoing as of November 15, 2004. The Company believes that it has complied with
SEC disclosure requirements and has cooperated 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. NOTE L SUBSEQUENT EVENTS In accordance with Section 7.8 of the Companys operating agreement, the
Companys Manager has completed its annual review of the value of the Companys
assets and has determined that, as a result of an increase in the value of the
assets owned by the Company, the value of members capital accounts must be
adjusted from $10 per unit to $10.30 per unit. As a result, new units sold by
the Company on or after November 10, 2004 will be sold at $10.30 per unit. The
change in valuation is primarily for tax and capital account purposes and does
not reflect the change in the value of the units calculated in accordance with
GAAP. Accordingly, unit prices calculated under GAAP may be different than
the adjusted price per unit. 13




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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 and nine months ended
September 30, 2004. This discussion should be read in conjunction with the
Companys consolidated 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 real property and in
mortgage loans secured by real estate 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, whose common stock is traded on the Nasdaq SmallCap
Market under the ticker symbol VSTN. Vestin Mortgage, Inc. is also the
manager of Vestin Fund I, LLC (Vestin Fund I), Vestin Fund II, LLC (Vestin
Fund II) and inVestin Nevada, Inc. which are entities in similar businesses to
the Company. 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 September 30, 2004, the Company
had sold 1,812,255 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 September 30, 2004, an
additional 29,010 units have been purchased under this plan. SUMMARY OF FINANCIAL RESULTS Three months
    
    Nine monthsended September
    
    ended September30, 2004
    
    30, 2004Total revenues
    
    $
    686,239
    
    
    $
    1,638,484Total expenses
    
    
    252,987
    
    
    
    736,353Net income
    
    $
    433,252
    
    
    $
    902,131Net income allocated to members per
Weighted average membership units
    
    $
    0.25
    
    
    $
    0.59Annualized rate of return to members (a)
    
    
    10.04
    %
    
    
    9.34
    %Weighted average membership units
    
    
    1,712,296
    
    
    
    1,519,198
  (a)
    
    The annualized rate of return to members is calculated based upon the net
income allocated to members per weighted average units as of September 30,
2004 divided by the number of days during the period (92 days for the
three months ended September 30, 2004 and 232 days from February 12, 2004
the day the minimum $10 million was achieved through September 30, 2004)
and multiplied by three hundred and sixty five (365) days, then divided by
ten (the $10 cost per unit). Total Revenues. Revenues for the three and nine months ended September 30,
2004 of approximately $686,000 and $1,638,000, respectively, were derived
primarily from interest income on mortgage loans approximating $581,000 14




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and $1,507,000, respectively. During the three and nine months ended September
30, 2004, revenues also included approximately $102,000 in rental income from
income producing real property. Approximately $220,000 and $368,000 of the Companys interest revenue for the
three and nine months ended September 30, 2004, respectively, was derived from
interest reserves. Total Expenses. For the three months ended September 30, 2004, expenses
totaled approximately $253,000, which is primarily related to management fees
of approximately $11,000, interest expense related to secured borrowings of
approximately $178,000, and depreciation and amortization of approximately
$31,000. For the nine months ended September 30, 2004, expenses totaled
approximately $736,000, which are primarily related to management fees of
approximately $22,000, and interest expense related to secured borrowings of
approximately $537,000, and depreciation and amortization of approximately
$31,000. In addition, the Companys Manager will be reimbursed for out of pocket
offering expenses in a amount not to exceed 2% of the gross proceeds of the
offering. As of September 30, 2004, the Company had incurred approximately
$869,000 of offering costs paid by the Manager 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. Any additional costs
above 2% of the gross proceeds of the offering will be absorbed by Vestin
Mortgage. Net Income. Net income for the three and nine months ended September 30, 2004
totaled approximately $433,000 and $902,000, respectively. Annualized Rate of Return to Members.For the three months ended September 30,
2004, annualized rate of return to members totaled 10.04%. For the nine months
ended September 30, 2004, annualized rate of return to members totaled 9.34%. Distributions to Members. For the three and nine months ended September 30,
2004, members received distributions totaling $425,758 and $823,890. 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 September 30, 2004, the Company had investments in mortgage loans secured
by real estate totaling $10.1 million, including nine loans of which all were
secured by first deeds of trust. As of September 30, 2004, the weighted average contractual interest rate on the
Companys investment in mortgage loans is 11.00%. 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; 15




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
    
    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 believes that the allowance
for loan losses totaling $72,500 included in the accompanying balance sheet as
of September 30, 2004 is adequate to meet estimated credit losses. 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. All leases on real property held by the Company are classified as operating
leases, and the related rental income is recognized on a straight-line basis
over the terms of the respective leases, unless rental income is dependent upon
criteria that cannot be determined at inception of the lease. Tenant
reimbursements are recognized as revenue in the period that the related
operating cost is incurred, and, are billed to tenants pursuant to the terms of
the underlying leases. Rents paid in advance, which do not qualify for revenue
recognition, are deferred to future periods. 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 16




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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 or included in income when the property is
sold. Secured Borrowings Loans that have been participated to third party investors through
intercreditor agreements (Agreements) and participation 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 and/or
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 loan 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 participation from the Investor for the outstanding
balance plus accrued interest. Additionally, an Investor may participate in certain loans with the Lead
Lenders through participation agreements. In the event of borrower
non-performance, the participation agreement allows the Investor to be repaid
up to the amount of the Investors investment prior to the Lead Lender being
repaid. 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 and nine
months ended September 30, 2004 of approximately $11,000 and $22,000,
respectively. During the nine months ended September 30, 2004, cash flows provided by
operating activities approximated $0.8 million. Investing activities consisted
of cash provided by loan sales and payoffs of approximately $16.7 million and
cash used in purchases of investments in mortgage loans approximating $26.8
million. Financing activities consisted of members distributions of $0.5
million (net of reinvestments) and issuance of member units totaling
approximately $18.1 million. As of September 30, 2004, members holding approximately 62% 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. As of September 30, 2004, the Company did not have any significant
non-performing assets. 17




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At September 30, 2004, the Company had $3.5 million in cash and $28.6 million
in total assets. It appears the Company has sufficient working capital to meet
its operating needs in the near term. As of September 30, 2004, the Company had secured borrowings of $4.1 million
related to intercreditor agreements (Agreements) and certain participation
agreements with various loan participants (Investors). The Agreements
provide the Company with additional funding sources for mortgage loans whereby
the Investor may invest in certain loans with Vestin Mortgage, Vestin Fund I,
Vestin Fund II and the Company (collectively, the Lead Lenders). In the event
of borrower non-performance, the Agreements provide that the Lead Lenders must
repay the Investors loan 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
participation from the Investor for the outstanding balance of the
participation plus accrued interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. In the event of borrower non-performance,
the participation agreement allows the Investor to be repaid up to the amount
of the Investors investment prior to the Lead Lenders being repaid. Mortgage loan financing under the intercreditor and participation agreements
are accounted for as a secured borrowing in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. 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. Off Balance Sheet Arrangements The Company does not have any interests in off-balance sheet special purpose
entities nor do we have any interests in non-exchange traded commodity
contracts. Contractual Obligations The following summarizes our contractual obligations at September 30, 2004. Payment due by periodLess than 1
    
    
    
    
    
    
    
    
    
    More thanContractual Obligation
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    5 yearsSecured borrowings
    
    $
    4,133,575
    
    
    $
    4,133,575
    
    
    $
    
    
    
    $
    
    
    
    $
    
 RELATED PARTY TRANSACTIONS For the three and nine months ended September 30, 2004, the Company recorded
management fees to the Companys Manager of approximately $11,000 and $22,000,
respectively. Additionally, for the three and nine months ended September 30,
2004, the Company recorded pro rata distributions owed to the Companys Manager
of approximately $22,000 and $59,000, respectively. As of September 30, 2004, amounts due to the Manager and Vestin Group of
approximately $1.0 million are primarily related to deferred offering costs
paid on behalf of the Company as well as unpaid management fees and
distributions. During the three months ended September 30, 2004, the Company acquired an
office building located in Las Vegas, Nevada (the
Property) for $9.8 million inclusive of $200,000
paid to the Manager for acquisition and advisory fees related to
diligence and other services provided in connection with the purchase
of the building. On March 31, 2003, the Companys Manager had entered into a ten-year 18




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lease agreement whereby the Manager will rent the entire building at a rate of
$71,645 per month, which shall increase by 4% each year. The Company has
obtained an analysis of the terms of such lease from an independent third
party, which confirms the lease rate represents a reasonable market rate
reasonable to both the Company and the Manager. The Company transferred the building to its wholly-owned subsidiary during the third quarter. 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 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 19




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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. Risks of Investing in Real Estate  
    
    Changes in the real estate market may reduce the demand for the types
of loans that the Company makes. In addition, a decline in real estate
values could impair the Companys security in outstanding loans its
investments in real property.  
    
    Tenant defaults, tenant improvements, cost of insurance, uninsured
losses, cost of compliance with laws, and undetected environmental
hazards may adversely affect the Companys operating results and the
amounts of cash available for distributions.  
    
    A property may incur vacancies either by the continued default of
tenants under their leases or the expiration of tenant leases. If
vacancies continue for a long period of time, the Company may suffer
reduced revenues resulting in less cash to be distributed to members.
In addition, the resale value of the property could be diminished
because the market value of a particular property will depend
principally upon the value of the leases of such property. Effect of Fluctuations in the Economy A portion of the Companys 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. 20




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Most of the Companys assets consist of mortgage loans, including those that
are financed under intercreditor agreements. Loans financed under
intercreditor and participation agreements approximated $4.1 million at
September 30, 2004 and are classified as assets under secured borrowing. Such
financing is at a weighted average contractual interest rate of 11.00%. These
mortgage loans mature within the next 24 months. All of the outstanding
mortgage loans at September 30, 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 September 30, 2004, the Company had cash totaling $3.5 million. The
Company anticipates that approximately 3% of its assets will be held in such
accounts as 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. 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s management has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) as of the end of the period covered by this
report. 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, CEO and CFO have concluded that, as of the end of the period, the
Companys disclosure controls and procedures were effective. There has been no changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) 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. 21




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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 November 15, 2004. The Company believes that it has complied with
SEC disclosure requirements and has cooperated 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. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) Not applicable. (b) On February 12, 2004, the Company raised the required $10,000,000 to
break escrow and commence operations. The units sold under the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-11 (the Registration Statement) (Reg. No. 333-105017)
that was declared effective by the Securities and Exchange Commission (SEC)
on November 7, 2003. The Company registered 12 million units, including units
under its Dividend Reinvestment Plan, at a selling price of $10 per unit. The
aggregate price of the offering amount registered was $120 million. Vestin
Capital, Inc., an affiliate of Vestin Mortgage, Inc., the Companys manager
(Vestin Mortgage), will receive 0.5% of the gross proceeds of the offering
for due diligence expenses. In addition, all expenses related to this
offering, including expenses incurred in connection with the offer and sale of
units under the Companys Distribution Reinvestment Plan, will be advanced by
Vestin Mortgage and will be reimbursed by the Company for up to 2% of the gross
proceeds received in the offering, which would leave $76 million in gross
proceeds. As of September 30, 2004, the Company had incurred approximately
$869,000 of offering costs paid by Vestin Mortgage on behalf of the Company,
which are primarily legal, accounting and registration fees. These deferred
offering costs will be converted into membership units at $10 per unit once the
Company receives sufficient gross offering proceeds to ensure that the offering
costs do not exceed 2% of the gross proceeds of the offering. As of September
30, 2004, the Company had raised $18,122,548 or 1,812,255 units and an
additional $290,101 or 29,010 units under its Dividend Reinvestment Plan. The Company has invested in 9 loans totaling approximately $10.1 million as of
September 30, 2004 and real property in Las Vegas, Nevada totaling
approximately $9.8 million. The Company anticipates that it will invest no
less than 82% of the gross proceeds of the offering and the distributions
reinvested under the Companys Dividend Reinvestment Plan in mortgage loans and
real property. Once the Company is fully funded, the Company anticipates
investing approximately 70% of its proceeds in real property and approximately
30% in mortgage loans. However, such percentages are only a guideline, the
actual percentages may vary. The Company will not invest more than 20% of its
proceeds in any one property once it is fully funded. The Company will retain
approximately 3% of offering proceeds as a working capital reserve. (c) Not applicable. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22




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No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the third quarter ended September 30, 2004. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS Exhibits ExhibitNo.
    
    Description of Exhibits3.1(1)
    
    Articles of Organization3.2(2)
    
    Certificate of Amendment to Articles of Organization3.3(3)
    
    Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)4(4)
    
    Distribution Reinvestment Plan10.7
    
    Purchase and Sale Agreement, dated August 1, 2004, by and between Luke
Properties, LLC and Vestin Fund III, LLC10.8
    
    Assignment and Assumption Agreement
dated August 16, 2004 by and between Vestin Fund III, LLC
and VFIII HQ, LLC31.1
    
    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 Form 10-Q filed on August 16, 2004, File No. 333-105017.(3)
    
    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.(4)
    
    Incorporated herein by reference to Exhibit 4.4 of our Pre-Effective Amendment No. 3 to Form S-11 Registration Statement filed on
September 2, 2003, File No. 333-105017. 23




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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 Managerand Duly Authorized Officer)
 Dated: November 15, 2004 24




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VESTIN FUND III, LLC A Nevada Limited Liability Company 
 INDEX TO EXHIBITS ExhibitNo.
    
    Description of Exhibits3.1(1)
    
    Articles of Organization3.2(2)
    
    Certificate of Amendment to Articles of Organization3.3(3)
    
    Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)4(4)
    
    Distribution Reinvestment Plan10.7
    
    Purchase and Sale Agreement, dated August 1, 2004, by and between Luke
Properties, LLC and Vestin Fund III, LLC10.8
    
    Assignment and Assumption Agreement
dated August 16, 2004 by and between Vestin Fund III, LLC
and VFIII HQ, LLC31.1
    
    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 Form 10-Q filed on August 16, 2004, File No. 333-105017.(3)
    
    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.(4)
    
    Incorporated herein by reference to Exhibit 4.4 of our Pre-Effective Amendment No. 3 to Form S-11 Registration Statement filed on
September 2, 2003, File No. 333-105017. 25