##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (MARK ONE) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 Or o 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
(State or Other Jurisdiction of
Incorporation or Organization)
    
    87-0693972
(I.R.S. Employer
Identification No.)
 8379 WEST SUNSET ROAD, 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 þ No o Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ As of April 30, 2005 the Issuer had 2,753,262 of its Units outstanding.




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TABLE OF CONTENTS  
 PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial StatementsConsolidated balance sheets as of March 31, 2005 (unaudited), and December 31, 2004
    
    3Consolidated statements of income for the three months ended March 31, 2005 and
2004 (unaudited)
    
    4Consolidated statement of members equity for the three months ended March 31,
2005 (unaudited)
    
    5Consolidated statements of cash flows for the three months ended March 31, 2005
and 2004 (unaudited)
    
    6Condensed notes to consolidated financial statements (unaudited)
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    28Item 4.
    
    Controls and Procedures
    
    28PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    31SIGNATURES
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32




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VESTIN FUND III, LLC 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)MARCH 31, 2005
    
    
    DECEMBER 31, 2004ASSETSCash
    
    $
    1,438,668
    
    
    $
    6,285,989Interest receivable
    
    
    203,591
    
    
    
    127,263Investment in mortgage loans, net of allowance for loan
losses of $104,324 and $72,500 as of March 31, 2005 and
December 31, 2004, respectively
    
    
    20,760,414
    
    
    
    13,519,998Investment in real property, net of accumulated depreciation
of $129,193 and $76,504 as of March 31, 2005 and
December 31, 2004, respectively
    
    
    9,761,288
    
    
    
    9,813,977Capitalized loan fees, net of amortization of $7,106 and $4,236
March 31, 2005 and December 31, 2004, respectively
    
    
    107,696
    
    
    
    110,566Assets under secured borrowings
    
    
    2,502,983
    
    
    
    2,590,491Deferred offering costs
    
    
    937,066
    
    
    
    926,054$
    35,711,706
    
    
    $
    33,374,338LIABILITIES AND MEMBERS EQUITYLiabilities
Accounts payable
    
    $
    56,470
    
    
    $
    Due to Manager
    
    
    1,200,240
    
    
    
    1,093,628Due to Fund II
    
    
    289
    
    
    
    Secured borrowings
    
    
    2,502,983
    
    
    
    2,590,491Note payable
    
    
    4,904,700
    
    
    
    4,927,885Total liabilities
    
    
    8,664,682
    
    
    
    8,612,004Members equity  Authorized 12,000,000 units at $10 per unit,
2,705,637 units issued and outstanding at March 31, 2005
and 2,471,658 units issued and outstanding at December 31, 2004
    
    
    27,047,024
    
    
    
    24,762,334Total members equity
    
    
    27,047,024
    
    
    
    24,762,334Total liabilities and members equity
    
    $
    35,711,706
    
    
    $
    33,374,338
 The accompanying notes are an integral part of these statements. 3




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VESTIN FUND III, LLC 
 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE
    
    
    FOR THE THREEMONTHS ENDED
    
    
    MONTHS ENDEDMARCH 31, 2005
    
    
    MARCH 31, 2004RevenuesInterest income from investments in
mortgage loans
    
    $
    635,893
    
    
    $
    298,558Rental income
    
    
    214,935
    
    
    
    Other
    
    
    2,954
    
    
    
    5,780Total revenues
    
    
    853,782
    
    
    
    304,338Operating expensesManagement fees
    
    
    16,497
    
    
    
    2,493Interest expense related to secured borrowings
    
    
    62,547
    
    
    
    117,363Interest expense related to investment in real estate
    
    
    68,896
    
    
    
    Provision for loan losses
    
    
    31,824
    
    
    
    Depreciation and amortization
    
    
    55,559
    
    
    
    Professional fees
    
    
    94,994
    
    
    
    Other
    
    
    61
    
    
    
    2,595Total operating expenses
    
    
    330,378
    
    
    
    122,451NET INCOME
    
    $
    523,404
    
    
    $
    181,887Net income allocated to members
    
    $
    523,404
    
    
    $
    181,887Net income allocated to members per weighted
average membership units
    
    $
    0.20
    
    
    $
    0.17Weighted average membership units
    
    
    2,665,400
    
    
    
    1,093,043
 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 THREE MONTHS ENDED MARCH 31, 2005 Units
    
    
    AmountMembers equity at December 31, 2004
    
    
    2,471,658
    
    
    $
    24,762,334Issuance of units
    
    
    214,844
    
    
    
    2,212,896Distributions
    
    
    
    
    
    
    (648,708
    )Reinvestments of distributions
    
    
    22,570
    
    
    
    232,474Members redemptions
    
    
    (3,435
    )
    
    
    (35,376
    )Net income
    
    
    
    
    
    
    523,404Members equity at March 31, 2005
    
    
    2,705,637
    
    
    $
    27,047,024
 The accompanying notes are an integral part of these statements. 5




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VESTIN FUND III, LLC 
 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
    
    
    FOR THE THREEMONTHS ENDED
    
    
    MONTHS ENDEDMARCH 31, 2005
    
    
    MARCH 31, 2004Cash flows from operating activities:Net income
    
    $
    523,404
    
    
    $
    181,887Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    52,689
    
    
    
    Amortization of capitalized loan fees
    
    
    2,870
    
    
    
    Provision for loan losses
    
    
    31,824
    
    
    
    Change in operating assets and liabilities:Interest receivable
    
    
    (76,328
    )
    
    
    (47,028
    )Accounts payable
    
    
    56,470
    
    
    
    Due to Fund II
    
    
    289
    
    
    
    Due to Vestin Group
    
    
    
    
    
    
    4,994Due to Manager
    
    
    95,600
    
    
    
    Net cash provided by operating activities
    
    
    686,818
    
    
    
    139,853Cash flows from investing activities:Investments in mortgage loans on real estate
    
    
    (7,384,110
    )
    
    
    (16,029,851
    )Sale of mortgage loans
    
    
    
    
    
    
    6,000,000Proceeds from loan payoff
    
    
    111,870
    
    
    
    Proceeds from secured borrowings
    
    
    
    
    
    
    5,029,851Net cash used by investing activities
    
    
    (7,272,240
    )
    
    
    (5,000,000
    )Cash flows from financing activities:Proceeds from issuance of member units
    
    
    2,212,896
    
    
    
    11,966,601Payments on notes payable
    
    
    (23,185
    )
    
    
    Members redemptions
    
    
    (35,376
    )
    
    
    (477,013
    )Distributions, net of reinvestments
    
    
    (416,234
    )
    
    
    (30,104
    )Net cash provided by financing activities
    
    
    1,738,101
    
    
    
    11,459,484NET CHANGE IN CASH
    
    
    (4,847,321
    )
    
    
    6,599,337Cash, beginning
    
    
    6,285,989
    
    
    
    4,952Cash, ending
    
    $
    1,438,668
    
    
    $
    6,604,289Interest paid during the period
    
    $
    62,547
    
    
    $
    117,263Non-cash financing activities:Offering costs paid by Vestin Mortgage, Inc. recorded as deferred
offering costs and due to manager on the accompanying balance sheet
    
    $
    11,012
    
    
    $
    181,910Change in loans funded through secured borrowing
    
    $
    87,508
    
    
    $
    
 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
MARCH 31, 2005
(UNAUDITED)
 NOTE A  ORGANIZATION We were organized on April 16, 2003 as a Nevada limited liability company for the purpose of
investing in mortgage loans and income-producing real property such as office properties, and
intend to invest in other income-producing real property, such as industrial and retail properties,
multifamily residential units, and assisted living facilities. Under our Operating Agreement, our
existence ends on December 31, 2023, unless the members vote to extend our duration. We refer to
Vestin Fund III, LLC as the Company, the Fund, we, us, or our. We are not a mutual fund
or an investment company within the meaning of the Investment Company Act of 1940 nor are we
subject to any regulation there under. As a company investing in mortgage loans and raising funds
through a public offering, we are 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. Our Manager is Vestin Mortgage, Inc. (the Manager), a Nevada corporation and licensed mortgage
broker engaged in the business of brokerage, placement and servicing of commercial loans secured by
real property. Our Manager is a wholly owned subsidiary of Vestin Group, Inc., a Delaware
corporation (Vestin Group). On May 11, 2005, Vestin Group announced that it had filed a Form 15
with the SEC to de-register as a reporting company following the completion of a tender offer by
its majority shareholder, Michael V. Shustek. Through its subsidiaries, Vestin Group is engaged in
asset management, real estate lending and other financial services. Our 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 our 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, our operating results 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., a company wholly owned by our Managers Chief Executive
Officer. These entities also invest in commercial mortgage loans. VF III HQ, LLC, our owned subsidiary, 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
subsidiary. 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,
2004. 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. NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 7




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1. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. 2. REVENUE RECOGNITION Interest income on loans is accrued by the effective interest method. We do 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 we 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. 3. INVESTMENTS IN MORTGAGE LOANS Investments in mortgage loans are secured by trust deeds and mortgages. Generally, all of our
mortgage loans require interest only payments with a balloon payment of the principal at maturity.
We have 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 us 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, we may not recover the
full amount of the loan. 4. ALLOWANCE FOR LOAN LOSSES We maintain an allowance for loan losses on our investments in mortgage loans for estimated credit
impairment. 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 as income. Our Manager
believes that the allowance for loan losses totaling $104,324 as of March 31, 2005, included in the
accompanying balance sheet is adequate to address estimated and expected credit impairment. 5. INVESTMENTS IN REAL PROPERTY Real property is stated at cost, less accumulated depreciation. Amounts capitalized as investments
in real property 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. Upon acquisition, the purchase price of the property is allocated to
land, building and improvements and other intangible assets and associated liabilities as required
by SFAS No. 141 Business Combinations. The allocation to land is based on an estimate of its
fair value based on available information, including appraisals. The allocation to other
intangible assets represents the value associated with the in-place leases, including leasing
commission, legal and other related costs. 8




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Real property is depreciated using the straight-line method over the useful lives of the assets by
class generally as follows: Land
    
    Not depreciatedBuilding
    
    40 yearsBuilding improvements
    
    10-25 yearsLand improvements
    
    20-25 yearsTenant improvements
    
    Lease termIntangible lease assets
    
    Lease term
 Our Manager continually monitors events and changes in circumstances that could indicate carrying
amounts of real estate and related intangible assets may not be recoverable. When indicators of
potential impairment are present, our Manager 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, we adjust the real estate and intangible assets to their fair value and recognize an
impairment loss. Our Manager has determined there has been no impairment in the carrying value of
real property held by us during the three months ended March 31, 2005. 6. DEFERRED OFFERING COSTS Our manager will be reimbursed for out of pocket offering expenses in an amount not to exceed 2% of
the gross proceeds of the offering of our units. As of March 31, 2005, approximately $937,066 of
offering costs were incurred by us and paid by our Manager on our behalf, which 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 we raise
enough capital to ensure the deferred offering costs do not exceed 2% of the gross proceeds of the
offering. Any additional offering costs paid by our Manager will be converted to membership units
of 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 our manager. 7. SECURED BORROWINGS 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 generally provide us additional funding sources for mortgage loans whereby a
third party investor (the Investor) may participate in certain mortgage loans with us and/or
Vestin Fund I and/or Vestin Fund II (collectively, the Lead Lenders) and/or inVestin Nevada, Inc.
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. Mortgage loan financing under the participation agreements are also accounted
for as a secured borrowing in accordance with SFAS No. 140. 9




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NOTE C  INVESTMENTS IN MORTGAGE LOANS Investments in mortgage loans as of March 31, 2005 are as follows: Number
    
    
    
    
    
    
    WeightedLoan
    
    Of
    
    
    
    
    
    
    Average
    
    
    Portfolio
    
    
    LoanType
    
    Loans
    
    
    Balance**
    
    
    Interest Rate
    
    
    Percentage
    
    
    To Value*Acquisition and development
    
    
    2
    
    
    $
    3,090,819
    
    
    
    11.13
    %
    
    
    14.81
    %
    
    
    56.84
    %Bridge
    
    
    2
    
    
    
    1,762,841
    
    
    
    10.45
    %
    
    
    8.45
    %
    
    
    51.62
    %Commercial
    
    
    6
    
    
    
    9,357,121
    
    
    
    12.25
    %
    
    
    44.85
    %
    
    
    70.35
    %Construction
    
    
    2
    
    
    
    1,195,201
    
    
    
    12.00
    %
    
    
    5.73
    %
    
    
    64.44
    %Land
    
    
    3
    
    
    
    5,458,756
    
    
    
    10.79
    %
    
    
    26.16
    %
    
    
    55.47
    %15
    
    
    $
    20,864,738
    
    
    
    11.54
    %
    
    
    100.00
    %
    
    
    62.54
    %
 Investments in mortgage loans as of December 31, 2004 are as follows: Number
    
    
    
    
    
    
    WeightedLoan
    
    Of
    
    
    
    
    
    
    Average
    
    
    Portfolio
    
    
    LoanType
    
    Loans
    
    
    Balance**
    
    
    Interest Rate
    
    
    Percentage
    
    
    To Value*Acquisition and development
    
    
    3
    
    
    $
    6,319,351
    
    
    
    10.90
    %
    
    
    46.49
    %
    
    
    56.74
    %Bridge
    
    
    1
    
    
    
    1,500,000
    
    
    
    10.00
    %
    
    
    11.04
    %
    
    
    50.62
    %Commercial
    
    
    2
    
    
    
    3,348,152
    
    
    
    13.27
    %
    
    
    24.63
    %
    
    
    73.28
    %Construction
    
    
    1
    
    
    
    265,451
    
    
    
    12.00
    %
    
    
    1.95
    %
    
    
    66.53
    %Land
    
    
    3
    
    
    
    2,159,544
    
    
    
    12.81
    %
    
    
    15.89
    %
    
    
    71.82
    %10
    
    
    $
    13,592,498
    
    
    
    11.71
    %
    
    
    100.00
    %
    
    
    62.73
    %
   * 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, we may not recover the full
amount of the loan. The following is a schedule of investments in mortgage loans by lien position. Up to 10% of our
loans may be secured by second deeds of trust based upon the total offering of $100 million. From
time to time, until the offering is complete, the percentage of second mortgages we invest in may
exceed 10%. December 31,March 31, 2005
    
    
    Portfolio
    
    
    2004
    
    
    PortfolioLoan Type
    
    Balance**
    
    
    Percentage
    
    
    Balance*
    
    
    PercentageFirst mortgages
    
    $
    18,338,129
    
    
    
    87.89
    %
    
    $
    11,014,604
    
    
    
    81.03
    %Second mortgages
    
    
    2,526,609
    
    
    
    12.11
    %
    
    
    2,577,894
    
    
    
    18.97
    %$
    20,864,738
    
    
    
    100.00
    %
    
    $
    13,592,498
    
    
    
    100.00
    %
 10




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The following is a schedule of contractual maturities of investments in mortgage loans as of March
31, 2005: 2005
    
    $
    6,149,7352006
    
    
    14,715,003$
    20,864,738
 The following is a schedule by geographic location of investments in mortgage loans as of: December 31,March 31, 2005
    
    
    Portfolio
    
    
    2004
    
    
    PortfolioBalance**
    
    
    Percentage
    
    
    Balance**
    
    
    PercentageArizona
    
    $
    6,864,538
    
    
    
    32.90
    %
    
    $
    6,864,538
    
    
    
    50.50
    %California
    
    
    4,839,671
    
    
    
    23.20
    %
    
    
    1,648,152
    
    
    
    12.12
    %Colorado
    
    
    262,841
    
    
    
    1.26
    %
    
    
    
    
    
    
    0.00
    %Nevada
    
    
    6,967,938
    
    
    
    33.40
    %
    
    
    4,079,808
    
    
    
    30.02
    %Oklahoma
    
    
    1,000,000
    
    
    
    4.79
    %
    
    
    1,000,000
    
    
    
    7.36
    %Texas
    
    
    929,750
    
    
    
    4.45
    %
    
    
    
    
    
    
    0.00
    %$
    20,864,738
    
    
    
    100.00
    %
    
    $
    13,592,498
    
    
    
    100.00
    %
   ** The following table reconciles the balance of the loan portfolio to the amount shown on the
accompanying Balance Sheet. December 31,March 31, 2005

    
    
    2004Balance per loan portfolio
    
    $
    20,864,738
    
    
    $
    13,592,498Less:Allowance for loan losses
    
    
    (104,324
    )
    
    
    (72,500
    )Balance per balance sheet
    
    $
    20,760,414
    
    
    $
    13,519,998
 We have 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 15%. Revenue by product will fluctuate based upon relative balances during the
period. Our Manager has evaluated the collectibility of the loans in our portfolio 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.
Our Manager believes a general allowance for loan losses totaling $104,324 included in the
accompanying balance sheet as of March 31, 2005 is adequate to address estimated credit losses in
our investment in mortgage loan portfolio. No specific allowances were deemed necessary. Decisions regarding an allowance for loan losses reflect our Managers judgment regarding 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
we experience losses greater than the amount of the allowance, we may incur a charge to earnings
that will adversely affect our operating results and the amount of any cash available for
distribution. The following is a rollforward of the allowance for loan losses for the three months ended March
31, 2005: Balance at
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    March 31,Description
    
    2004
    
    
    Provisions
    
    
    2005General Valuation Allowance
    
    $
    72,500
    
    
    $
    31,824
    
    
    $
    104,324
 In addition, our Manager had granted extensions on 1 loan pursuant to the terms of the original
loan agreements, which permit extensions by mutual consent. Such extensions are generally provided
on loans where the original term 11




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was 12 months or less and where a borrower requires additional time to complete a construction
project or negotiate take-out financing. However, our Manager only grants extensions when a
borrower is in full compliance with the terms of the loan, including, but not limited to the
borrowers obligation to make interest payments on the loan. The aggregate amount due from
borrowers whose loans had been extended as of March 31, 2005 was approximately $0.3 million. Our
Manager concluded that no allowance for loan loss was necessary with respect to these loans as of
that date. NOTE D  INVESTMENT IN REAL PROPERTY Investment in real property consists of an approximately 42,000 square foot office building located
at 8379 West Sunset Road in Las Vegas, Nevada. The purchase price and related closing costs was
approximately $9.8 million. As of March 31, 2005, the building was fully leased by Vestin Group
earning rental revenues of $71,645 per month. Vestin Group has sub-leased office space in the
building as permitted by the lease agreement. We provided $4,850,000 of the purchase price from
our capital and borrowed $4,950,000 for the remainder of the purchase price. We subsequently
conveyed the real property to our wholly-owned subsidiary, VF III HQ LLC. Subsequent to the purchase of this property we invested an additional $90,481 in tenant
improvements. As of March 31, 2005 the carrying value of this property was $9,761,288 which is net
of accumulated depreciation of $129,193. NOTE E  LEASING ACTIVITY Future minimum base rental income due under non-cancelable leases with Vestin Group in effect as of
March 31, 2005 is as follows: 2005
    
    $
    656,2682006
    
    
    906,0512007
    
    
    942,2932008
    
    
    979,9852009
    
    
    1,019,185Thereafter
    
    
    5,316,833$
    9,820,615
 NOTE F  RELATED PARTY TRANSACTIONS For the three months ended March 31, 2005 and 2004, we recorded management fees to our Manager of
approximately $16,500 and $2,500, respectively. Additionally, for the three months ended March 31,
2005, we recorded pro rata distributions owed to our Manager of approximately $23,000, no such
distributions were paid for the same period in prior year. As of March 31, 2005, amounts due to the Manager, Fund II, and Vestin Group of approximately
$1,200,000 are primarily related to deferred offering costs paid on our behalf as well as unpaid
management fees and distributions. During the three months ended March 31, 2005, we incurred expenses of $21,375 to L.L. Bradford &
Company, LLC, a certified public accounting firm for accounting services. One of Vestin Mortgages
former directors is an equity owner in that firm. During the three months ended March 31, 2005, we incurred expenses of $1,143 for legal fees to a
law firm in which the Secretary of Vestin Group has an equity ownership interest. NOTE G  SECURED BORROWINGS 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 generally provide us additional funding sources for mortgage loans whereby a
third party investor (the Investor) may participate in certain mortgage loans with us and/or
Vestin Fund I and/or Vestin Fund II (collectively, the Lead Lenders) and/or inVestin Nevada, Inc.
In the event of borrower non-performance, the intercreditor agreements provide that the Lead 12




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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. Mortgage loan financing under the participation agreements are also accounted
for as a secured borrowing in accordance with SFAS No. 140. As of March 31, 2005, funds being used under intercreditor and participation agreements where we
have potential obligations as defined above totaled $2,502,983. NOTE H  NOTE PAYABLE Note payable consists of the following: Balance atMarch 31, 200510- year note payable secured by
real property, bearing interest at
5.6% per annum, payable in monthly
principal and interest installments
of $30,694
    
    $
    4,904,700
 As of March 31, 2005, the scheduled maturity of the note payable is as follows: 2005
    
    $
    71,6082006
    
    
    100,2672007
    
    
    106,0292008
    
    
    112,1212009
    
    
    118,563Thereafter
    
    
    4,396,112$
    4,904,700
 NOTE I  MEMBERS EQUITY Membership Units During the three months ended March 31, 2005, we sold 214,844 units for proceeds totaling
$2,212,896. Additionally, members received 22,570 units as a result of reinvestments of
distributions. Our Manager will be reimbursed for out of pocket offering expenses in an amount not to exceed 2% of
the gross proceeds of the offering of our units. As of March 31, 2005, approximately $937,000 of
offering costs were incurred by us and paid by our Manager on our behalf, which were recorded as
deferred offering costs. These deferred offering costs, which are primarily legal, accounting and
registration fees, will be converted to membership units once we raise enough capital to ensure the
deferred offering costs do not exceed 2% of the gross proceeds of the offering. Any additional
offering costs paid by our Manager will be converted to membership units of 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 our Manager. Allocations and Distributions In accordance with our Operating Agreement, profits, gains and losses are to be credited to and
charged against each members capital account in proportion to their respective capital accounts as
of the close of business on the last day of each calendar month. Revenues received net of expenses, is distributed monthly to members, members may elect to reinvest
their distributions. 13




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##### Table of Contents



Distributions of proceeds from the repayment of principal on a mortgage loan will be made to the
members pro rata based on their capital accounts. For the three months ended March 31, 2005, members received distributions totaling $648,708. Working Capital Reserves We are required by our Operating Agreement to maintain working capital reserves of approximately 3%
of the aggregate capital accounts of the members. This reserve is available to pay any future
expenses in excess of revenues, satisfy obligations of underlying secured properties, expend money
to satisfy our unforeseen obligations and other permitted uses of our working capital. Working
capital reserves up to 3% in cash or cash equivalents are excluded from the funds committed to
investments in determining what proportion of the offering proceeds and reinvested distributions
have been invested in mortgage loans or real property. Value of Members Capital Accounts In accordance with Section 7.8 of our Operating Agreement, our Manager reviewed the value of our
assets during the last quarter of fiscal 2004. Based on this review, as a result of an increase in
the value of our assets, the value of members capital accounts was adjusted from $10 per unit to
$10.30 per unit. As a result, new units sold on or after November 10, 2004 have been 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. NOTE J  RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material and requires that such items be recognized as current-period
charges regardless of whether they meet the so abnormal criterion outlined in ARB No. 43. SFAS
No. 151 also introduces the concept of normal capacity and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production facilities.
Unallocated overheads must be recognized as an expense in the period incurred. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. While we
are still evaluating the impact of this statement, we do not currently believe it will have a
material impact on our financial statements. In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004
(FAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time dividend
received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the
repatriation provision, and was effective immediately upon issuance. We do not believe that the
adoption of FAS 109-2 will have a significant effect on our financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-based Payment which replaces
the prior SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. SFAS 123 (revised 2004) requires compensation
costs related to share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. In addition, liability awards will be
remeasured each reporting period. Compensation costs will be recognized over the period an
employee provides services in exchange for the award. This new standard will become effective for
us July 8, 2005, and we are still evaluating the impact of this statement. We do not currently
believe it will have a material impact on our financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21 14




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(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS No. 153 is effective for periods
beginning after June 15, 2005. The Company does not expect that adoption of SFAS No. 153 will have
a material effect on its financial position, results of operations, or liquidity. We do not
currently believe it will have a material impact on our financial statements. NOTE K  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 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. We are not a party to the Action. Our Manager is involved in a number of legal proceedings concerning matters arising in connection
with the conduct of its business activities. Our Manager believes it has meritorious defenses to
each of these actions and intends to defend them vigorously. Our Manager believes it is not a
party to any pending legal or arbitration proceedings that would have a material adverse effect on
its 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 our Managers net income in any
particular period. NOTE L  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 us, Vestin Group, Fund I and Fund
II. We have fully cooperated during the course of the informal inquiry. On January 6, 2005, we
received from the SEC an Order Directing Private Investigation and Designating Officers to Take
Testimony which appears to focus on the financial reporting of us, Fund I and Fund II. We intend
to continue to cooperate fully in this matter and believe we have complied with SEC disclosure
requirements. We cannot at this time predict the outcome of this matter. We may become involved in a number of legal proceedings concerning matters arising in connection
with the conduct of our business activities. The outcome of any such proceedings could have a
material impact on our net income in any particular period. NOTE M SEGMENT INFORMATION Operating segments are components of an enterprise in which separate financial information is
available that is regularly reviewed by the chief operating decision makers in assessing
performance and deciding how to allocate resources. Reportable segments consist of one or more
operating segments with similar economic characteristics, products and services, production
processes, type of customer, distribution system and regulatory environment. 15




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##### Table of Contents



The information provided for Segment Reporting is based on internal reports utilized by management.
The presentation and allocation of overhead and the net contribution for the operating segments may
not reflect the actual economic costs, contribution or results of operations of the segments as
stand alone businesses. If a different basis of allocation were utilized, the relative
contributions of the segments might differ but the relative trends in segments would, in
managements view, likely not be impacted. Our two reportable segments are investments in mortgage loans and investments in real estate. Financial information concerning our reportable segments is presented as follows for the three
months ended March 31, 2005: Investment in
    
    
    Investments inmortgage loans
    
    
    real estate
    
    
    TotalRevenues:Interest income
    
    $
    635,893
    
    
    $
    
    
    
    $
    635,893Rental income
    
    
    
    
    
    
    214,935
    
    
    
    214,935Other
    
    
    2,954
    
    
    
    
    
    
    
    2,954Total revenues
    
    
    638,847
    
    
    
    214,935
    
    
    
    853,782Operating expenses:Management fees
    
    
    11,221
    
    
    
    5,276
    
    
    
    16,497Interest related to secured borrowings
    
    
    62,547
    
    
    
    
    
    
    
    62,547Provision for loan losses
    
    
    31,824
    
    
    
    
    
    
    
    31,824Professional fees
    
    
    64,614
    
    
    
    30,380
    
    
    
    94,994Other
    
    
    41
    
    
    
    20
    
    
    
    61Total operating expenses
    
    
    170,247
    
    
    
    35,676
    
    
    
    205,923EBITDA*
    
    
    468,600
    
    
    
    179,259
    
    
    
    647,859Less:Depreciation and amortization
    
    
    
    
    
    
    55,559
    
    
    
    55,559Interest expense
    
    
    
    
    
    
    68,896
    
    
    
    68,896Net income
    
    $
    468,600
    
    
    $
    54,804
    
    
    $
    523,404
   * EBITDA represents net earnings before interest expense, income taxes, depreciation and
amortization. We present EBITDA because we consider it an important supplemental measure of our
performance but it does not represent cash flows. EBITDA is a measure of our performance that is not required by, or presented in accordance with,
GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be
considered as an alternative to net earnings, operating income or any other performance measures
derived in accordance with GAAP or as an alternative to cash flow from operating activities as a
measure of our liquidity. We compensate for these limitations by relying primarily on our GAAP
results and using EBITDA only supplementally. A reconciliation of EBITDA to net income is set
forth above. Although depreciation and amortization are non-cash charges, the assets being depreciated or
amortized often will have to be replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements. Other companies in our industry may calculate EBITDA
differently than we do, limiting its usefulness as a comparative measure. In addition, EBITDA does
not reflect the impact of earnings or charges resulting from matters we consider not to be
indicative of our ongoing operations. NOTE N SUBSEQUENT EVENTS 16




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Our Manager is currently evaluating a plan to convert Vestin Fund III into a Real Estate Investment
Trust (REIT) whereby equity holders would be able to sell their interests on an exchange, but
would not have any withdrawal rights. If successfully implemented, this plan would prevent erosion
of our capital through member withdrawals. Implementation of this plan would require resolution of
various tax and structural issues, filing of a proxy and registration statement with the SEC,
approval of a majority in interest of our outstanding units and approval for listing on a national
securities exchange. None of these requirements have been met and no assurance can be given that
any proposal to convert Vestin Fund III into a REIT will be successfully implemented. 17




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##### Table of Contents



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a financial review and analysis of our financial condition and results of
operations for the three months ended March 31, 2005. This discussion should be read in
conjunction with our consolidated financial statements and accompanying notes and other detailed
information regarding us appearing elsewhere in this Form 10-Q and our report on Form 10-K for the
year ended December 31, 2004. BACKGROUND We were organized on April 16, 2003 as a Nevada limited liability company for the purpose of
investing in mortgage loans and income-producing real property such as office properties, and
intend to invest in other income-producing real property, such as industrial and retail properties,
multifamily residential units, and assisted living facilities. Under our Operating Agreement, our
existence ends on December 31, 2023, unless the members vote to extend our duration. We refer to
Vestin Fund III, LLC as the Company, the Fund, we, us, or our. We are not a mutual fund
or an investment company within the meaning of the Investment Company Act of 1940 nor are we
subject to any regulation thereunder. As a company investing in mortgage loans and raising funds
through a public offering, we are 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. Our Manager is Vestin Mortgage, Inc. (the Manager), a Nevada corporation and licensed mortgage
broker engaged in the business of brokerage, placement and servicing of commercial loans secured by
real property. Our Manager is a wholly owned subsidiary of Vestin Group, Inc., a Delaware
corporation (Vestin Group). On May 11, 2005, Vestin Group announced that it had filed a Form 15
with the SEC to de-register as a reporting company following the completion of a tender offer by
its majority shareholder, Michael V. Shustek. Through its subsidiaries, Vestin Group is engaged in
asset management, real estate lending and other financial services. Our 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 our 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, our operating results are dependent on the
Managers ability and intent to continue to service the our 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., a company wholly owned by our Managers Chief Executive
Officer. These entities also invest in commercial mortgage loans. OVERVIEW On November 7, 2003, our 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). We commenced operations on February 12, 2004. By March 31, 2005, we had sold
approximately 2,600,000 units. Members may participate in our Distribution Reinvestment Plan
whereby the members distribution may be used to purchase additional units at the current value.
As of March 31, 2005, an additional approximately 70,000 units have been purchased under this plan. Our operating results depend primarily upon (i) the amount of capital we have to invest in mortgage
loans and income producing real estate, (ii) the level of real estate lending activity in the
markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the
interest rates we are able to charge on our loans, (v) our ability to identify and acquire suitable
income-producing properties, (vi) the level of rents or other income we are able to generate from
our acquired properties and (vii) the level of non-performing assets and loan losses which we
experience. 18




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We only operated for 49 days during the three month period ended March 31, 2004 and we had limited
assets during that quarter. It is therefore not possible to make any meaningful comparison between
the results of our operations for the three month period ended March 31, 2004 with the three month
period ended March 31, 2005. In accordance with Section 7.8 of our Operating Agreement, our Manager reviewed the value of our
assets during the last quarter of fiscal 2004. Based on this review, as a result of an increase in
the value of our assets, the value of members capital accounts was adjusted from $10 per unit to
$10.30 per unit. As a result, new units sold on or after November 10, 2004 have been 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. SUMMARY OF FINANCIAL RESULTS Three months endedMarch 31, 2005
    
    
    March 31, 2004Total revenues
    
    $
    853,782
    
    
    $
    304,338Total expenses
    
    
    330,378
    
    
    
    122,451Net income
    
    $
    523,404
    
    
    $
    181,887Net income allocated to members per
weighted average membership units
    
    $
    0.20
    
    
    $
    0.17Annualized rate of return to members
    
    
    7.73
    %(a)
    
    
    12.40
    %(b)Weighted average membership units
    
    
    2,665,400
    
    
    
    1,093,043
   (a)
    
    The annualized rate of return to members in 2005 is calculated based upon the net income
allocated to members per weighted average units as of March 31, 2005 divided by the number of
days during the period (90 days for the three months ended March 31, 2005) and multiplied by
three hundred and sixty five (365) days, then divided by 10.30 (the $10.30 cost per unit).(b)
    
    The annualized rate of return to members in 2004 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 we commenced operations after
raising the minimum $10 million) 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 months ended March 31, 2005 and 2004 of approximately
$900,000 and $300,000, respectively, an increase of $600,000 or 200%, and were derived primarily
from interest income on mortgage loans approximating $636,000 and $299,000, respectively. This
increase is largely due to the fact that we were only operating for 49 days during the quarter
ended March 31, 2004 and the amount of capital we have to invest in mortgage loans increased
significantly from 2004 to 2005. During the three months ended March 31, 2005, revenues also
included approximately $215,000 in rental income from income producing real property. Approximately $264,000 of our interest revenue for the three months ended March 31, 2005 was
derived from interest reserves, no such revenue was earned for the same period in the prior year. As of March 31, 2005, our Manager had granted extensions on 1 loan pursuant to the terms of the
original loan agreements, which permit extensions by mutual consent. 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. However, our
Manager only grants extensions when a borrower is in full compliance with the terms of the loan,
including, but not limited to the borrowers obligation to make interest payments on the loan. The
aggregate amount due from borrowers whose loans had been extended as of March 31, 2005 was
approximately $0.3 million. Our Manager concluded that no allowance for loan loss was necessary
with respect to these loans as of that date. Total Expenses. For the three months ended March 31, 2005 and 2004, expenses were relatively flat
as a percentage of revenues, totaling approximately $330,000 or 37% of revenues for the 2005 period
and $122,000, or 40% of revenues for the 2004 period. The increase of $208,000 or 170% is
primarily related to the following: 19




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
    Management fees increased by approximately $14,000 due to a proportionate increase in
the amount of capital we have.
    Depreciation and amortization totaled approximately $56,000 due to the acquisition of an
investment in real property in August 2004.
    Professional fees, which represent primarily accounting and auditing fees, totaled
approximately $95,000 for the three months ended March 31, 2005. We did not incur such
expense for the same period in the prior year.
    During the three months ended March 31, 2005, we recorded provisions for loan losses of
approximately $32,000 to adjust our general allowance for loan losses. These increases were partially offset by a decrease in interest expense of approximately $60,000
related to secured borrowings as a result of secured borrowings decreasing to $2,500,000 from
$5,000,000 for the same period in prior year. Net Income. Net income for the three months ended March 31, 2005 totaled approximately $500,000
compared to $200,000 for the same period in prior year, an increase of $300,000 or 150%. Annualized Rate of Return to Members.For the three months ended March 31, 2005 and 2004,
annualized rate of return to members totaled 7.73% and 12.40%, respectively. Distributions to Members. For the three months ended March 31, 2005 and 2004, members received
distributions totaling $648,708 as compared to distributions totaling $52,217 for the same period
in 2004. The foregoing distributions were paid entirely from Net Income Available for Distribution
as defined in our 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, 2005, we had investments in mortgage loans secured by real estate totaling $20.9
million, including thirteen loans totaling $18.3 million that were secured by first deeds of trust
and two loans totaling $2.5 million that were secured by second deeds of trust. As of March 31, 2005, the weighted average contractual interest rate on our investment in mortgage
loans is 11.54%. These mortgage loans have contractual maturities within the next 18 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 the 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 our 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; 20




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
    review and evaluation of loans identified as having loss potential; and
    estimated fair value of any underlying collateral. Based upon this evaluation, our Manager believes that the allowance for loan losses totaling
$104,324 included in the accompanying balance sheet as of March 31, 2005 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 we
experience losses greater than the amount of the allowance, we may incur a charge to earnings that
will adversely affect its operating results and the amount of any distributions payable to our
members. INVESTMENT IN REAL PROPERTY Investment in real property consists of an office building which has approximately 42,000 square
feet of rentable space, located at 8379 West Sunset Road in Las Vegas, Nevada. In August 2004, Vestin Group relocated its corporate headquarters to this facility. As further
discussed in Segment Information below, net income on this segment of our business for the three
months ended March 31, 2005 was approximately $54,804. The following represents our estimated
yield on this investment from a cash flow perspective. Net income from real estate segment
    
    $
    54,804Add back depreciation and amortization
    
    
    55,559Cash yield
    
    $
    110,363Cash investment
    
    $
    4,850,000Number of months
    
    
    3Annualized cash yield on real estate segment
    
    
    9.10
    %
 CRITICAL ACCOUNTING ESTIMATES Revenue Recognition Interest income on loans is accrued by the effective interest method. We do 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 we 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 our
mortgage loans require interest only payments with a balloon payment of the principal at maturity.
We have 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 us 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. 21




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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, we may not recover the full amount of the loan. Allowance for Loan Losses We maintain an allowance for loan losses on our investments in mortgage loans for estimated credit
impairment. 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 as income. Our Manager
believes that the allowance for loan losses totaling $104,324 as of March 31, 2005, included in the
accompanying balance sheet is adequate to address estimated and expected credit impairment. Investments in Real Property Real property is stated at cost, less accumulated depreciation. Amounts capitalized as investments
in real property 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. Upon acquisition, the purchase price of the property is allocated to
land, building and improvements and other intangible assets and associated liabilities as required
by SFAS No. 141 Business Combinations. The allocation to land is based on an estimate of its
fair value based on available information, including appraisals. The allocation to other
intangible assets represents the value associated with the in-place leases, including leasing
commission, legal and other related costs. Real property is depreciated using the straight-line method over the useful lives of the assets by
class generally as follows: Land
    
    Not depreciatedBuilding
    
    40 yearsBuilding improvements
    
    10-25 yearsLand improvements
    
    20-25 yearsTenant improvements
    
    Lease termIntangible lease assets
    
    Lease term
 Our Manager continually monitors events and changes in circumstances that could indicate carrying
amounts of real estate and related intangible assets may not be recoverable. When indicators of
potential impairment are present, our Manager assess 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, we adjust the real estate and intangible assets to their fair value and recognize an
impairment loss. Our Manager has determined there has been no impairment in the carrying value of
real property held by us during the three months ended March 31, 2005. Secured Borrowings 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 generally provide us additional funding sources for mortgage loans whereby a
third party investor (the Investor) may participate in certain mortgage loans with us and/or
Vestin Fund I and/or Vestin Fund II (collectively, the Lead Lenders) and/or inVestin Nevada, Inc.
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 22




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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. Mortgage loan financing under the participation agreements are also 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 general operational purposes. We do not have any
significant capital expenditures. Accordingly, we believe that cash held at bank institutions will
be sufficient to meet our capital requirements in the next twelve months. We do 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 our Manager will continue
to manage our affairs. We are charged by our Manager a monthly management fee of up to 0.25% of
our aggregate capital contributions. Pursuant to our Operating Agreement, we recorded management
fees to our Manager during the three months ended March 31, 2005 and 2004 of approximately $16,500
and $2,500, respectively. During the three months ended March 31, 2005, cash flows provided by operating activities
approximated $0.7 million. Investing activities consisted of cash provided by loan sales and
payoffs of approximately $0.1 million and cash used in purchases of investments in mortgage loans
approximating $7.4 million. Financing activities consisted of members distributions of $0.4
million (net of reinvestments) and issuance of member units totaling approximately $2.2 million. We currently rely upon the sale of units to new investors, dividend reinvestments by our members,
loan pay-offs and funds obtained under inter-creditor agreements to provide the funds we need to
make mortgage loans and acquire properties. Our sales of new units have averaged $154,512 per
month for the last six months. We believe sales of our units have been adversely impacted by the
pending SEC investigation and the lower returns paid to members of Fund I and Fund II. As of March 31, 2005, members holding approximately 57% 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 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. Requests for redemptions could increase
in the future as members will be permitted to seek redemption on the full amount of their
investment without any discount commencing on the second anniversary of their date of investment.
Our Manager is currently evaluating a plan to convert Vestin Fund III into a Real Estate Investment
Trust (REIT) whereby equity holders would be able to sell their interests on an exchange, but
would not have any withdrawal rights. If successfully implemented, this plan would prevent erosion
of our capital through member withdrawals. Implementation of this plan would require resolution of
various tax and structural issues, filing of a proxy and registration statement with the SEC,
approval of a majority in interest of our outstanding units and approval for listing on a national
securities exchange. None of these requirements have been met and no assurance can be given that
any proposal to convert Vestin Fund III into a REIT will be successfully implemented. As of March 31, 2005, we did not have any significant non-performing assets. At March 31, 2005, we had approximately $1,400,000 in cash and approximately $35,700,000 in total
assets. It appears we have sufficient working capital to meet our operating needs in the near
term. 23




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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 generally provide us additional funding sources for mortgage loans whereby a
third party investor (the Investor) may participate in certain mortgage loans with us and/or
Vestin Fund I and/or Vestin Fund II (collectively, the Lead Lenders) and/or inVestin Nevada, Inc.
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. Mortgage loan financing under the participation agreements are also accounted
for as a secured borrowing in accordance with SFAS No. 140. As of March 31, 2005, funds being used under intercreditor and participation agreements where we
have potential obligations, as defined above, totaled $2,502,983. We maintain 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 properties, expend money to satisfy
unforeseen obligations and other permitted uses of 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. Segment Information Operating segments are components of an enterprise in which separate financial information is
available that is regularly reviewed by the chief operating decision makers in assessing
performance and deciding how to allocate resources. Reportable segments consist of one or more
operating segments with similar economic characteristics, products and services, production
processes, type of customer, distribution system and regulatory environment. The information provided for Segment Reporting is based on internal reports utilized by management.
The presentation and allocation of overhead and the net contribution for the operating segments may
not reflect the actual economic costs, contribution or results of operations of the segments as
stand alone businesses. If a different basis of allocation were utilized, the relative
contributions of the segments might differ but the relative trends in segments would, in
managements view, likely not be impacted. Our two reportable segments are investments in mortgage loans and investments in real estate. Financial information concerning our reportable segments is presented as follows for the three
months ended March 31, 2005 Investment in
    
    
    Investments inmortgage loans
    
    
    real estate
    
    
    TotalRevenues:Interest income
    
    $
    635,893
    
    
    $
    
    
    
    $
    635,893Rental income
    
    
    
    
    
    
    214,935
    
    
    
    214,935Other
    
    
    2,954
    
    
    
    
    
    
    
    2,954Total revenues
    
    
    638,847
    
    
    
    214,935
    
    
    
    853,782Operating expenses:Management fees
    
    
    11,221
    
    
    
    5,276
    
    
    
    16,497Interest related to secured borrowings
    
    
    62,547
    
    
    
    
    
    
    
    62,547
 24




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Investment in
    
    
    Investments inmortgage loans
    
    
    real estate
    
    
    TotalProvision for loan losses
    
    
    31,824
    
    
    
    
    
    
    
    31,824Professional fees
    
    
    64,614
    
    
    
    30,380
    
    
    
    94,994Other
    
    
    41
    
    
    
    20
    
    
    
    61Total operating expenses
    
    
    170,247
    
    
    
    35,676
    
    
    
    205,923EBITDA*
    
    
    468,600
    
    
    
    179,259
    
    
    
    647,859Less:Depreciation and amortization
    
    
    
    
    
    
    55,559
    
    
    
    55,559Interest expense
    
    
    
    
    
    
    68,896
    
    
    
    68,896Net income
    
    $
    468,600
    
    
    $
    54,804
    
    
    $
    523,404
   * EBITDA represents net earnings before interest expense, income taxes, depreciation and
amortization. We present EBITDA because we consider it an important supplemental measure of our
performance but it does not represent cash flows. EBITDA is a measure of our performance that is not required by, or presented in accordance with,
GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be
considered as an alternative to net earnings, operating income or any other performance measures
derived in accordance with GAAP or as an alternative to cash flow from operating activities as a
measure of our liquidity. We compensate for these limitations by relying primarily on our GAAP
results and using EBITDA only supplementally. Although depreciation and amortization are non-cash charges, the assets being depreciated or
amortized often will have to be replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements. Other companies in our industry may calculate EBITDA
differently than we do, limiting its usefulness as a comparative measure. In addition, EBITDA does
not reflect the impact of earnings or charges resulting from matters we consider not to be
indicative of our ongoing operations. Off Balance Sheet Arrangements We do 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 March 31, 2005. Payment due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligation
    
    
    Total
    
    
    
    year
    
    
    
    1-3 years
    
    
    
    3-5 years
    
    
    
    5 yearsSecured borrowings
    
    
    $
    2,502,983
    
    
    
    $
    2,502,983
    
    
    
    $
    
    
    
    
    $
    
    
    
    
    $
    
 RELATED PARTY TRANSACTIONS For the three months ended March 31, 2005 and 2004, we recorded management fees to our Manager of
approximately $16,500 and $2,500, respectively. Additionally, for the three months ended March 31,
2005, we recorded pro rata distributions owed to our Manager of approximately $23,000, no such
distributions were paid for the same period in prior year. As of March 31, 2005, amounts due to the Manager, Fund II, and Vestin Group of approximately
$1,200,000 are primarily related to deferred offering costs paid on our behalf as well as unpaid
management fees and distributions. 25




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During the three months ended March 31, 2005, we incurred expenses of $21,375 to L.L. Bradford &
Company, LLC, a certified public accounting firm for accounting services. One of Vestin Mortgages
former directors is an equity owner in that firm. During the three months ended March 31, 2005, we incurred expenses of $1,143 for legal fees to a
law firm in which the Secretary of Vestin Group has an equity ownership interest. FACTORS AFFECTING THE COMPANYS OPERATING RESULTS Our business is subject to numerous factors affecting its operating results. In addition to the
factors discussed above, our operating results may be affected by: Risks of Investing in Mortgage Loans  
    Our Managers underwriting standards and procedures are more lenient than conventional
lenders in that we will invest in loans to borrowers who will not be required to meet the
credit standards of conventional mortgage lenders.
    Our Manager approves mortgage loans more quickly then other mortgage lenders. Due to the
nature of loan approvals, there is a risk that the credit inquiry our 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 which appraised values
dramatically exceed immediate sales values. Therefore there is a risk that the borrower
will not complete development of the project which may affect the expected value of the
property and the loan to value ratio. Also, property may not have value above its as-is
value which itself may be difficult to realize.
    Our 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, we expect 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 in which we will have fewer loans to
acquire, thus reducing our revenues and the distributions to our 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 our
reputation and make it more difficult for us to attract investors willing to acquire
interest in mortgage loans. Risk of Defaults Our performance will be directly impacted by any defaults on the loans in our portfolio and by
defaults by tenants in properties that we own. As noted above, we may experience a higher rate of
defaults than conventional mortgage lenders. We seek to mitigate the risk by estimating the rate of
the underlying collateral and insisting on low loan to value ratios. However, no assurance can be
given that these efforts will fully protect us 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 we will earn less (if any) income from such loans, thereby reducing our earnings. If we do
foreclose on a property, our Manager may determine that the best course of action is to sell such
property quickly in order to generate a return of funds to us which may then be used in our lending
operations. As a result, we may not receive the best price for the foreclosed property and, in some
cases; we may receive less than the amount due to us under the defaulted loan. Similarly, we will
attempt to mitigate against the risk of tenant defaults through security deposits, guaranties,
letters of credit and by selecting properties which we believe are attractive and easy to rent.
However, our assessment in this regard may prove incorrect and changes in local real estate markets
may result in our experiencing extended vacancies in our properties. Competition for Borrowers and Properties 26




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We consider our 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
we compete have substantially greater financial, technical and other resources than we do.
Competition in our 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. There are numerous investors in income producing real estate including, a Real Estate Investment
Trust (REIT), insurance companies, pension funds, property management companies and high net
worth individuals. Many of these investors have substantially more financial resources and
experience than we have, which may enable them to acquire the most attractive properties on the
market. We will attempt to benefit from our Managers experience and contacts in certain markets to
assist us in acquiring attractive income producing properties. However, there is substantial
competition for real estate investments in each of those markets and no assurance can be given that
our Managers contacts and expertise will provide us with any competitive advantage. Risks of Investing in Real Property  
    Changes in the general economic or local conditions could have an adverse impact on the
real estate market in general.
    Changes in the supply of or demand for similar or competing properties in an area. If we
pay a higher price, our profitability will be reduced. Additionally, if we are unable to
sell a property when we determine to do so, it could have a significant adverse affect on
our cash flow and operations.
    Changes in interest rates and availability of permanent mortgage funds may render the
sale of a property difficult or unattractive.
    Changes in tax, real estate, environmental and zoning laws may require additional
material expenditures by us in order to be in compliance.
    Periods of high interest rates and tight money supply may make the sale of property more
difficult.
    Tenant turnover could cause us to lose revenue associated with that lease and increase
costs for tenant improvements.
    General overbuilding or excess supply in the market area could lead to vacancies. If
vacancies occur for a long period of time, we may suffer reduced revenues and could
diminish the market value of the property. Effect of Fluctuations in the Economy Our sole business, investing in income producing property and 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 we concentrate our investments
and loans, could result in a decline in real estate values, tenant vacancies and a decline in the
demand for real estate development loans. Declines in real estate values after we have acquired our
properties could result in our holding properties longer than intended. In addition, a general
decline in the economy could result in an increase in tenant defaults. We might also encounter
under these circumstances greater difficulty in finding replacement tenants. In order to adjust to
market conditions, we might be forced to reduce the amount of rent we collect and to offer various
concessions to attract new tenants. Any such measures could reduce our cash flow and the funds we
have available to distribute. In order to stay fully invested during a period of declining demand
for real estate loans, we may be required to make loans on terms less favorable to us or to make
loans involving greater risk to us. Declines in economic activity are often accompanied by a
decline in prevailing interest rates. Although our 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 we are able to earn on our loans. Since our loans will generally not have
prepayment penalties, declining interest rates may also cause our borrowers to prepay their loans
and we 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 our
borrowers to complete their projects and obtain take-out financing. This in turn could increase the
level of defaults we may experience. 27




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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
our financial performance and could cause our actual results for future periods to differ
materially from any opinion or statements expressed herein with respect to future periods. As a
result, we wish 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 We are exposed to market risk, primarily from changes in interest rates. We do not have any assets
or liabilities denominated in foreign currencies nor do we own any options, futures or other
derivative instruments. As of March 31, 2005, approximately 65% of our assets consist of investments in mortgage loans,
including those which are financed under intercreditor agreements. At March 31, 2005, our aggregate
investment in mortgage loans was approximately $20.9 million with a weighted average effective
interest rate of 11.54%. Loans financed under intercreditor agreements totaled $2,502,983 at March
31, 2005 and are classified as assets under secured borrowings. Such financing is at a weighted
average interest rate of 10.78%. These mortgage loans mature within the next 12 months. Most of
the mortgage loans have a term of 12 months; the weighted average term of outstanding loans at
March 31, 2005 was 17 months. All of the outstanding mortgage loans at March 31, 2005 were fixed
rate loans. All of the mortgage loans are held for investment purposes; none are held for sale. We
intend to hold such mortgage loans to maturity. None of the mortgage loans have prepayment
penalties. As of March 31, 2005, approximately $9.8 million or 27% of our assets consist of an investment in
income producing real property. This property is located in Las Vegas, Nevada and is leased
entirely by Vestin Group at $71,645 per month. Market fluctuations in interest rates generally do not affect the carrying value of our investment
in mortgage loans. However, significant and sustained changes in interest rates could affect our
operating results. If interest rates decline significantly, some of the borrowers could prepay
their loans with the proceeds of a refinancing at lower interest rates. This would reduce our
earnings and funds available for distribution to Members. On the other hand, a significant increase
in interest rates could result in a slowdown in real estate development activity which would reduce
the demand for commercial mortgage loans. As a result, we might encounter greater difficulty in
identifying appropriate borrowers. We are not in a position to quantify the potential impact on our
operating results from a material change in interest rates. Additionally, these market
fluctuations could impact the business of our Manager which could in turn affect our Managers
ability to pay rents due to us. As of March 31, 2005, we had cash of approximately $1,400,000. We anticipate approximately 3% of
our assets will be held in such accounts as cash reserves. Additional deposits in such accounts
will be made as funds are received by us from new investors and repayment of loans pending the
deployment of such funds in new mortgage loans. We believe that these financial assets do not give
rise to significant interest rate risk due to their short-term nature. 
 ITEM 4. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our company is in the process of conducting its evaluation, under the supervision and with the
participation of our companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our companys disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) as of March 31, 2005. 28




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Based on preliminary results to date, the Chief Executive Officer and Chief Financial Officer
concluded that our companys disclosure controls and procedures as of the end of the period covered
by this report were not effective as a result of material weaknesses in internal controls as of
March 31, 2005 as discussed below. Managements Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial
reporting of our company. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Our companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures of our company are being made only in accordance with authorizations of
management and directors of our company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our companys
assets that could have a material effect on the financial statements. Management conducted an evaluation of the effectiveness of internal control over financial
reporting based on various resources including the framework in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that our companys internal control over financial reporting
was not effective as of March 31, 2005. Management identified internal control deficiencies that
represented material weaknesses in internal control over the financial statement close process. The
control deficiencies generally related to our companys limited resources and internal level of
technical accounting and reporting expertise. These material weaknesses affects our ability to
prepare and properly review interim and annual consolidated financial statements and accompanying
footnote disclosures in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission. As we have not completed the testing and evaluation of our internal control over financial
reporting, it is possible that additional deficiencies could be determined to be individually or in
aggregate a material weakness. A material weakness in internal controls is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material misstatement of the
financial statements would not be prevented or detected on a timely basis by our company. Changes in Internal Control Over Financial Reporting In order to address and correct the deficiencies identified above, managements corrective actions
include: 1) Pursue and hire the appropriate amount of highly qualified personnel to perform the
internal function of the preparation and review of our interim and annual reports, 2) increase
training and strengthen the expertise in accounting, internal controls over financial reporting for
employees in critical accounting and financial reporting positions, and 3) where appropriate,
replacing and/or adding experienced personnel to our accounting and financial reporting functions
to review and monitor transactions, accounting processes and control activities more effectively. While we are recruiting experienced, skilled finance professionals, we cannot anticipate when our
staffing initiative will be completed and therefore cannot anticipate when the material weaknesses
relating to our financial close process will be remediated. Except for the material weaknesses discussed above, no changes in our internal control over
financial reporting have occurred that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 29




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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 us, Vestin Group, Fund I and Fund
II. We have fully cooperated during the course of the informal inquiry. On January 6, 2005, we
received from the SEC an Order Directing Private Investigation and Designating Officers to Take
Testimony which appears to focus upon the financial reporting of us, Fund I and Fund II. We
intend to continue to cooperate fully in this matter and believe that we have complied with SEC
disclosure requirements. We cannot at this time predict the outcome of this matter. We may become involved in a number of legal proceedings concerning matters arising in connection
with the conduct of our business activities. The outcome of any such proceedings could have a
material impact on our 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, we 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. We registered 12 million units, including units under its Dividend Reinvestment
Plan, at a selling price of $10.00 per unit. The aggregate price of the offering amount registered
was $120 million. This offering will continue until all offered units are sold or until November
2005. Vestin Capital, Inc., an affiliate of Vestin Mortgage, Inc., our 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 our Distribution Reinvestment Plan will be advanced by our manager
and will be reimbursed by us for up to 2% of the gross proceeds received in the offering, which
would leave $76 million in gross proceeds. As of March 31, 2005, we had incurred approximately
$937,000 of offering costs paid by Vestin Mortgage on behalf of us, which are primarily legal,
accounting and registration fees. These deferred offering costs will be converted into membership
units once we receive sufficient gross offering proceeds to ensure that the offering costs do not
exceed 2% of the gross proceeds of the offering. As of March 31, 2005, we had raised approximately
$26,500,000 or 2,600,000 units and an additional $700,000, or 70,000 units under its Dividend
Reinvestment Plan. In accordance with Section 7.8 of our Operating Agreement, our Manager reviewed the value of our

assets during the last quarter of fiscal 2004. Based on this review, as a result of an increase in
the value of our assets, the value of members capital accounts was adjusted from $10 per unit to
$10.30 per unit. As a result, new units sold on or after November 10, 2004 have been 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. We have invested in 15 loans totaling approximately $20.9 million as of March 31, 2005 and real
property in Las Vegas, Nevada totaling approximately $9.8 million. We anticipate that we will
invest no less than 82% of the gross proceeds of the offering and the distributions reinvested
under our Dividend Reinvestment Plan in mortgage loans and real property. Once we are fully funded,
we anticipate investing approximately 70% of our proceeds in real property and approximately 30% in
mortgage loans. However, such percentages are only a guideline, the actual percentages may vary. We
will not invest more than 20% of its proceeds in any one property once it is fully funded. We will
retain approximately 3% of offering proceeds as a working capital reserve. (c) Not applicable. 30




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 17, 2005, our Members approved certain amendments to our Operating Agreement at a
Special Meeting of the Members. The amendments are described in an 8-K report we filed with the
SEC on January 20, 2005, as amended on January 21, 2005. 
 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(5)
    
    Purchase and Sale Agreement, dated August 1, 2004, by and between Luke
Properties, LLC and Vestin Fund III, LLC10.8(5)
    
    Assignment and Assumption Agreement
dated August 16, 2004 by and between Vestin Fund III, LLC and VFIII
HQ, LLC10.9(6)
    
    Office lease agreement dated
March 31, 2003 by and between Luke Properties, LLC and Vestin
Fund III, LLC31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of John Alderfer32
    
    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.(5)
    
    Incorporated herein by reference to our
Form 10-Q filed on November 15, 2004, File
No. 333-105017.(6)
    
    Incorporated herein by reference to our
Form 10-KSB filed on March 30, 2005, File
No. 333-105017. 31




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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/John AlderferJohn Alderfer(Chief Financial Officer of the Manager
and Duly Authorized Officer)
 Dated: May 13, 2005 32




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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(5)
    
    Purchase and Sale Agreement, dated August 1, 2004, by and between Luke
Properties, LLC and Vestin Fund III, LLC10.8(5)
    
    Assignment and Assumption Agreement
dated August 16, 2004 by and between Vestin Fund III, LLC and VFIII
HQ, LLC10.9(6)
    
    Office lease agreement dated
March 31, 2003 by and between Luke Properties, LLC and Vestin
Fund III, LLC31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of John Alderfer32
    
    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.(5)
    
    Incorporated herein by reference to our
Form 10-Q filed on November 15, 2004, File
No. 333-105017.(6)
    
    Incorporated herein by reference to our
Form 10-KSB filed on March 30, 2005, File
No. 333-105017. 33