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U.S. SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB
 (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2004 [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM  TO COMMISSION FILE NUMBER 000-24803 VESTIN GROUP, INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
    
    52-2102142
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 8379 WEST SUNSET BOULEVARD, LAS VEGAS, NEVADA 89113 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (702) 227-0965 (ISSUERS TELEPHONE NUMBER) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] 
    No [   ] Number of shares outstanding of each of the issuers classes of common equity,
as of September 30, 2004: 2,628,972 Post-Split Shares of Common Stock Transitional Small Business
Disclosure Format (Check one): Yes [   ]   No [X]




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VESTIN GROUP, INC. AND
SUBSIDIARIES INDEX PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheet (unaudited)
    
    
    3Consolidated Statements of Operations  (unaudited)
    
    
    4Consolidated Statement of Stockholders' Equity (unaudited)
    
    
    5Consolidated Statements of Cash Flows (unaudited)
    
    
    6Condensed Notes to Consolidated Financial Statements (unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis
    
    
    18Item 3.
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    28Item 6.
    
    Exhibits
    
    
    29SIGNATURES
    
    
    
    
    30Exhibit 3.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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Vestin Group, Inc. and Subsidiaries 
  CONSOLIDATED BALANCE SHEET
 September 30, 2004 (Unaudited) ASSETSCash
    
    $
    2,092,092Accounts receivable
    
    
    1,774,542Interest receivable
    
    
    4,365Due from related parties
    
    
    2,031,403Notes receivable  related party
    
    
    22,964Investments in real estate held for sale
    
    
    3,568,754Investments in mortgage loans on real estate,
net of allowance of $110,000
    
    
    218,035Other investments  related parties
    
    
    3,461,149Deferred tax asset
    
    
    1,187,539Property and equipment, net
    
    
    1,399,973Other assets
    
    
    173,336Total assets
    
    $
    15,934,152LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accrued expenses
    
    $
    2,232,462Due to related party
    
    
    345,309Dividend payable
    
    
    38,223Income taxes payable
    
    
    1,221,352Note payable  Fund II
    
    
    1,000,000Notes payable  related party
    
    
    2,335,518Notes payable
    
    
    374,654Capital leases payable
    
    
    107,885Total liabilities
    
    
    7,655,403Commitments and contingencies
    
    
    Stockholders equityPreferred stock, $.0001 par value; 20 million shares
authorized; 458,675 shares issued and outstanding
    
    
    46Common stock, $.0001 par value; 100 million shares
authorized 2,628,972 shares issued and outstanding
    
    
    263Additional paid-in capital
    
    
    4,981,495Retained earnings
    
    
    3,296,945Total stockholders equity
    
    
    8,278,749Total liabilities and stockholders equity
    
    $
    15,934,152
 The accompanying notes are an integral part of these statements. 3




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Vestin Group, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended
    
    For the Nine Months EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003RevenuesLoan placement and related fees
    
    $
    4,584,776
    
    
    $
    3,000,850
    
    
    $
    17,665,764
    
    
    $
    15,397,362Interest income
    
    
    28,896
    
    
    
    133,147
    
    
    
    110,072
    
    
    
    500,745Gain from settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    5,850,000
    
    
    
    Other revenues
    
    
    407,871
    
    
    
    385,657
    
    
    
    1,241,860
    
    
    
    1,184,507Total revenues
    
    
    5,021,543
    
    
    
    3,519,654
    
    
    
    24,867,696
    
    
    
    17,082,614ExpensesSales and marketing expenses
    
    
    1,166,415
    
    
    
    1,743,902
    
    
    
    4,892,362
    
    
    
    7,378,684General and administrative expenses
    
    
    2,951,690
    
    
    
    3,237,067
    
    
    
    9,822,263
    
    
    
    10,171,400Valuation losses on real estate held for sale
    
    
    
    
    
    
    
    
    
    
    1,545,860
    
    
    
    1,287,883Valuation loss on purchase of rights to receive
proceeds of judgment
    
    
    3,565,795
    
    
    
    
    
    
    
    3,565,795
    
    
    
    Bad debt expense
    
    
    129,017
    
    
    
    
    
    
    
    210,608
    
    
    
    715,301Capital Contribution to Fund I
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600,000Interest expense
    
    
    4,480
    
    
    
    24,453
    
    
    
    21,628
    
    
    
    224,403Total expenses
    
    
    7,817,397
    
    
    
    5,005,422
    
    
    
    20,058,516
    
    
    
    21,377,671Income (loss) from operations before
provision (benefit) for income taxes
    
    
    (2,795,854
    )
    
    
    (1,485,768
    )
    
    
    4,809,180
    
    
    
    (4,295,057
    )Provision (benefit) for income taxes
    
    
    (943,612
    )
    
    
    (505,161
    )
    
    
    1,654,448
    
    
    
    (1,460,319
    )NET INCOME (LOSS)
    
    
    (1,852,242
    )
    
    
    (980,607
    )
    
    
    3,154,732
    
    
    
    (2,834,738
    )Preferred stock dividends
    
    
    (132,231
    )
    
    
    (224,450
    )
    
    
    (536,742
    )
    
    
    (703,350
    )Net income (loss) applicable to common shareholders
    
    $
    (1,984,473
    )
    
    $
    (1,205,057
    )
    
    $
    3,691,474
    
    
    $
    (3,538,088
    )Earnings (loss) per common share  Basic
    
    $
    (0.73
    )
    
    $
    (0.45
    )
    
    $
    1.42
    
    
    $
    (1.33
    )Earnings (loss) per common share  Diluted
    
    $
    (0.73
    )
    
    $
    (0.45
    )
    
    $
    1.03
    
    
    $
    (1.33
    )Weighted average number of common shares
outstanding  Basic
    
    
    2,717,561
    
    
    
    2,654,654
    
    
    
    2,601,798
    
    
    
    2,661,066Weighted average number of common shares
outstanding  Diluted
    
    
    2,717,561
    
    
    
    2,654,654
    
    
    
    3,569,158
    
    
    
    2,661,066
 The accompanying notes are an integral part of these statements. 4




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Vestin Group, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY For the Nine Months Ended September 30, 2004 (Unaudited) Preferred Stock
    
    Common Stock
    
    Treasury Stock
    
    AdditionalPaid-in
    
    RetainedShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Earnings
    
    TotalBalance at January 1, 2004
    
    
    897,800
    
    
    $
    90
    
    
    
    2,664,170
    
    
    $
    266
    
    
    
    (89,000
    )
    
    $
    (544,305
    )
    
    $
    9,767,453
    
    
    $
    678,955
    
    
    $
    9,902,459Expenses related to issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,856,604
    
    
    
    
    
    
    
    1,856,604Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (536,742
    )
    
    
    (536,742
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (346,198
    )
    
    
    (1,317,254
    )
    
    
    
    
    
    
    
    
    
    
    (1,317,254
    )Redemption of preferred stock
    
    
    (439,125
    )
    
    
    (44
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,789,006
    )
    
    
    
    
    
    
    (4,789,050
    )Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (435,198
    )
    
    
    (43
    )
    
    
    435,198
    
    
    
    1,861,559
    
    
    
    (1,861,516
    )
    
    
    
    
    
    
    Common stock options exercised
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    7,960
    
    
    
    
    
    
    
    8,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,154,732
    
    
    
    3,154,732Balance at September 30, 2004
    
    
    458,675
    
    
    $
    46
    
    
    
    2,628,972
    
    
    $
    263
    
    
    
    
    
    
    $
    
    
    
    $
    4,981,495
    
    
    $
    3,296,945
    
    
    $
    8,278,749
 The accompanying notes are in integral part of these statements. 5




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Vestin Group, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Cash flow from operating activities:Net income (loss)
    
    $
    3,154,732
    
    
    $
    (1,854,130
    )Adjustments to reconcile net income (loss) from operations
to net cash provided by operating activities:Depreciation
    
    
    190,268
    
    
    
    62,079Bad debt
    
    
    210,608
    
    
    
    Stock based compensation
    
    
    1,856,604
    
    
    
    464,151Capital contribution to Fund I
    
    
    
    
    
    
    1,600,000Gain from settlement of lawsuit
    
    
    (3,600,000
    )
    
    
    Valuation loss on purchase of rights to receive
proceeds of judgment
    
    
    3,565,795
    
    
    
    Provision for loan losses
    
    
    
    
    
    
    110,000Valuation loss on real estate held for sale
    
    
    1,545,860
    
    
    
    1,287,883Changes in operating assets and liabilities:
    
    
    
    
    
    
    Accounts receivable
    
    
    397,533
    
    
    
    278,041Interest receivable
    
    
    6,284
    
    
    
    101,836Due from related parties
    
    
    134,652
    
    
    
    (2,052,708
    )Other assets
    
    
    (29,131
    )
    
    
    102,381Deferred tax asset
    
    
    691,989
    
    
    
    Accounts payable and accrued expenses
    
    
    (1,801,115
    )
    
    
    1,273,004Due to related party
    
    
    345,309
    
    
    
    Dividend payable
    
    
    (36,594
    )
    
    
    (833
    )Deferred income
    
    
    (2,875,000
    )
    
    
    Income taxes payable
    
    
    962,458
    
    
    
    (955,158
    )Net cash provided by operating activities
    
    
    4,720,252
    
    
    
    416,546Cash flows from investing activities:Purchase of property and equipment
    
    
    (693,021
    )
    
    
    (74,824
    )Purchase of investment in real estate held for sale
    
    
    
    
    
    
    (1,100,000
    )Proceeds from sale of investment in real estate held for sale
    
    
    2,955,794
    
    
    
    Proceeds from payoff on note receivable
    
    
    400,000
    
    
    
    Proceeds
from payoff on note receivable - related party
    
    
    65,000
    
    
    
    Purchase of
other investments - related party
    
    
    (324,387
    )
    
    
    (1,449
    )Proceeds from the sale of investments in mortgage loans
on real estate from other related party
    
    
    295,000
    
    
    
    Proceeds from loan payoff
    
    
    330,000
    
    
    
    Proceeds from sale of investments in mortgage loans
on real estate
    
    
    
    
    
    
    8,058,939Net cash provided by investing activities
    
    
    3,028,386
    
    
    
    6,882,666
 The accompanying notes are in integral part of these statements. 6




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Vestin Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS
OF CASH FLOWS - CONTINUED (Unaudited) For the Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Cash flows from financing activities:Payments on lines of credit
    
    
    
    
    
    
    (7,000,000
    )Proceeds from notes payable
    
    
    
    
    
    
    1,078,997Payment on notes payable-related party
    
    
    
    
    
    
    (140,415
    )Payments on notes payable
    
    
    (1,100,000
    )
    
    
    Payments on capital leases
    
    
    (52,555
    )
    
    
    Common stock options exercised
    
    
    8,000
    
    
    
    15,999Redemption of preferred stock
    
    
    (4,789,050
    )
    
    
    (100,000
    )Payment of dividend on preferred stock
    
    
    (536,742
    )
    
    
    (452,178
    )Purchase of treasury stock
    
    
    (1,317,254
    )
    
    
    Payment of dividend on common stock
    
    
    
    
    
    
    (639,372
    )Net cash used in financing activities
    
    
    (7,787,601
    )
    
    
    (7,236,969
    )NET CHANGE IN CASH
    
    
    (38,963
    )
    
    
    62,243Cash at beginning of period
    
    
    2,131,055
    
    
    
    2,523,017Cash at end of period
    
    $
    2,092,092
    
    
    $
    2,585,260Supplemental cash flow information:Cash paid for federal income taxes
    
    $
    
    
    
    $
    Cash paid for interest
    
    $
    21,628
    
    
    $
    199,950Non-cash investing and financing activities:Dividends declared on preferred stock
    
    $
    38,223
    
    
    $
    75,650Retirement of treasury stock
    
    $
    1,861,559
    
    
    $
    Notes payable assumed through foreclosure
    
    $
    
    
    
    $
    244,654Notes payable  related parties assumed through foreclosure
    
    $
    
    
    
    $
    802,363Note payable related to capital contribution to Fund I
    
    $
    
    
    
    $
    723,763In substance receipt of amounts due from Fund I related to
capital contribution in Fund I
    
    $
    
    
    
    $
    876,237Investments in real estate held for sale acquired through foreclosure
    
    $
    
    
    
    $
    1,094,914Investment in real estate held for sale acquired for
investments in mortgage loans on real estate
    
    $
    
    
    
    $
    478,829Purchase of rights to receive proceeds of judgment
    
    $
    1,000,000
    
    
    $
    
 The accompanying notes are in integral part of these statements. 7




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##### Table of Contents



VESTIN GROUP, INC.
AND SUBSIDIARIES 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION Vestin Group, Inc. (Vestin or the Company) conducts its operations
primarily through Vestin Mortgage, Inc., a wholly owned subsidiary (Vestin
Mortgage). Vestin Mortgage operates as a mortgage broker licensed in the state
of Nevada. Vestin Mortgage is engaged in the brokerage and placement of
commercial loans secured by real property. Vestin Mortgages primary operations
consist of the brokerage and placement of commercial, construction, acquisition
and development, land, and residential mortgage loans secured by real property
as well as managing three publicly held funds, Vestin Fund I, LLC (Fund I),
Vestin Fund II, LLC (Fund II), and Vestin Fund III, LLC (Fund III),
(collectively referred to as (the Funds)) and an entity owned by the
Companys Chief Executive Officer, inVestin Nevada, Inc. (inVestin), which
invest in mortgage loans. Fund III also invests in real estate. Vestin
Mortgage, as manager of the Funds and inVestin Nevada will be referred to as
Manager. Vestin Capital, Inc., a wholly owned subsidiary of the Company, serves as the
lead broker dealer on the sale of units for the Funds and also provides
administrative services. Vestin Capital does not receive any commissions from
the sale of units for the Funds. Rather, Vestin Capital receives an
administrative fee from Vestin Mortgage related to the maintenance of investor
files and general investor services. Vestin Advisors, Inc., a wholly owned subsidiary of the Company, is a licensed
trust company in the state of Nevada that serves as a custodian for individual
retirement accounts of investors in Vestin products. JLS Advertising, a wholly owned subsidiary of the Company, is an advertising
company formed solely for the purposes of providing advertising buying power
for the Companys marketing efforts. There was no specific operating activity
in this company during the three months ended September 30, 2004 and 2003. The Company operates in one business segment. The interim consolidated financial statements present the balance sheet,
statements of operations, stockholders equity and cash flows of Vestin and its
subsidiaries. The interim consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation. The interim consolidated financial information is unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial position
as of September 30, 2004 and the results of operations and cash flows presented
herein have been included in the consolidated financial statements. Interim
results are not necessarily indicative of results of operations for the full
year. The accompanying consolidated financial statements have been prepared in
accordance with Securities and Exchange Commission requirements for interim
financial statements. Therefore, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The financial statements
should be read in conjunction with the Companys Form 10-KSB/A and Form
10-KSB/A-2 for the year ended December 31, 2003. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect 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. Significant estimates include expected useful lives of
property and equipment, allowance for accounts receivable, allowances for
investments in mortgage loans on real estate, and valuations of real estate
held for sale. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known. 8




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NOTE 2  SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition The Company recognizes revenue primarily from loan placement fees, loan
servicing fees and extension fees. Loan placement fees are generally recorded
as revenue at the close of escrow and reduced by direct loan placement costs on
loans which the Company has not recorded as investments in mortgage loans on
its financial statements. Typically, deeds of trust related to loans placed are initially in the
Companys name to facilitate the loan placement process. Upon arranging a
funding source for such loans, the deeds of trust are assigned to the
respective investor (i.e., the Funds). Loan servicing fees are recorded as
revenue when such services are rendered. Servicing fees represent the interest
spread between what is paid to the investor and what the borrower pays for the
use of the money, which can vary from loan to loan. Servicing costs approximate
servicing fees and therefore, the Company has not recognized a servicing asset
or liability. Extension fees are generally recorded as revenue at the extension
grant date. Interest income on investments in mortgage loans on real estate is recorded
when earned. The Company does not recognize interest income from loans once
they are determined to be impaired. A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due. Investments in Real Estate Held for Sale Real estate held for sale includes real estate acquired through foreclosure and
is carried at the lower of cost or the propertys estimated fair value, less
estimated costs to sell. The Company seeks to sell properties acquired through
foreclosure as quickly as circumstances permit. Investments in Mortgage Loans on Real Estate Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, the Companys mortgage loans require interest only payments, either
through payments or decrease of an interest reserve, with a balloon payment of
the principal at maturity. The Company has both the intent and ability to hold
mortgage loans until maturity and therefore, mortgage loans are classified and
accounted for as held for investment and are carried at cost. Loan to value
ratios are based on appraisals obtained at the time of loan origination and may
not reflect subsequent changes in value estimates. Such appraisals, which may
be commissioned by the borrower, are generally dated within 12 months of the
date of loan origination. The appraisals may be for the current estimate of the
as-if developed value of the property, which approximates the
post-construction value of the collateralized property assuming that such
property is developed. As-if developed values on raw land loans or acquisition
and development loans often drastically exceed the immediate sales value and
may include anticipated zoning changes, selection by a purchaser against
multiple alternatives, and successful development by the purchaser; upon which
development is dependent on availability of financing. As most of the
appraisals will be prepared on an as-if developed basis, if a loan goes into
default prior to any development of a project, the market value of the property
may be substantially less than the appraised value. As a result, there may be
less security than anticipated at the time the loan was originally made. If
there is less security and a default occurs, the Company may not recover the
full amount of the loan. Allowance for Loan Losses The Company maintains an allowance for loan losses on its investment in
mortgage loans for estimated credit impairment in the Companys investment in
mortgage loans portfolio. The Company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 including, but not limited to, estimated losses
on the loans. Actual losses on loans are recorded as a charge-off or a
reduction to the allowance for loan losses. Subsequent recoveries of amounts
previously charged off are added back to the allowance or included in income
when the asset is disposed of. 9




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Income taxes The Company accounts for its income taxes using the liability method, which
requires recognition of deferred tax assets and liabilities for the future tax
consequences attributable to differences between carrying amounts of existing
assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. NOTE 3  STOCK-BASED COMPENSATION The Company has stock-based compensation plans covering the majority of its
employees, a plan covering the Companys Board of Directors, and plans related
to employment contracts with certain executive officers of the Company. The
Company accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25 (APB 25), Accounting for Stock Issued to Employees and related
Interpretations. Accordingly, no compensation expense is recognized for fixed
option plans because the exercise prices of employee stock options equal or
exceed the market prices of the underlying stock on the dates of grant. Under APB 25, compensation cost is recognized for stock options granted to
employees when the option is less than the market price of the underlying
common stock on the date of grant. SFAS No. 123 (SFAS 123), Accounting for
Stock-Based Compensation and SFAS No. 148 (SFAS 148), Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123 require disclosures as if the Company had applied the fair
value method to employee awards rather than the intrinsic value method. The
Company has determined that it will not adopt SFAS No. 123 to account for
employee stock options using the fair value method. The fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
differ significantly from the Companys stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Companys fair value calculations for awards from stock option plans were made
using the Black-Scholes option pricing model. The following table represents the effect on net income (loss) and income
(loss) per share if the Company had applied the fair value based method and
recognition provisions SFAS 123 to stock-based employee compensation: For the nine months endedSeptember 30,
    
    September 30,2004
    
    2003Net income (loss), as reported
    
    $
    3,154,732
    
    
    $
    (2,834,738
    )Add: Stock-based compensation
expense included in reported income (loss),
net of related tax effects
    
    
    1,856,604
    
    
    
    459,510Deduct: Total stock-based
compensation expense determined under
fair value based methods for all awards,
net of related tax effects
    
    
    (255,578
    )
    
    
    (1,176,684
    )Pro forma net income (loss)
    
    $
    4,755,758
    
    
    $
    (3,551,912
    )Net income (loss) per common shareBasic income (loss), as reported
    
    $
    1.42
    
    
    $
    (0.66
    )Basic income (loss), pro forma
    
    $
    1.83
    
    
    $
    (0.79
    )Diluted income (loss), as reported
    
    $
    1.03
    
    
    $
    (0.66
    )Diluted income (loss), pro forma
    
    $
    1.33
    
    
    $
    (0.79
    )
 10




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As required, the pro forma disclosures above include options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures. For purposes of pro forma disclosures, the estimated fair
value of stock-based compensation plans and other options is amortized to
expense primarily over the vesting period. NOTE 4  RELATED PARTY TRANSACTIONS Notes receivable  In 2000, the Company loaned a former employee approximately
$251,000 to enable him to operate, develop and grow a California real estate
loan fund. The Company does not have any affiliations with the California real
estate loan fund. The loan is unsecured but is a full recourse loan. The
interest rate of 10% is payable on a semi-annual basis and the loan
was extended to December 31, 2004. As of September 30, 2004 the principal balance on this
loan was $22,964. Due from related parties totaling $2,031,403 as of September 30, 2004 are
comprised of the following:  Amounts due from Fund I totaling $657,134 relate to management fees, earnings
on units in Fund I, and reimbursable expenses. Amounts due from Fund I bear
no interest and are due on demand.Amounts due from Fund II totaling $925,745 relate to management fees,
earnings on units in Fund II, and reimbursable expenses. Amounts due from
Fund II bear no interest and are due on demand.Amounts due from Fund III totaling $81,123 relate to management fees and
earnings on the Companys investment in Fund III. Amounts due from Fund III
bear no interest and are due on demand.Advances to C-5, LLC totaling $257,200 relate to various expenses paid for
travel related to an aircraft usage agreement as discussed below.Amounts due from the majority stockholder and Chief Executive Officer of the
Company totaling $14,316 related to various advances and legal costs paid by
Vestin Mortgage on his behalf.Amounts due from inVestin totaling $95,885 related to management fees earned
by Vestin Mortgage. Such amounts bear no interest and are due on demand. In
October 2002, inVestin, a corporation wholly-owned by the Chief Executive
Officer of the Company, was created as an additional funding source for the
Company to raise $100,000,000 through the sale of subordinated notes to Nevada
residents. Vestin Mortgage has entered into an agreement to provide management
services to inVestin whereby Vestin Mortgage will receive a monthly management
fee equal to the first four percent (4%) of revenues earned by the Company
above the average aggregate interest paid to the debenture holders. For the
three and nine months ended September 30, 2004, Vestin Mortgage earned $32,881
and $84,938, respectively, related to the agreement. Due to related party totaling $345,309 as of September 30, 2004 is comprised of
the following:  Amounts due to inVestin totaling $218,654 related to loan origination fees
shared by inVestin during the three months ended September 30, 2004 pursuant
to the agreement to provide management services which states that inVestin
will receive a pro-rata share of the origination fees charged on loan in
which it participates.Amounts due to Fund III for September rent totaling $71,645 as further
discussed below.Amounts due to a law firm in which the Secretary of the Company has an equity
ownership interest totaling $55,010. Other investments  related parties totaling $3,461,149 as of September 30,
2004 comprised of the following:  The Companys investments in units of the Funds totaling $3,026,774. 11




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##### Table of Contents



Investments in collateralized mortgage obligations which are controlled by a
company wholly owned by the Companys Chief Executive Officer totaling
$434,375. During the three-month periods ended September 30, 2004 and 2003, the Company
paid $271,502 and $141,000, respectively, for legal fees to a law firm in which
the Secretary of the Company has an equity ownership interest. During the
nine-month periods ended September 30, 2004 and 2003, the Company paid $749,681
and $670,000, respectively, for legal fees to a law firm in which the Secretary
of the Company has an equity ownership interest. During the three months ended
September 30, 2004 the Company received $200,000 as an acquisition
and advisory fee related to due diligence and other services provided
in connection with the purchase of real property by Fund III. The Companys Chief Financial Officer and Tax Manager are equity owners in L.L.
Bradford & Company, LLC, a Certified Public Accounting firm (L.L. Bradford).
For the three-month periods ended September 30, 2004 and 2003, approximately
$180,233 and $84,000, respectively, was paid to L.L. Bradford for accounting
and consulting services provided to the Company. For the nine-month periods
ended September 30, 2004 and 2003, approximately $448,806 and $180,000,
respectively, was paid to L.L. Bradford for accounting and consulting services
provided to the Company. For the three-month periods ended September 30, 2004 and 2003, the Company
recorded revenues of approximately $16,000 and $20,000, respectively, from its
investment in Fund I as a result of distributions declared during those
periods. For the nine-month periods ended September 30, 2004 and 2003, the
Company recorded revenues of approximately $45,000 and $72,000, respectively,
from its investment in Fund I as a result of distributions declared during
those periods. Vestin Mortgage, as the manager, is entitled to a monthly
management fee of up to 0.25% of the aggregate capital contributions
to Fund I.
During the three month periods ended September 30, 2004 and 2003, Vestin
Mortgage recorded management fees from Fund I of approximately $64,000 for both
periods. During the nine-month periods ended September 30, 2004 and 2003,
Vestin Mortgage recorded management fees from Fund I of approximately $191,000
and $190,000, respectively. All of the foregoing management fees and
distributions are reflected as a due from party on the balance sheet. For the three-month periods ended September 30, 2004 and 2003, the Company
recorded revenues of approximately $16,000 and $25,000, respectively, from its
investment in Fund II as a result of distributions declared during those
periods. For the nine-month periods ended September 30, 2004 and 2003, the
Company recorded revenues of approximately $52,000 and $94,000, respectively,
from its investment in Fund II as a result of distributions declared during
those periods. Vestin Mortgage as the manager is entitled to a monthly
management fee of up to 0.25% of the aggregate capital contributions to Fund
II. During the three month periods ended September 30, 2004 and 2003, Vestin
Mortgage recorded management fees from Fund II approximating $258,000 and
$253,000, respectively. During the nine-month periods ended September 30, 2004
and 2003, Vestin Mortgage recorded management fees from Fund II approximating
$773,000 and $696,000, respectively. All of the foregoing management fees and
distributions are reflected as a due from party on the balance sheet. During the three months ended September 30, 2004, the Company purchased from
Fund II, the right to receive the proceeds of a personal loan guarantee related
to a foreclosed loan for $3,565,795. The Board of Directors of the Company approved the transaction. Because of the uncertainties inherent
with litigation and enforcement of judgments, the Company elected to write off
the full amount paid for the right to receive the proceeds of the loan
guarantee. A summary judgment motion was filed in the U.S. District Court for
the Southern District of Texas seeking a judgment against the loan guarantors.
To date, a ruling on the motion has not been rendered. If the summary judgment
motion is not granted, the Company will proceed to litigate the matter in the
U.S. District Court. The Company believes a judgment will ultimately be ordered
and that it will collect the full amount of the loan guarantee plus accrued
interest. Vestin Mortgage, as the manager of Fund III, is entitled to a monthly
management fee of up to 0.25% of the aggregate capital contributions
to Fund III. During the three and nine months ended September 30, 2004, Vestin Mortgage
recorded management fees from Fund III of approximately $22,000 and $59,000,
respectively. For the three and nine month periods ended September 30, 2004,
the Company recorded revenues of approximately $6,000 and $22,000,
respectively, from its investment in Fund III as a result of distributions
declared during those periods. All of the foregoing management fees and
distributions are reflected as a due from party on the balance sheet. The Company placed approximately $48.4 million and $50.8 million in mortgage
loans in the three month periods ended September 30, 2004, and 2003,
respectively. The Company placed approximately $268.5 million and $203.4
million in mortgage loans in the nine-month periods ended September 30, 2004,
and 2003, respectively. These loans were primarily funded by Fund I and Fund
II. 12




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##### Table of Contents



During the three and nine month periods ended September 30, 2004, the Company
paid approximately $293,500 and $732,000 to C5, LLC, a company wholly owned by
the Companys Chief Executive Officer, pursuant to an Aircraft Usage Agreement.
The agreement allows the Company to use an airplane on a preferred basis over
any other proposed user. The Company used the airplane primarily for marketing
and lending activities. The Company is required to pay a monthly fee based on
an hourly rate of $3,000 per hour for the first 10 hours and $2,500 per hour
for each hour thereafter. The Company is required to make a minimum monthly
payment equivalent to 16 hours of usage ($45,000). The terms of the agreement
were approved by the Companys Board of Directors. The Company believes based
upon a review of aircraft rental rates that the terms of the Aircraft Usage
Agreement are fair and reasonable to the Company. On August 21, 2002, the Companys Board of Directors determined to seek new
premises for the offices of the Company. The Board of Directors determined that
the Company was not interested in purchasing a building. The Chief Executive
Officer (CEO) of the Company advised the Board of Directors that he would be
interested in acquiring a property which might be suitable to lease to the
Company as its new premises. The Board of Directors agreed that the CEO could
pursue such an opportunity providing that lease rates and other terms of the
lease agreement were at market standards. On March 15, 2003, the CEO, through a
wholly owned company, acquired unimproved real estate located in Las Vegas,
Nevada. On March 31, 2003, the CEO sold the company, which owned the real
estate in Las Vegas. The CEO has advised the Company that he made a profit of
approximately $1.0 million in connection with the sale. The unrelated party
proceeded to build an approximately 41,000 square foot office building on the
site. On March 31, 2004, the Company entered into a ten year triple net lease,
which took effect August 1, 2004. The lease rate is $1.75 per square foot, or
an aggregate monthly rental of $71,645. In May 2004, Fund III entered into an
agreement to purchase the building. Accordingly, Fund III is the Companys
owner and lessor. Vestin Mortgage obtained a review of the lease terms by an
independent third party which concluded that the lease rate represents a market
rate reasonable to both parties. NOTE 5  INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE As of September 30, 2004 the Company had investments in mortgage loans on real
estate totaling $218,035, net of allowance. All outstanding mortgage loans were
current and performing according to their terms. No outstanding mortgage loans
were past due with respect to payment of interest at September 30, 2004. See
Note 6 for information with respect to properties acquired through foreclosure
on certain defaulted mortgage loans. Management has evaluated the
collectibility of the loans in foreclosure in light of the category and dollar
amounts of such loans, adverse situations that may affect the borrowers
ability to repay, prevailing economic conditions and the underlying collateral
securing the loan. Due to economic uncertainties and historical loss
experience, the Companys management has established a reserve for inherent
losses in the portfolio totaling $110,000 based on the Companys policies and
procedures regarding the valuation of its investments in mortgage loans on real
estate. 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. The appraisals may be for the current estimate of the as-if
developed value of the property, which approximates the post-construction
value of the collateralized property assuming that such property is developed.
As-if developed values on raw land loans or acquisition and development loans
often dramatically exceed the immediate sales value and may include anticipated
zoning changes, selection by a purchaser against multiple alternatives, and
successful development by the purchaser; upon which development is dependent on
availability of financing. As most of the appraisals will be prepared on an
as-if developed basis, if a loan goes into default prior to any development of
a project, the market value of the property may be substantially less than the
appraised value. As a result, there may be less security than anticipated at
the time the loan was originally made. If there is less security and a default
occurs, the Company may not recover the full amount of the loan. NOTE 6  INVESTMENTS IN REAL ESTATE HELD FOR SALE At September 30, 2004, the Company had various properties with a carrying value
totaling $3,568,754, which were acquired through foreclosure and recorded as
investments in real estate held for sale. These properties secure specific
notes payable as discussed in Notes 7 and 8. Such investments in real estate
held for sale are accounted for at the lower of cost or fair value less costs
to sell, based on appraisals and knowledge of local market conditions. It 13




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##### Table of Contents



is not the Companys intent to invest in or hold on to real estate acquired
through foreclosure. The Company seeks to sell properties acquired through
foreclosure as quickly as circumstances permit. AdjustedDescription
    
    % of ownership
    
    Carrying valueRaw land in Utah*
    
    
    100
    %
    
    $
    1,650,000Raw land in Las Vegas, Nevada
    
    
    100
    %
    
    
    490,000Raw land in Las Vegas, Nevada
    
    
    100
    %
    
    
    343,84030-unit condominium project in Las Vegas, Nevada
    
    
    83
    %
    
    
    1,084,914Total
    
    
    
    
    
    $
    3,568,754
 *This property is subject to a lien related to a Special Improvement District
(SID) which is not due and payable until such time as the Company sells the
property to a third party. If the Company begins development on the property,
the costs related to the SID will be assessed to the buyers of each individual
parcel resulting in no gain or loss to the Company. The carrying values of real estate held for sale are assessed on a regular
basis from management assessments, comparable sales values or purchase offers.
Below is a rollforward of investments in real estate held for sale for the
three months ended September 30, 2004: Balance atBalance at
    
    
    
    
    
    
    
    
    
    Valuation
    
    September 30,Description
    
    June 30, 2004
    
    Acquisitions
    
    Sales
    
    Adjustments
    
    2004Raw land in Utah
    
    $
    1,650,000
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    1,650,000Raw land in Las Vegas, Nevada (1)
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    490,000Raw land in Las Vegas, Nevada
    
    
    343,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,84030-unit condominium project in
Las Vegas, Nevada
    
    
    1,084,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,084,914Raw land in Mesquite, Nevada (1)
    
    
    3,500,000
    
    
    
    
    
    
    
    (3,500,000
    )
    
    
    
    
    
    
    Total
    
    $
    7,078,754
    
    
    $
    
    
    
    $
    (3,500,000
    )
    
    $
    (10,000
    )
    
    $
    3,568,754
 (1)Sales for the third quarter 2004: During May 2004 the Company entered into an agreement to sell raw land in
Las Vegas, Nevada for $6.2 million. Prior to quarter end, $10,000 was
released from escrow representing an early release of funds. The
transaction is expected to be finalized during the second quarter of 2005. During July 2004 the Company sold raw land in Mesquite, Nevada for
$3,500,000 which approximated the Companys carrying value of this asset.
Therefore, no gain or loss was recorded on the sale. NOTE 7  NOTES PAYABLE Notes payable as of September 30, 2004, consists of promissory notes totaling
$374,654 to various parties related to foreclosed real estate properties. The
related properties were formerly collateral for loans placed by the Company.
Through foreclosure, the Company acquired the properties subject to the debt
owed to the existing trust deed holders. The Company is not required and does
not intend to pay interest on these notes. NOTE 8  NOTES PAYABLE  RELATED PARTY Notes payable  related party totaling $2,335,518 as of September 30, 2004,
consists of the following: Note payable to a company solely owned by the Companys Chief Executive
Officer totaling $158,000 related to developed parcels of land. Since the
Company acquired the properties through foreclosure, it is not required and
does not intend to pay interest on this note. 14




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##### Table of Contents



Note payable to an entity controlled by the Companys Chief Executive Officer
totaling $569,061 related to vacant land. Since the Company acquired the
properties through foreclosure, it is not required and does not intend to pay
interest on this note. Note payable to entities controlled by the Companys Chief Executive Officer
totaling $806,094 related to vacant land. Since the Company acquired the
properties through foreclosure, it is not required and does not intend to pay
interest on this note. Notes payable to entities controlled by the Companys Chief Executive Officer
totaling $541,901 related to an apartment complex. Since the Company acquired
the properties through foreclosure, it is not required and does not intend to
pay interest on this note. Notes payable to entities controlled by the Companys Chief Financial Officer
totaling $260,462 related to an apartment complex. Since the Company acquired
the properties through foreclosure, it is not required and does not intend to
pay interest on this note. NOTE 9  NOTE PAYABLE  FUND II During the three months ended September 30, 2004, the Company purchased from
Fund II the right to receive the proceeds of a personal loan guarantee related
to a foreclosed loan for $3,565,795. The Company paid cash of $2,565,795 and
issued a promissory note for $1,000,000 for the balance. The note bears
interest at 8%, is payable in quarterly interest only installments of $20,000,
and matures in August 2005. NOTE 10  DIVIDENDS PAYABLE In September 2004, the Company declared a cash dividend to preferred
stockholders of approximately $0.08 per share that was paid in October 2004. NOTE 11  PREFERRED STOCK During the three and nine months ended September 2004, the Company redeemed
189,125 and 439,125 shares of its Series A convertible preferred stock for
$2,039,050 and $4,789,050, respectively. NOTE 12  TREASURY STOCK During the nine months ended September 30, 2004, the Company purchased 346,198
shares of its common stock for $1,317,254. Additionally, as of September 30,
2004, all treasury stock purchased has been retired. NOTE 13  STOCK SPLIT In July 2004, the Companys Board of Directors adopted a resolution whereby it
approved a 2-for-1 reverse stock split of the issued and outstanding shares of
common stock. Accordingly, the accompanying financial statements have been
retroactively restated to reflect the 2-for-1 reverse stock split as if the
stock split occurred since inception. NOTE 14  EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share exclude the effects of dilution and are
computed by dividing net income (loss) available to common stockholders
adjusted for dividends to preferred stockholders by the weighted average amount
of common stock outstanding for the periods. Diluted earnings (loss) per share
reflect the potential dilution that may occur if options, convertible preferred
stock or other contracts to issue stock were exercised or converted into common
stock. During the three months ended September 30, 2004 and 2003, basic and
diluted earnings per share included adjustments for dividends to preferred
shareholders of $132,231 and $536,742, respectively. For the three
months ended September 30, 2004, the company sustained a loss. Therefore no
options or warrants were deemed dilutive and were excluded from the computation
of diluted earnings per share. For the nine months ended 15




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##### Table of Contents



September 30, 2004,
options and warrants to purchase 1,812,872 shares, respectively, of common
stock were excluded from the computation of diluted earnings per share because
their effect would be antidilutive. NOTE 15  RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities, and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46 also
referred to an Interpretation 46 (R) (FIN 46 (R)). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the entitys residual returns or both. The Company is required
to apply FIN 46 as revised, to all entities subject to it no later than the end
of the first reporting period ending after March 15, 2004. However, prior to
the required application of FIN 46, as revised, the Company shall apply FIN 46
or FIN 46 ® to those entities that are considered to be special-adoption of
this interpretation did not have a material effect on the Companys
consolidated financial statements. In October 2003, the American Institute of Certified Public Accountants issued
SOP 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer
(SOP 03-3). SOP 03-3 applies to a loan with the evidence of deterioration of
credit quality since origination acquired by completion of a transfer for which
it is probable at acquisition, that the Company will be unable to collect all
contractually required payments receivable. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. The Company does
not expect SOP 03-3 to have a material impact on its consolidated financial
position or results of operations. NOTE 16  LEGAL MATTERS Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly
owned by Michael Shustek, the largest stockholder 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 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 United
States Court of Appeals for the Ninth Circuit. The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to the Company, Fund I, Fund II and Fund III. The staff of the SEC has
not identified the reasons for its inquiry, which remains ongoing as of
November 15, 2004. We believe that we have complied with SEC disclosure
requirements and have cooperated with the inquiry. We cannot at this time
predict the outcome of the inquiry. On May 30, 2003, Vestin Mortgage filed a civil action for damages against First
American Title Company in the Utah Third District Court (Case No. 030912242)
for various causes of action in connection with First American
Title Companys alleged failure to note in its title report a bond assessment
on certain foreclosed land in Utah. First 16




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##### Table of Contents



American Title Company subsequently
filed for dismissal and the case was dismissed on November 5, 2003. On March 2,
2004, Vestin Mortgage appealed the judgment to the Utah Court of Appeals. During the three months ended September 30, 2004, the Company purchased from
Fund II, the right to receive the proceeds of a personal loan guarantee related
to a foreclosed loan for $3,565,795. A summary judgment motion was filed in
the U.S. District Court for the Southern District of Texas (Case
No. H-03-5071) seeking a judgment against the loan guarantors. To date, a ruling
on the motion has not been rendered. If the summary judgment motion is not
granted, the Company will proceed to litigate the matter in the U.S. District
Court. The Company and its subsidiaries are involved in a number of legal proceedings
concerning matters arising in connection with the conduct of their business
activities. The Company believes it has meritorious defenses to each of these
actions and intends to defend them vigorously. The Company believes that it is
not a party to, nor are any of its subsidiaries the subject of, any pending
legal or arbitration proceedings that would have a material adverse effect on
the Companys financial condition or results of operations or cash flows,
although it is possible that the outcome of any such proceedings could have a
material impact on the Companys net income in any particular period. NOTE 17  COMMITMENTS AND CONTINGENCIES Intercreditor agreements provide the Company additional funding sources for
mortgage loans whereby a third party investor (the Investor) may participate
in certain mortgage loans with the Company and/or the Funds (collectively the
Lead Lenders). In the event of borrower non-performance, the intercreditor
agreements provide that the Lead Lenders must repay the Investors loan amount
either by (i) continuing to remit to the Investor the interest due on the
participated loan amount; (ii) substituting an alternative loan acceptable to
the Investor; or (iii) repurchasing the participated loan amount from the
Investor for the outstanding balance plus accrued interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. In the event of borrower non-performance,
the participation agreement allows the Investor to be repaid up to the amount
of the Investors investment prior to the Lead Lenders being repaid. As of September 30, 2004, funds being used under intercreditor and
participation agreements where the Company has potential obligations as defined
above totaled $42.9 million. NOTE 18  SUBSEQUENT EVENTS Mr. Shustek, the Companys Chairman, Chief Executive Officer and
President, has filed a statement on Schedule 13E-3 with the Securities and
Exchange Commission (SEC) on August 23, 2004 and an amendment on September
30, 2004. Mr. Shustek has entered into privately negotiated purchase
agreements to acquire an aggregate of 52,341 shares of the Companys
Common Stock from certain stockholders of the Company. Consummation of such
proposed purchases are subject to certain conditions, including the
dissemination of an amended Schedule 13E-3 to all stockholders of the Company.
The consummation of such purchases by Mr. Shustek may cause the Company to no
longer meet the requirements for listing on the Nasdaq SmallCap Market. In
addition, such purchases by Mr. Shustek may lead the Company to de-register
with the SEC. However, the Company cannot assure you that such purchases will
be consummated or that the Company will de-register with the SEC. 17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS The following financial review and analysis concerns the financial condition
and results of operations of the Company for the three and nine months period
ended September 30, 2004 and 2003. This information should be read in
conjunction with the Companys unaudited Consolidated Financial Statements and
accompanying notes and other detailed information regarding the Company
appearing elsewhere in this Form 10-QSB and in the Companys annual report on
Form 10-KSB/A and Form 10-KSB/A-2 for the year ended December 31, 2003. BACKGROUND Vestin Group, Inc. (Vestin Group) was incorporated in Delaware on June 2,
1998 under the name Sunderland Acquisition Corporation. Vestin Group is a
holding company that conducts all of its operations through its wholly owned
subsidiaries. Vestin Groups stock is traded on the NASDAQ SmallCap Market
under the ticker symbol VSTN. OVERVIEW The Company is primarily engaged in the commercial mortgage brokerage business.
The Company arranges loans to owners and developers of real property whose
financing needs are not being met by traditional mortgage lenders. The
underwriting standards and length of time required by traditional mortgage
lenders, such as commercial banks, result in certain potential borrowers who
are unable to or unwilling to go through the process required by traditional
lenders. As a non-conventional lender, the Company focuses on the needs of
borrowers unable or unwilling to meet the more restrictive requirements of
traditional lenders. When evaluating prospective borrowers, the Company
typically focuses on the value of the collateral, which reduces the paperwork
and time needed to evaluate other factors. Vestin Mortgage, Inc., our wholly-owned subsidiary (Vestin Mortgage),
operates as a mortgage broker licensed in the state of Nevada. Vestin
Mortgages primary operations consist of the brokerage and placement of
commercial, construction, acquisition and development, land and residential
mortgage loans secured by real property as well as managing Vestin Fund I, LLC
(Fund I), Vestin Fund II, LLC (Fund II), Vestin Fund III, LLC (Fund III)
(collectively, the Funds) and inVestin Nevada, Inc. (inVestin Nevada), a
company wholly-owned by the Companys Chief Executive Officer. The Funds and
inVestin Nevada invest in mortgage loans. Fund III also invests in real
property. The Funds are the main funding sources for Vestin Mortgages commercial
mortgage brokerage activities. As manager of the Funds, Vestin Mortgage
evaluates prospective investments, selects the mortgages in which the Funds
will invest and makes all investment decisions for the Funds. Additionally,
Vestin Mortgage is responsible for all administrative matters such as
accounting, tax and legal requirements for the Funds. RESULTS OF OPERATIONS COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Revenue The Company reported total revenues of approximately $5.0 million and $3.5
million for the three months ended September 30, 2004 and 2003, respectively,
an increase of $1.5 million or 43%. For the nine months ended September 30,
2004 and 2003, total revenues approximated $24.9 million and $17.1 million,
respectively, an increase of $7.8 million or 46%. Revenues represent primarily
fees received for originating, servicing and extending mortgage loans. Thus,
revenues reflect the amount of loan activity as well as the rates charged the
Company for its services. In addition, as explained below, revenues for the
2004 periods were favorably impacted by a settlement of a significant lawsuit. The total dollar amount of loans placed for the three months ended September
30, 2004 and 2003 was $48.4 million and $50.8 million, respectively, a decrease
of $2.4 million or 4.7%. For the nine months ended September 30, 2004 18




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and 2003, the total dollar amount of loans placed approximated $268.5 million
and $203.4 million, respectively, an increase of $65.1 million or 32%. The Company reported total loan placement fees of approximately $1.6 million
and $1.3 million for the three months ended September 30, 2004 and 2003,
respectively, an increase of $0.3 million or 23%. For the nine months ended
September 30, 2004 and 2003, loan placement fees approximated $10.9 million and
$9.9 million, respectively, an increase of $1.0 million or 10%. Although the
total dollar amount of loans placed for the three months ended September 30,
2004 decreased by $2.4 million, loan origination fees as a percentage of loans
placed increased to 3.3% from 2.6% for the same period in the prior year. Other fees related to loan placement and servicing totaled $0.9 million for the
three months ended September 30, 2004, as compared to $0.8 million for the same
period in 2003. Other fees related to loan placement and servicing totaled
$2.2 million for the nine months ended September 30, 2004, compared to $2.1
million for the same period in 2003. Extension fees for the three months ended September 30, 2004 and 2003 totaled
$2.0 million and $0.8 million, respectively, an increase of $1.2 million or
150%. For the nine months ended September 30, 2004 and 2003, extension fees
totaled $4.5 million and $3.3 million, respectively, an increase of $1.2
million or 36%. During the three months ended September 30, 2004 and 2003 the
Company extended three loans for both periods for a total dollar amount
of $22.0 million and $18.9 million, respectively. During the nine months ended September 30, 2004
and 2003 the Company extended 14 loans and 21 loans, respectively, for a total
dollar amount of $250.7 million and $286.9 million, respectively. During the nine months ended September 30, 2004, the Company entered into a
legal settlement with the guarantors of a loan to recover shortfalls resulting
from the sale of related real estate acquired through foreclosure. The
settlement resulted in revenue of approximately $5.9 million which came in the
form of cash totaling $2.3 million and land valued at $3.6 million. During the
three months ended September 30, 2004, the land was re-valued at $3.5 million
based on an offer received on the property less costs related to the sale. Geographical Expansion Although the Company has historically focused its operations in certain Western
states, the Company has commenced expansion of its operations throughout the
U.S. The Company has developed a significant degree of knowledge with respect
to the real estate markets in the Western states. Such knowledge is critical to
the Companys business as it enables the Company to process loan applications
more quickly than many conventional lenders. The Company is able to rapidly
process loan applications in large part because the Companys underwriting
standards focus heavily on the value of the underlying property rather than the
creditworthiness of the borrower. The Companys ability to quickly assess the
underlying value of real estate when it arranges the terms of a mortgage loan
is therefore essential to its strategy of providing fast turnaround for loan
applications. Real estate markets are significantly influenced by local conditions as well as
by national economic conditions. Thus, real estate markets vary greatly from
place to place and local knowledge of a real estate market is essential to
prudent lending. In order to obtain such local knowledge, the Company intends
to engage the services of local real estate brokers and real estate lawyers who
are believed to be familiar with the markets into which the Company may expand.
No assurances can be given that the Company will be successful in any
geographical expansion of its operations or that it will be able to mitigate
the risk of such expansion by working with local brokers and lawyers. Any
difficulties encountered by the Company in this regard could adversely affect
the Companys results of operations, slow down its expansion plans or result in
a reduction of loan placement fees. Sales and Marketing Expenses Sales and marketing expenses primarily consist of advertising costs, public
relations expenses, commissions and travel expenses. Sales and marketing
expenses for the three months ended September 30, 2004 and 2003 were
approximately $1.2 million and $1.7 million, respectively, a decrease of $0.5
million or 29%. During the nine months ended September 30, 2004 and 2003,
sales and marketing expenses were approximately $4.9 million and $7.4 million,
respectively, a decrease of $2.5 million or 34%. The changes are primarily
related to the following: 19




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
    
    As part of the Companys program of rightsizing and strategic cost
controls, advertising expenses decreased by $0.5 million for the three
months ended September 30, 2004 compared to the same period in the
prior year.
    
    Commissions expense decreased by $2.5 million for the nine months
ended September 30, 2004 compared to the same period in the prior year.
The majority of loans placed during the period were not referred to the
Company by brokers or other outside sources. The decrease is not
indicative of a trend as the Company is actively pursuing outside
sources such as brokers. General and Administrative Expenses General and administrative expenses included payroll and related expenses,
consultation fees, professional fees, and general corporate expenses. General
and administrative expenses of the Company were $3.0 million for the three
months ended September 30, 2004, as compared to $3.2 million for same period in
2003, a decrease of $0.2 million or 6.3%. Expenses totaled $9.8 million and
$10.2 million, a decrease of $0.4 million or 3.9% for the nine-month periods
ended September 30, 2004 and 2003, respectively. The decrease in expenses is
primarily related to the Companys program of rightsizing and strategic cost
controls discussed below. During February 2004, the Company performed an extensive review of the economic
environment and the status of its business and concluded that in order to
provide the best possible opportunity for success in meeting its strategic and
financial objectives, a change in operating strategy was required. To that end
the Company initiated a program of rightsizing and strategic cost controls
which involve the reduction of various costs including payroll, marketing and
sales expenses to a level that is more suitable to its current business
strategy. As a result, the Company expects payroll and related expenses to
significantly decrease for the remaining part of 2004. Valuation loss on purchase rights to receive proceeds of Judgement The Company recorded a loss on investments totaling $3.6 million during the
three months ended September 30, 2004 due to the write-off of $3.6 million
related to the rights to a legal judgment it acquired from Fund II as
described in more detail below. The Company purchased from Fund II, the right to receive the proceeds of a
personal loan guarantee related to a foreclosed loan. Because of the
uncertainties inherent with litigation and enforcement of judgments, the
Company elected to write off the full amount paid for the right to receive the
proceeds of the loan guarantee. A summary judgment motion was filed in the U.S.
District Court for the Southern District of Texas seeking a judgment against
the loan guarantors. To date, a ruling on the motion has not been rendered. If
the summary judgment motion is not granted, the Company will proceed to
litigate the matter in the U.S. District Court. The Company believes a judgment
will ultimately be ordered and that it will collect the full amount of the loan
guarantee plus accrued interest. Other Expenses The Company periodically assesses the value of real estate held for sale
acquired through foreclosure by various methods including obtaining updated
appraisals when deemed necessary, reviewing recent market activity or any other
method available to properly assess such values. As a result of such
assessments, the Company recorded valuation losses of $1.5 million for the nine
months ended September 30, 2004. The following is a rollforward of the
carrying value of real estate held for sale and related valuation adjustments
for the nine months ended September 30, 2004: Balance at
    
    
    
    
    
    
    
    
    
    Valuation
    
    September 30,Description
    
    January 1, 2004
    
    Acquisitions
    
    Sales
    
    Adjustments
    
    2004Raw land in Utah
    
    $
    3,000,000
    
    
    $
    
    
    
    
    
    
    
    $
    (1,350,000
    )
    
    $
    1,650,000Raw land in Las Vegas, Nevada
    
    
    595,860
    
    
    
    
    
    
    
    (10,000
    )
    
    
    (95,860
    )
    
    
    490,000Raw land in Las Vegas, Nevada
    
    
    593,840
    
    
    
    
    
    
    
    (250,000
    )
    
    
    
    
    
    
    343,840
 20




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Balance at
    
    
    
    
    
    
    
    
    
    Valuation
    
    September 30,Description
    
    January 1, 2004
    
    Acquisitions
    
    Sales
    
    Adjustments
    
    2004Residence in Las Vegas, Nevada
    
    
    1,761,589
    
    
    
    
    
    
    
    (1,761,589
    )
    
    
    
    
    
    
    30-unit condominium project
in Las Vegas, Nevada
    
    
    1,084,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,084,914Raw land in Mesquite, Nevada
    
    
    
    
    
    
    3,600,000
    
    
    
    (3,500,000
    )
    
    
    (100,000
    )
    
    
    Total
    
    $
    7,036,203
    
    
    $
    3,600,000
    
    
    $
    (5,521,589
    )
    
    $
    (1,545,860
    )
    
    $
    3,568,754
 Income (Loss) Before Income Taxes As a result of the foregoing factors, results from operations before provision
(benefit) for income taxes generated a loss of $2.8 million and income of $4.8
million, respectively, for the three and nine months ended September 30, 2004
compared to losses of $1.5 million and $4.3 million, respectively, for the same
periods in 2003. Net Income (Loss) For the three months ended September 30, 2004, net loss was approximately $1.9
million and for the nine months ended September 30, 2004, net income was
approximately $3.2 million, compared to a net loss of $1.0 million and $2.8
million, respectively, for the same periods in 2003. Earnings (Loss) Per Share For the three months ended September 30, 2004 basic and diluted loss per share
totaled $0.73, compared to a loss of $.45 per basic and diluted share for the
three months ended September 30, 2003. For the nine months ended September 30,
2004 basic earnings per share totaled $1.42 per share and diluted earnings per
share totaled $1.03 per share compared to a loss of $1.33 per basic and diluted
share for the nine months ended September 30, 2003. Earnings per diluted share
considers the dilutive effect of stock options and warrants. CRITICAL ACCOUNTING ESTIMATES Revenue Recognition The Company recognizes revenue primarily from loan placement fees, loan
servicing fees and extension fees. Loan placement fees are generally recorded
as revenue at the close of escrow and reduced by direct loan placement costs on
loans which the Company has not recorded as investments in mortgage loans on
its financial statements. Typically, deeds of trust related to loans placed are initially in the
Companys name to facilitate the loan placement process. Upon arranging a
funding source for such loans, the deeds of trust are assigned to the
respective investor (i.e., the Funds). Loan servicing fees are recorded as
revenue when such services are rendered. Servicing fees represent the interest
spread between what is paid to the investor and what the borrower pays for the
use of the money, which can vary from loan to loan. Servicing costs approximate
servicing fees and therefore, the Company has not recognized a servicing asset
or liability. Extension fees are generally recorded as revenue at the extension
grant date. Interest income on investments in mortgage loans on real estate is recorded
when earned. The Company does not recognize interest income from loans once
they are determined to be impaired. A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due. Investments in Real Estate Held for Sale Real estate held for sale includes real estate acquired through foreclosure and
is carried at the lower of cost or the propertys estimated fair value, less
estimated costs to sell. The Company seeks to sell properties acquired through
foreclosure as quickly as circumstances permit. 21




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Investments in Mortgage Loans Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, the Companys mortgage loans require interest only payments, either
through payments or decrease of an interest reserve, with a balloon payment of
the principal at maturity. The Company has both the intent and ability to hold
mortgage loans until maturity and therefore, mortgage loans are classified and
accounted for as held for investment and are carried at cost. Loan to value
ratios are based on appraisals obtained at the time of loan origination and may
not reflect subsequent changes in value estimates. Such appraisals, which may
be commissioned by the borrower, are generally dated within 12 months of the
date of loan origination. The appraisals may be for the current estimate of the
as-if developed value of the property, which approximates the
post-construction value of the collateralized property assuming that such
property is developed. As-if developed values on raw land loans or acquisition
and development loans often drastically exceed the immediate sales value and
may include anticipated zoning changes, selection by a purchaser against
multiple alternatives, and successful development by the purchaser; upon which
development is dependent on availability of financing. As most of the
appraisals will be prepared on an as-if developed basis, if a loan goes into
default prior to any development of a project, the market value of the property
may be substantially less than the appraised value. As a result, there may be
less security than anticipated at the time the loan was originally made. If
there is less security and a default occurs, the Company may not recover the
full amount of the loan. Allowance for Loan Losses The Company maintains an allowance for loan losses on its investment in
mortgage loans for estimated credit impairment in the Companys investment in
mortgage loans portfolio. The Company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 including, but not limited to, estimated losses
on the loans. Actual losses on loans are recorded as a charge-off or a
reduction to the allowance for loan losses. Subsequent recoveries of amounts
previously charged off are added back to the allowance or included in income
when the property is sold. Income taxes The Company accounts for its income taxes using the liability method, which
requires recognition of deferred tax assets and liabilities for the future tax
consequences attributable to differences between carrying amounts of existing
assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Investments in the Funds The equity method of accounting is used to account for the Companys
investments in the Funds due to the Companys significant influence exercised over the operation and financing decisions of the Funds. Under the equity method, original investments are recorded at cost and the Companys estimated pro rata share of income and distributions are recorded on a monthly basis. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of the Companys ability to meet potential cash
requirements, including ongoing commitments to fund lending activities. The
Company has historically met its capital requirements through cash flows from
operations and its ability to access individual investors, as well as the
Funds, who acquire interests in mortgage loans. For the nine months ended September 30, 2004, the cash flows provided by
operating activities of the Company were approximately $4.7 million, compared
to cash provided by operating activities of $0.4 million for the nine months
ended September 30, 2003. Cash provided by investing activities were
approximately $3.0 million for the nine months ended September 30, 2004,
compared to $6.9 million during the same period of the prior year. Financing
activities used $7.8 million for the nine months ended September 30, 2004
compared to $7.2 million for the same period in 2003. The Company has historically relied upon cash flow from operations to provide
for its capital requirements. For the nine months ended September 30, 2004, the
Company generated positive cash flow of $7.7 million from operating 22




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and investing activities and believes that cash generated from operations will
be sufficient to provide for its capital requirements to sustain currently
expected loan volumes for at least the next 12 months. The Company is also exploring additional sources of financing including new
and/or expanded credit facilities. There can be no assurance that the Company
will be able to obtain any additional financing. Funding Sources In order to maintain and expand its business, the Company must have access to
funding sources that are prepared to invest in mortgage loans which it brokers.
Historically, the Company had relied primarily upon individual investors and
participating lenders for this purpose. However, in order to expand its
business, the Company organized Fund I and Fund II upon which it now depends as
its principal funding sources. At September 30, 2004, Fund I had capital of
approximately $82.3 million and Fund II had capital of approximately $365.0
million. Both Fund I and Fund II have completed the public offering of their
units and are not expected to raise significant amounts of additional capital.
The Companys wholly-owned subsidiary, Vestin Mortgage, is the manager of both
Funds. On November 7, 2003, the SEC declared the registration statement (Form S-11) of
Fund III to be effective and the marketing of $100 million of Fund III units
commenced. Fund III invests in and operates office property and will invest in
and operate multifamily, assisted living, industrial and retail property, and
other income producing properties. In addition, Fund III invests in mortgage
loans where the collateral is real property. Vestin Mortgage is the manager of
Fund III. Vestin Mortgage will earn real estate commissions, advisory fees, and
property management fees as well as loan brokerage, evaluation, administration
and extension, or modification fees. Vestin Capital, Inc., the Companys
wholly-owned subsidiary, is the dealer-manager for the sale of Fund III units.
As of September 30, 2004, Fund III has raised approximately $18.4 million
including reinvestments of distributions. The Companys ability to attract investors to acquire interests in mortgage
loans, either directly or through the Funds or other means, depends upon a
number of factors, some of which are beyond its control. The key factors in
this regard include general economic conditions, the condition of real estate
markets, the availability of alternative investment opportunities, and the
Companys business reputation. The yields generated by loans the Company
originates may prove more attractive in the near term if equity markets are
perceived as being risky or volatile and if most fixed rate investments do not
offer comparable yields. On the other hand, when equity markets are doing well,
it is generally harder to attract investors to the Funds. Notwithstanding the high historical yields generated by the Companys mortgage
loans compared to conventional mortgage lenders, the Company believes its
ability to attract investors may be impaired by its small size and limited
operating history. In addition, the mortgage loan investments the Company
offers are not federally insured as are certain bank deposits and the mortgage
loan interests are generally illiquid as compared to government or corporate
bonds. Thus, the Companys ability to place loans with high yields is critical
to offsetting some of the disadvantages of investments in mortgage loans. The
Companys ability to attract investors has suffered because the rate of return
paid to members of the Funds has declined over the past year and a half. If
this decline continues, the Company will find it increasingly difficult to
attract investors and the Funds may shrink as members exercise their redemption
rights. Any significant level of redemptions by the Funds members would reduce the
capital available by the Funds for investment, and accordingly, reduce the fees
paid to Vestin Mortgage. In order to comply with the operating agreements of
the Funds and the Internal Revenue Code, the Funds may redeem no more than 10%
of the aggregate members capital in any calendar year. As of September 30,
2004, the total of redemptions made from inception was $30.4 million for Fund I
and $65.2 million for Fund II. Balances in members capital accounts for Fund
I as of January 1, 2004 was $89.5 million, which would limit redemptions to
$9.0 million for calendar 2004. Balances in members capital accounts for Fund
II as of January 1, 2004 was $394.0 million, which would limit redemptions to
$39.4 million for calendar 2004. As of September 30, 2004, Fund I had paid
approximately $7.7 million in redemptions and Fund II had paid approximately
$31.2 million in redemptions in 2004. Fund II has $8.2 million in redemptions
that remain to be fulfilled in 2004 and Fund I had $1.2 million in redemptions
that remain to be fulfilled in 2004. As of September 30, 2004, requests to
redeem approximately $8.1 million in 2005, $7.2 million in 2006, $6.5 million
in 2007, $5.9 million in 2008, $5.3 million in 2009, $4.8 million in 2010, $4.3
million in 2011, and $3.9 million in 2012 had been logged for Fund I. As of
September 30, 2004, remaining requests to redeem approximately $35.5 million in
2005, $31.9 million in 2006, $28.7 million in 2007, $25.9 million in 2008,
$23.3 23




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##### Table of Contents



million in 2009, $20.9 million in 2010, $18.8 million in 2011, and $17.0
million in 2012 had been logged for Fund II. Intercreditor agreements provide the Company additional funding sources for
mortgage loans whereby a third party investor (the Investor) may participate
in certain mortgage loans with the Company and/or the Funds (collectively the
Lead Lenders). In the event of borrower non-performance, the intercreditor
agreements provide that the Lead Lenders must repay the Investors loan amount
either by (i) continuing to remit to the Investor the interest due on the
participated loan amount; (ii) substituting an alternative loan acceptable to
the Investor; or (iii) repurchasing the participated loan amount from the
Investor for the outstanding balance plus accrued interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. In the event of borrower non-performance,
the participation agreement allows the Investor to be repaid up to the amount
of the Investors investment prior to the Lead Lenders being repaid. As of September 30, 2004, funds being used under intercreditor and
participation agreements where the Company has potential obligations as defined
above totaled $42.9 million. FACTORS AFFECTING THE COMPANYS OPERATING RESULTS This quarterly report and other written reports and oral statements made from
time to time by the Company may contain forward looking statements. Such
forward looking statements may be identified by the use of such words as
expects, plans, estimates, forecasts, projects, anticipates,
believes and words of similar meaning. Forward looking statements are likely
to address such matters as the Companys business strategy, future operating
results, future sources of funding for mortgage loans brokered by the Company,
future economic conditions and pending litigation involving the Company. As a
result, investors should carefully consider any forward looking statements in
light of the various factors which could affect future results. Some of these
factors are discussed below. The Companys business is subject to numerous factors affecting its operating
results. In addition to the factors discussed above, the Companys operating
results may be affected by: Limited Experience in Certain Real Estate Markets Currently, the Company brokers mortgage loans or works with mortgage brokers
primarily in areas in which the Company and Vestin Mortgage have substantial
experience such as Arizona, California, Nevada, Texas, and Hawaii. Depending on
the market and on the Companys performance, the Company plans to expand its
operations throughout the United States. However, the Company has limited
experience outside of certain Western States. Real estate markets vary greatly
from location to location. The Companys limited experience in most U.S. real
estate markets may impact its ability to make prudent investment decisions and
may delay the loan approval process. This delay could have a material impact on
the Companys competitive advantage of providing fast loan approvals.
Accordingly, the Company plans to utilize independent real estate advisors
located in markets where the Company lacks experience for consultation prior to
making investment decisions. No assurance can be given that such advisors will
provide the Company effective assistance. Dependence on Key Personnel The Companys success depends upon the continued contributions of certain key
personnel, including Michael V. Shustek and Lance Bradford, each of whom would
be difficult to replace because of their extensive experience in his field,
extensive market contacts and familiarity with the Companys activities. If any
of these key employees were to cease employment, the Companys operating
results could suffer. The Companys future success also depends in large part
upon its ability to hire and retain additional highly skilled managerial,
operational and marketing personnel. Should the Company be unable to attract
and retain skilled personnel, the Companys performance may suffer. Risks of Underwriting Standards and Procedures 24




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##### Table of Contents



The Companys underwriting standards and procedures are more lenient than
conventional lenders in that it invests in loans to borrowers who will not be
required to meet the credit standards of conventional mortgage lenders. The Company approves mortgage loans more quickly than other mortgage lenders.
Due to the nature of such loan approvals, there may be a risk that the credit
inquiry the Company performs may not reveal all material facts pertaining to
the borrower and the security. As a result, the loans the Company arranges and
loans in which the Company may invest may suffer from a higher rate of defaults
as compared to loans arranged by more conventional lenders. The Company
attempts to mitigate this risk by insisting upon lower loan-to-value ratios.
Nonetheless, the Companys future results of operations may be adversely
affected by defaulting borrowers and the attendant risk and expense of
foreclosure proceedings. Additionally, loan-to-value ratios on some
construction and development loans may be calculated using an as-if completed
appraisal, the values of which can dramatically change. Risks of Interest Rate Changes The Companys results of operations will vary with changes in interest rates
and with the performance of the relevant real estate markets. If the economy is healthy, the Company expects that more people will be
borrowing money to acquire, develop or renovate real property. However, if the
economy grows too fast, interest rates may increase too much and the cost of
borrowing may become too expensive. This could result in a slowdown in real
estate lending which may mean the Company will have fewer loans to acquire,
thus reducing its revenues and the distributions to stockholders. One of the results of interest rate fluctuations is that borrowers may seek to
extend their low-interest-rate mortgage loans after market interest rates have
increased. Generally, the Companys loan documents permit it to raise the
interest rate it charges on extended loans anywhere from between 3/4% to 3%
from the then-current rate on the loan. This creates three risks for the
Company: (i) There can be no assurance that this permitted rate increase will be
adequate if interest rates have increased beyond the range contemplated by the
Companys loan documents. (ii) If interest rates rise, borrowers under loans with monthly or quarterly
principal payments may be compelled to extend their loans to decrease the
principal paid with each payment because the interest component has increased.
If this happens, there is a higher risk that the borrower may default on the
extended loan, and the increase in the interest rate on the loan may not be
adequate compensation for the increased risk. Distributions on mortgage loans
the Company places may decline if lenders are unable to reinvest at higher
rates or if an increasing number of borrowers default on their loans. (iii) If, at a time of relatively low interest rates, a borrower prepays
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
compensation for their loss. This in turn could harm the Companys business
reputation and may make it more difficult for the Company to attract investors
willing to acquire interests in mortgage loans. Competition For Funds The Companys ability to access funds for mortgage loans depends upon the
perceived attractiveness of yields on loans the Company places, the safety of
the underlying investment, the Companys business reputation, general economic
conditions and real estate market conditions. The Companys principal advantage
in attracting investors is the high historical yields generated by loans the
Company brokers. The Company is at a disadvantage compared to alternative
investment vehicles to the extent that an investment in mortgage loans lacks
liquidity and is not guaranteed or insured by a governmental agency. In
addition, the fact that the Company is smaller than many of the full service
financial firms offering alternative investment vehicles and has a more limited
operating history may be disadvantages in seeking to attract investors.
Furthermore, the increase in non-performing loans in the Funds has adversely
affected the Companys ability to compete for new investors. Competition For Borrowers 25




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The Company considers its competitors for borrowers to be the providers of
non-conventional mortgage loans, that is, lenders who offer short-term,
equity-based loans on an expedited basis for slightly higher fees and rates
than those charged by conventional lenders. To a lesser extent, the Company
also competes with conventional mortgage lenders and mortgage loan investors,
such as commercial banks, thrifts, conduit lenders, insurance companies,
mortgage brokers, pension funds and other financial institutions that offer
conventional mortgage loans. Many of the companies against which the Company
competes have substantially greater financial, technical and other resources
than the Company does. Competition in the Companys market niche depends upon a
number of factors, including price and interest rates of the loan, speed of
loan processing, cost of capital, reliability, quality of service and support
services. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any interests in off-balance sheet special purpose
entities nor does the Company have any interests in non-exchange traded
commodity contracts. 
 ITEM 3. CONTROLS AND PROCEDURES. The Companys management has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act) as of the end of the period covered by this
report. Such evaluation was conducted under the supervision and with the
participation of the Chief Executive Officer (the CEO) and the Chief
Financial Officer (the CFO). Based upon such evaluation, the CEO and the CFO
have concluded that, as of the end of the period, the Companys disclosure
controls and procedures were effective. There
have been no changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the Companys most recent fiscal quarter,
that have materially affected, or are reasonable likely to materially affect,
the Companys internal controls over financial reporting. 26




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly
owned by Michael Shustek, the largest stockholder 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 $5,683,312.19 (which amount includes prejudgment interest and
attorney 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 United
States Court of Appeals for the Ninth Circuit. The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to the Company, Fund I, Fund II and Fund III. The staff of the SEC has
not identified the reasons for its inquiry, which remains ongoing as of
November 15, 2004. The Company believes that it has complied with SEC
disclosure requirements and have cooperated with the inquiry. The Company
cannot at this time predict the outcome of the inquiry. On May 30, 2003, Vestin Mortgage filed a civil action for damages against First
American Title Company in the Utah Third District Court (Case No. 030912242)
for various causes of action in connection with First American Title Companys
alleged failure to note in its title report a bond assessment on certain
foreclosed land in Utah. First American Title Company subsequently filed for
dismissal and the case was dismissed on November 5, 2003. On March 2, 2004,
Vestin Mortgage appealed the judgment to the Utah Court of Appeals. During the three months ended September 30, 2004, the Company purchased from
Fund II, the right to receive the proceeds of a personal loan guarantee related
to a foreclosed loan for $3,565,795. A summary judgment motion was filed in
the U.S. District Court for the Southern District of Texas (Case
No. H-03-5071) seeking a judgment against the loan guarantors. To date, a ruling
on the motion has not been rendered. If the summary judgment motion is not
granted, the Company will proceed to litigate the matter in the U.S. District
Court. The Company and its subsidiaries are involved in a number of legal proceedings
concerning matters arising in connection with the conduct of their business
activities. The Company believes it has meritorious defenses to each of these
actions and intends to defend them vigorously. The Company believes that it is
not a party to, nor are any of its subsidiaries the subject of, any pending
legal or arbitration proceedings that would have a material adverse effect on
the Companys financial condition or results of operations or cash flows,
although it is possible that the outcome of any such proceedings could have a
material impact on the Companys net income in any particular period. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable 27




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its 2004 Annual Meeting of Stockholders as further
discussed below: (a) Our 2004 Annual Meeting of Stockholders was held on July 6, 2004 in
Las Vegas, Nevada. (b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934, as amended, there was no
solicitation in opposition to the managements nominees as listed in the proxy
statement, and all of such nominees were elected. (c) At the Annual Meeting, the following matters were considered and voted
upon: (i) The election of five directors to the Companys board of directors.
The Companys board of directors currently consists of five persons. At the
Annual Meeting, the Companys stockholders elected each of the following
director nominees as directors, to serve on the Companys board of directors
until the Annual Meeting of Stockholders of 2005 or until their successors are
duly elected and qualified. The vote for each director was as follows: Name
    
    For
    
    Against
    
    WithheldMichael V. Shustek
    
    601,580
    
    0
    
    30,370Lance K. Bradford
    
    566,680

    
    0
    
    65,270Robert J. Aalberts
    
    601,880

    
    0

    
    30,070David Chavez
    
    602,780

    
    0
    
    29,170Roland M. Sansone
    
    602,480

    
    0

    
    29,470
 (ii) To ratify the appointment of Moore Stephens Wurth Frazer and Torbet,
LLP as our independent auditors for the fiscal year ending December 31, 2004.
At the Annual Meeting, the Companys stockholders approved this proposal by the
votes indicated below: SharesFor
    
    602,915Against
    
    12,735Abstain
    
    16,300
 (iii) To approve an amendment to the Companys certificate of
incorporation in order to effect a 1:2 reverse stock split. At the Annual
Meeting, the Companys stockholders approved this proposal by the votes
indicated below: SharesFor
    
    557,218Against
    
    72,032Abstain
    
    2,700
 (d) Not applicable. 
 ITEM 5. OTHER INFORMATION None. 28




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ITEM 6. EXHIBITS (a) Exhibits EXHIBIT INDEX Exhibit
    
    
    
    Page Number/Number
    
    Description
    
    Filing Method3.1
    
    Certificate of Incorporation
    
    
    (1
    )3.2
    
    By-laws
    
    
    (1
    )3.3
    
    Certificate of Amendment of Certificate of Designations of
Rights, Preferences, Privileges and Restrictions of Series A
Convertible Preferred Stock
    
    
    (3
    )3.4
    
    Certificate of Amendment to Certificate of Incorporation
    
    
    (3
    )3.5
    
    Amendment to By-laws4.1
    
    See Exhibits 3.1, 3.2, 3.3, 3.4 and
3.5 for provisions of the
Certificate of Incorporation, Certificate of Designations and
By-laws of the Registrant defining the rights of holders of
Common Stock and Series A Preferred Stock of the Registrant
    
    
    (1),
    (3)4.2
    
    See Exhibit 10.9 for Certificate of Designations authorizing
the issuance of Series A Convertible Preferred Stock
    
    
    (2
    )31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to 18 U.S.C. Section 1350
   (1)
    
    Previously filed on Form 10-SB (File
No. 000-24803) on August 13, 1998.(2)
    
    Previously filed on Form 8-K (File
No. 000-24803) on December 7, 2001.(3)
    
    Previously filed on Form 10-QSB (File No. 000-24803) on August 16,
2004. 29




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. VESTIN GROUP, INC. By:
    
    /s/ Michael V. ShustekMichael V. Shustek, Chief Executive OfficerDate: November 15, 2004By:
    
    /s/ Lance K. BradfordLance K. Bradford, Chief Financial OfficerDate: November 15, 2004
 30




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EXHIBIT INDEX Exhibit
    
    
    
    Page Number/Number
    
    Description
    
    Filing Method3.1
    
    Certificate of Incorporation
    
    
    (1
    )3.2
    
    By-laws
    
    
    (1
    )3.3
    
    Certificate of Amendment of Certificate of Designations of
Rights, Preferences, Privileges and Restrictions of Series A
Convertible Preferred Stock
    
    
    (3
    )3.4
    
    Certificate of Amendment to Certificate of Incorporation
    
    
    (3
    )3.5
    
    Amendment to By-laws4.1
    
    See Exhibits 3.1, 3.2, 3.3, 3.4 and
3.5 for provisions of the
Certificate of Incorporation, Certificate of Designations and
By-laws of the Registrant defining the rights of holders of
Common Stock and Series A Preferred Stock of the Registrant
    
    
    (1),
    (3)4.2
    
    See Exhibit 10.9 for Certificate of Designations authorizing
the issuance of Series A Convertible Preferred Stock
    
    
    (2
    )31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to 18 U.S.C. Section 1350
   (1)
    
    Previously filed on Form 10-SB (File No. 000-24803) on
August 13, 1998.(2)
    
    Previously filed on Form 8-K (File No. 000-24803) on
December 7, 2001.(3)
    
    Previously filed on Form 10-QSB (File No. 000-24803) on August 16,
2004. 31