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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark one)  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004 Or  o
    
    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 333-52484 VESTIN FUND II, LLC  NEVADA
    
    88-0481336(State or other jurisdiction of
Incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 8379 WEST SUNSET ROAD, LAS VEGAS, NEVADA 89113
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code 702.227.0965 Securities registered pursuant to Section 12(b) of the Act:
NONE Securities registered pursuant to Section 12(g) of the Act:
NONE Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes þ No o State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of the last business day of the registrants most recently completed second
fiscal quarter. Not applicable. As of August 31, 2004, 36,749,861 Units of interest in the Company were
outstanding. Documents incorporated by reference: None.




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TABLE OF CONTENTS PART I
    
    PAGEITEM 1. BUSINESS
    
    1ITEM 2. PROPERTIES
    
    9ITEM 3. LEGAL PROCEEDINGS
    
    9ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    10PART IIITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    11ITEM 6. SELECTED FINANCIAL DATA
    
    12ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    13ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    27ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    27ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    27ITEM9A. CONTROLS AND PROCEDURES
    
    27ITEM 9B. OTHER INFORMATION
    
    27PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
    
    28ITEM 11. EXECUTIVE COMPENSATION
    
    29ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS
    
    29ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    30ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    31PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    32SIGNATURESEXHIBIT INDEXExhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 31.1Exhibit 31.2Exhibit 32




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PART I Note Regarding Forward Looking Statements This report and other written reports and oral statements made from time to
time by us 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 our business strategy, future operating results, future sources of funding
for mortgage loans brokered by us, future economic conditions and pending
litigation involving us. Some of the factors which could affect future results
are set forth in the discussion under Managements Discussion and Analysis of
Financial Condition and Results of Operations  Factors Affecting Our Operating
Results. 
 ITEM 1. BUSINESS General We were organized in December 2000 as a Nevada limited liability company for
the purpose of investing in mortgage loans. We invest in loans secured by real
estate through deeds of trust and mortgages. We commenced our business
operations in June 2001. Through June 30, 2004, we raised approximately $432.0
million through a public offering of our membership interests (Units). Our
manager is Vestin Mortgage, Inc., a licensed mortgage company in the State of
Nevada (Vestin Mortgage or Manager). Vestin Mortgage is a wholly-owned
subsidiary of Vestin Group, Inc., a Delaware corporation
(Vestin Group), whose
common stock is publicly held and traded on the Nasdaq SmallCap Market under
the ticker symbol VSTN. Through its subsidiaries, Vestin Group is engaged in
asset management, real estate lending and other financial services. In this
annual report, from time to time, we will refer to our company, Vestin Fund II,
LLC, as the Company. We invest in mortgage loans throughout the areas in which Vestin Mortgage and
its correspondents have experience, primarily Arizona, California, Florida,
Hawaii, Nevada, New York, North Carolina and Texas. The loans we invest in are
selected for us by Vestin Mortgage from among loans originated by Vestin
Mortgage or non-affiliated mortgage brokers. When Vestin Mortgage or a
non-affiliated mortgage broker originates a loan for us, that entity identifies
the borrower, processes the loan application, makes or invests in the loan, and
brokers or sells the loan to us. We believe that our loans are attractive to
borrowers because of the expediency of Vestin Mortgages loan approval process,
which takes about ten to twenty days. As a non-conventional lender, we are more willing to invest in mortgage loans
to borrowers that conventional lenders would not deem to be creditworthy.
Because of our increased willingness to fund riskier loans, borrowers are
willing to pay us an interest rate that is two to five points above the rates
charged by conventional lenders. We invest a significant amount of our funds in
loans in which the real property being developed is not generating any income
to the borrower. The balloon payment loans and bridge loans in which we
invest are riskier because the borrowers repayment depends on its ability to
refinance the loan or develop the property so it can refinance the loan. Our principal investment objectives are to:  
    
    Produce revenues from the interest income on our mortgage loans;
    
    Provide monthly cash distributions from the net income earned on our mortgage loans;
    
    Preserve capital contributions; and
    
    Reinvest, to the extent permissible, payments of principal and sales (net of expenses). Acquisition and Investment Policies We seek to invest about 97% of our assets in mortgage loans. Approximately 3%
will be held as a working capital cash reserve. 1




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The majority of our collateral on our mortgage loans is the real property that
the borrower is purchasing or developing with the funds that we make available.
We sometimes refer to these real properties as the security properties. While
we may invest in other types of loans, most of the loans in which we invest
have been made to real estate developers with a lesser proportion of loans
involving land loans and bridge financing. Our mortgage investments are not insured or guaranteed by any government
agency. Vestin Mortgage continuously evaluates prospective investments, selects the
mortgages in which we invest and makes all investment decisions on our behalf
in its sole discretion. In evaluating prospective mortgage loan investments,
Vestin Mortgage considers such factors as the following:  
    
    the ratio of the amount of the investment to the value
of the property by which it is secured (loan-to-value ratio);
    
    the potential for capital appreciation or depreciation
of the property securing the investment;
    
    expected levels of rental and occupancy rates (if applicable);
    
    potential for rental increases (if applicable);
    
    current and projected revenues from the property (if applicable);
    
    the status and condition of the record title of the property
securing the investment;
    
    geographic location of the property securing the investment; and
    
    the financial condition of the borrowers and their
principals, if any, who guarantee the loan. Vestin Mortgage may obtain our loans from non-affiliated mortgage brokers and
previous borrowers, and by solicitation of new borrowers in those states where
permissible. We may purchase existing loans that were originated by third party
lenders and acquired by Vestin Mortgage to facilitate our purchase of the
loans. Vestin Mortgage will sell the loans to us for no greater than Vestin
Mortgages cost, not including its service fees and compensation. There are no
specific requirements or guidelines governing Vestin Mortgages discretion in
determining which mortgage loans it will place with us and which it will place
with other funding sources. When selecting mortgage loans for us, Vestin Mortgage adheres to the following
guidelines, which are intended to control the quality of the collateral given
for our loans:  1.
    
    Priority of Mortgages.Generally, our assets are secured by first
mortgages. First mortgages are mortgages secured by a full or divided
interest in a first deed of trust secured by the property. Other mortgages
that we invest in on the security property will not be junior to more than
one other mortgage. As of June 30, 2004, more than 99% of the principal
amount of our outstanding interest in loans was secured by first
mortgages.2.
    
    Loan-to-Value Ratio.The amount of our loan combined with the outstanding
debt secured by a senior mortgage on a security property does not exceed
the following percentage of the appraised value of the security property
at origination: Type of Secured Property
    
    Loan-to-Value RatioResidential
    
    75%Unimproved Land
    
    60% (of anticipated as-if
development value)Acquisition and Development
    
    60% (of anticipated as-if
development value)Commercial Property
    
    75% (of anticipated as-if
development value)Construction
    
    75% (of anticipated
post-development value)Bridge
    
    75% (of anticipated as-if
development value)Leasehold Interest
    
    75% (of value of leasehold interest)
 2




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The target loan-to-value ratio for our loan portfolio as a whole is
approximately 70%. However, we may deviate from these guidelines under
certain circumstances. For example, Vestin Mortgage, in its discretion, may
increase any of the above loan-to-value ratios if a given loan is supported
by credit adequate to justify a higher loan-to-value ratio, including
personal guarantees. Occasionally, our collateral may include personal
property as well as real property. We do not have specific requirements with
respect to the projected income or occupancy levels of a property securing
our investment in a particular loan. These loan-to-value ratios will not
apply to financing offered by us to the purchaser of any real estate
acquired through foreclosure, or to refinance an existing loan that is in
default when it matures. In those cases, Vestin Mortgage, in its sole
discretion, shall be free to accept any reasonable financing terms it deems
to be in our best interest.The Manager receives an appraisal at the time of loan underwriting, which
may have been commissioned by the borrower and also may precede the
placement of the loan with us. Such appraisals are generally dated no
greater than 12 months prior to the date of loan origination. The appraisal
may be for the current estimate of the as-if developed value of the
property which approximates the post-construction value of the
collateralized property assuming that such property is developed. As-if
developed values on raw land loans or acquisition and development loans
often dramatically exceed the immediate sales value and may include
anticipated zoning changes, selection by a purchaser against multiple
alternatives, and successful development by the purchaser; upon which
development is dependent on availability of financing. As most of the
appraisals will be prepared on an as-if developed basis, if a loan goes into
default prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As a result,
there may be less security than anticipated at the time the loan was
originally made. If there is less security and a default occurs, we may not
recover the full amount of the loan.We retain appraisers who are licensed or qualified as independent appraisers
and certified by or hold designations from one or more of the following
organizations: the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, the National Association of Review Appraisers,
the Appraisal Institute, the Society of Real Estate Appraisers, M.A.I.,
Class IV Savings and Loan appraisers or from among appraisers with other
qualifications acceptable to Vestin Mortgage. However, appraisals are only
estimates of value and cannot be relied on as measures of realizable value.
An employee or agent of Vestin Mortgage will review each appraisal report
and will conduct a physical inspection for each property. A physical
inspection includes an assessment of the subject property, the adjacent
properties and the neighborhood but generally does not include entering any
structures on the property.3.
    
    Construction Mortgage Loans. We invest in construction loans other than
home improvement loans on residential property, when the loan-to-value
ratio does not exceed 75% of the appraised, completed value of the
security property at origination.4.
    
    Terms of Mortgage Loans.Our loans to date in 2004 range from a
four-month term to a 30-month term. Most of our loans are for a term of 12
months. Our original loan agreements, however, permit extensions to the
term of the loan by mutual consent. Such extensions are generally provided
on loans where the original term was 12 months or less and where a
borrower requires additional time to complete a construction project or
negotiate take out financing.Currently all of our loans provide for payments of interest only with a
balloon payment of principal payable in full at the end of the term. In
addition, we invest in mortgage loans which require borrowers to maintain
interest reserves funded from the principal amount of the loan for a period
of time. At June 30, 2004, we had outstanding principal on mortgage loans
that had interest reserves of approximately $94.0 million and interest
reserves in the amount of approximately $8.8 million.5.
    
    Escrow Conditions.Our loans will often be funded by us through an escrow
account held by a title insurance company, subject to the following
conditions:  
    
    Borrowers will obtain title insurance coverage for all
loans, with the title insurance policy naming us as the
insured and providing title insurance in an amount at least
equal to the principal amount of the loan. Title insurance
insures only the validity and priority of our deed of trust,
and does not insure us against loss by other causes, such as
diminution in the value of the security property. 3




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
    
    Borrowers will obtain fire and casualty insurance for
all loans secured by improved real property, naming us as
loss payee in an amount sufficient to cover the replacement
cost of improvements.
    
    All insurance policies, notes, deeds of trust or
mortgages, escrow agreements, and any other loan documents
for a particular transaction will name us as payee and
beneficiary. Mortgage loans will not be written in the name
of Vestin Mortgage or any other nominee.  6.
    
    Purchase of Mortgage Investments from Affiliates.We may acquire mortgage
loans from our affiliates, including Vestin Mortgage, for a price not in
excess of the carrying value of the note, plus allowable fees and expenses, but
without the allowance of any other compensation for the loans.7.
    
    Note Hypothecation.We may also acquire mortgage loans secured by
assignments of secured promissory notes. These mortgage loans must satisfy
our stated investment standards, including our loan-to-value ratios, and
also may not exceed 80% of the principal amount of the assigned note upon
acquisition. For example, if the property securing a note we acquire is
commercial property, the total amount of outstanding debts secured by the
property must not exceed 75% of the appraised value of the property, and
the mortgage loan will not exceed 80% of the principal amount of the
assigned note. For mortgage loans secured by promissory notes, we will
rely on the appraised value of the underlying property, as determined by
an independent written appraisal which was conducted within the
then-preceding twelve months. If an appraisal was not conducted within
that period, then we will arrange for a new appraisal to be prepared for
the property prior to acquisition of the loan.8.
    
    Participation.We participate in loans with other lenders, including
affiliates as permitted by the North American Securities Administrators
Association guidelines (NASAA Guidelines), by providing funds for or
purchasing an undivided interest in a loan meeting our investment
guidelines described above. Typically, we participate in loans if:  
    
    We did not have sufficient funds to invest in an entire loan.
    
    We are seeking to increase the diversification of our loan portfolio.
    
    Vestin Mortgage originated a loan that fit within our
investment guidelines but it would constitute more than 20%
of our anticipated capital contribution or otherwise be
disproportionately large given our then existing portfolio.  As of June 30, 2004, 44% of our loans were loans in which we participated
with other lenders.9.
    
    Diversification.The NASAA Guidelines provide that we neither invest in
or make mortgage loans on any one property which would exceed, in the
aggregate, an amount equal to 20% of our capital nor may we invest in or
make mortgage loans to or from any one borrower which would exceed, in the
aggregate, an amount greater than 20% of our capital.10.
    
    Reserve Fund.We have established contingency working capital reserves of
approximately 3% of our capital to cover our unexpected cash needs.11.
    
    Credit Evaluations.When reviewing a loan proposal, Vestin Mortgage
determines whether a borrower has sufficient equity in the security
property. Vestin Mortgage may also consider the income level and
creditworthiness of a borrower to determine its ability to repay the
mortgage loan.12.
    
    Sale of Mortgage Investments. Although Vestin Mortgage has no plans to
do so, Vestin Mortgage may sell our mortgage loans or interest in our
loans to either affiliates or non-affiliated parties when Vestin Mortgage
believes that it is advantageous to us to do so. However, we do not
expect that the loans will be marketable or that a secondary market will
ever develop for them. 4




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Mortgage Loans to Affiliates We will not invest in mortgage loans made to Vestin Mortgage, Vestin Group or
any of our affiliates. However, we may acquire an investment in a mortgage loan
payable by Vestin Mortgage when Vestin Mortgage has assumed the obligations of
the borrower under that loan, through a foreclosure on the property. Purchase of Loans from Vestin Mortgage and its Affiliates In addition to those loans Vestin Mortgage selects for us, we purchase loans
that were originated by Vestin Mortgage or other parties and first held for
Vestin Mortgages own portfolio, as long as the loan is not in default and
otherwise satisfies all of our lending criteria. This requirement also applies
to any loan originated by an affiliate of Vestin Mortgage, such as Vestin
Group, Michael Shustek, Chief Executive Officer of Vestin Group, or another
principal of Vestin Mortgage. However, we will not acquire a loan from or sell
a loan to a mortgage program in which Vestin Mortgage has an interest except in
compliance with NASAA Guidelines. Types of Loans We Invest In We primarily invest in loans which are secured by first or second mortgages on
real property. Such loans fall into the following categories: raw and
unimproved land, acquisition and development, construction, commercial,
residential and bridge loans. Raw and Unimproved Land Loans Approximately 15% to 25% of the loans invested in by us may be loans made for
the purchase or development of raw, unimproved land. Generally, we determine
whether to invest in these loans based upon the appraised value of
the property and the borrowers actual capital investment in the property. We
will generally invest in loans for up to 60% of the as-if developed appraised
value of the property and we generally require that the borrower has invested
in the property actual capital expenditures of at least 25% of the propertys
value. As-if developed values on raw and unimproved land loans often
dramatically exceed the immediate sales value and may include anticipated
zoning changes, selection of a purchaser against multiple alternatives, and
successful development by the purchaser, upon which development is dependent on
availability of financing. As of June 30, 2004, approximately 19% of our loans
were in this category. Acquisition and Development Loans Approximately 10% to 25% of the loans invested in by us may be acquisition and
development loans. These loans enable borrowers to acquire and/or complete the
basic infrastructure and development of their property prior to the
construction of buildings or structures. Such development may include
installing utilities, sewers, water pipes, and/or streets. We will generally
invest in loans with a face value of up to 60% of the appraised value of the
property. Loan to value ratios on acquisition and development loans are
calculated using as-if developed appraisals. Such appraisals have the same
valuation limitations as raw and unimproved land loans, described above. As of
June 30, 2004, approximately 22% of our loans were in this category. Construction Loans Approximately 10% to 70% of our loans may be construction loans. A
construction loan provides funds for the construction of one or more structures
on developed land. Funds under this type of loan will generally not be
forwarded to the borrower until work in the previous phase of the project has
been completed and an independent inspector has verified certain aspects of the
construction and its costs. We will typically require material and labor lien
releases by the borrower per completed phase of the project. We will review the
appraisal of the value of the property and proposed improvements, and will
generally finance up to 75% of the appraised value of the property and proposed
improvements. Such appraisals have the same valuation limitations as raw and
unimproved land loans, described above. As of June 30, 2004, approximately 18%
of our loans were in this category. Commercial Property Loans Approximately 20% to 50% of the loans invested in by us may be commercial
property loans. Commercial property 5




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loans provide funds to allow commercial borrowers to acquire income producing
property or to make improvements or renovations to the property in order to
increase the net operating income of the property so that it may qualify for
institutional refinancing. We will review the appraisal of the value of the
property and will generally invest in loans for up to 75% of such appraised
value of the property. As of June 30, 2004, approximately 24% of our loans
were in this category. Residential Loans A small percentage of the loans invested in by us may be residential loans.
Such loans facilitate the purchase or refinance of one to four family
residential property units provided the borrower uses one of the units on the
property as such borrowers principal residence. We will generally invest in
loans for up to 75% of the value of the property. As of June 30, 2004, there
were no loans in this category. Bridge Loans Up to 15% of our loans may be bridge loans. Such loans provide interim
financing (12 to 24 months) to enable commercial borrowers to qualify for
permanent refinancing. We will review the appraisal of the value of the
property and will generally invest in loans of up to 75% of that value of the
property. Such appraisals may be based on either an as-is basis or as-if
developed basis, depending on the circumstances, and therefore, may not be an
accurate indicator of the fair value of the property. As of June 30, 2004,
approximately 15% of our loans were in this category. Collateral The types of collateral that will secure the loans include a first deed of
trust, a second deed of trust or a leasehold interest. First Deed of Trust Most of our loans are secured by a first deed of trust. Thus as a lender, we
will have rights as a first mortgage lender of the collateralized property. As
of June 30, 2004, more than 99% of our loans were secured by a first deed of
trust. Second Deed of Trust In the future, up to 10% of our loans may be secured by second deeds of trust.
In a second mortgage loan, the rights of the lender (such as the right to
receive payment on foreclosure) will be subject to the rights of the first
mortgage lender. In a wraparound loan, the lenders rights will be comparably
subject to the rights of a first mortgage lender, but the aggregate
indebtedness evidenced by the loan documentation will be the first mortgage
loan plus the new funds the lender invests. The lender would receive all
payments from the borrower and forward to the senior lender its portion of the
payments the lender receives. As of June 30, 2004, less than 1% of our loans
were secured by a second deed of trust. Leasehold Interest Up to 20% of the loans invested in by us may be in loans where the collateral
is an interest in a lease. As of June 30, 2004, we did not have any loans
secured by a leasehold interest. Prepayment Penalties and Exit Fees Generally, the loans we invest in will not contain prepayment penalties or exit
fees. If our loans are at a high rate of interest in a market of falling
interest rates, the failure to have a prepayment penalty provision or exit fee
in the loan allows the borrower to refinance the loan at a lower rate of
interest, thus providing a lower yield to us on the reinvestment of the
prepayment proceeds. However, these loans will usually be written with
relatively high minimum interest rates, which we would expect to minimize the
risk of lower yields. 6




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Extensions to Term of Loan Our original loan agreements permit extension to the term of the loan by mutual
consent. Such extension are generally provided on loans where the original
term was 12 months or less and where a borrower requires additional time to
complete a construction project or negotiate take out financing. However, we
only grant extensions when a borrower is in full compliance with the terms of
the loan, including, but not limited to, the borrowers obligation to make
interest payments on the loan. Interest Reserves We sometimes invest in loans which include a commitment for an interest reserve
which is usually established at loan closing. The interest reserve may be
advanced by us or other lenders with the amount of the borrowers
indebtedness increased by the amount of such advances. As of June 30, 2004,
interest reserves had been established on approximately $94.0 million of our
outstanding loans. Balloon Payment Currently all of the loans we invest in or purchase will require the borrower
to make a balloon payment on the principal amount upon maturity of the loan.
There are no specific criteria used in evaluating the credit quality of
borrowers for mortgage loans requiring balloon payments. Furthermore, a
substantial period of time may elapse between the review of the financial
statements of the borrower and the date when the balloon payment is due. As a
result, there is no assurance that a borrower will have sufficient resources to
make a balloon payment when due. To the extent that a borrower has an
obligation to pay mortgage loan principal in a large lump sum payment, its
ability to repay the loan may be dependent upon its ability to sell the
property, obtain suitable refinancing or otherwise raise a substantial amount
of cash. As a result, these loans can involve a higher risk of default than
loans where the principal is paid at the same time as the interest payments. Repayment of Mortgages on Sale of Properties We may require a borrower to repay a mortgage loan upon the sale of the
mortgaged property rather than allow the buyer to assume the existing loan. We
will require repayment if we determine that repayment appears to be
advantageous to us based upon then-current interest rates, the length of time
that the loan has been held by us, the creditworthiness of the buyer and our
objectives. We will either invest our net proceeds from any capital
transaction in new mortgage loans, hold the net proceeds as cash or distribute
them to our members. These net proceeds will also include the principal of a
loan deemed to be repaid for tax purposes as a result of the nature of a loan
modification or loan extension. Our operating agreement provides that whether
we choose to distribute the proceeds or reinvest them, our members will be
deemed to have received a distribution of capital and recontributed the same
amount to us. Capital transaction include payments of principal, foreclosures
and prepayments of mortgages to the extent classified as a return of capital
under the Internal Revenue Code and any other disposition of a mortgage or
property. Variable Rate Loans Occasionally we may acquire variable rate loans. Variable rate loans originated
by Vestin Mortgage may use as indices the one and five year Treasury Constant
Maturity Index, the Prime Rate Index and the Monthly Weighted Average Cost of
Funds Index for Eleventh District Savings Institutions (Federal Home Loan Bank
Board). Vestin Mortgage may negotiate spreads over these indices of 2.5% to
5.5%, depending upon market conditions when the loan is made. As of June 30,
2004, we did not hold any variable rate loans, and all of the loans in the
mortgage loans portfolio were fixed rate loans. It is possible that the interest rate index used in a variable rate loan will
rise (or fall) more slowly than the interest rate of other loan investments
available to us. Vestin Mortgage attempts to minimize this interest rate
differential by tying variable rate loans to indices that are sensitive to
fluctuations in market rates. Additionally, most variable rate loans originated
by Vestin Mortgage contain provisions under which the interest rate cannot fall
below the initial rate. Variable rate loans generally have interest rate caps. We anticipate that the
interest rate cap will be a ceiling that is 7




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2% to 4% above the starting rate with a floor rate equal to the starting rate.
For these loans there is the risk that the market rate may exceed the interest
cap rate. Variable rate loans of five to ten year maturities are not assumable without
the prior consent of Vestin Mortgage. We do not expect to invest in or purchase
a significant amount of other assumable loans. To minimize our risk, any
borrower assuming an existing mortgage loan will be subject to the same
underwriting criteria as the original borrower. Borrowing We may incur indebtedness:  
    
    to finance our investments in mortgage loans,
    
    to prevent a default under mortgage loans that are senior to our mortgage loans,
    
    to discharge senior mortgage loans if this becomes
necessary to protect our investment in mortgage loans, or
    
    to operate or develop a property that we acquired
under a defaulted loan. Our indebtedness will not exceed 70% of the fair market value of our mortgage
loans. This indebtedness may be with recourse to our assets. In addition, we may enter into structured arrangements with other lenders in
order to provide them with a senior position in mortgage loans which we might
jointly fund. For example, we might establish a wholly-owned special purpose
corporation which would borrow funds from an institutional lender under an
arrangement where the resulting mortgage loans would be assigned to a trust,
and the trust would issue a senior certificate to the institutional lender and
a junior certificate to the special purpose corporation. This would assure the
institutional lender of repayment in full prior to our receipt of any repayment
on the jointly funded mortgage loans. Competition Generally, real estate developers depend upon the timely completion of a
project to obtain a competitive advantage when selling their properties. We
have sought to attract real estate developers by offering expedited loan
processing, which generally provides quick loan approval and funding of a loan.
As a result, we have established a market niche as a non-conventional mortgage
lender. We consider our direct competitors to be the providers of non-conventional
mortgage loans, that is, lenders who offer short-term, equity-based loans on an
expedited basis for higher fees and rates than those charged by conventional
lenders. To a lesser extent, we also compete 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. Our principal
competitors in our market niche as a non-conventional mortgage lender include:
USA Capital, Residential Funding, First Security Bank, and United Bank of
Texas. No particular competitor dominates the market. Many of the companies
against which we compete have substantially greater financial, technical and
other resources than we do. Competition in our market niche depends upon a number
of factors, including price and interest rates of the loan, speed of loan
processing, cost of capital, reliability, quality of service and support
services. Regulation Our operations are conducted by Vestin Mortgage. Vestin Mortgages operations
as a mortgage company are subject to extensive regulation by federal, state and
local laws and governmental authorities. Vestin Mortgage conducts its real
estate mortgage business under a license issued by the State of Nevada
Financial Institutions Division. Under applicable Nevada law, the division has
broad discretionary authority over Vestin Mortgages activities, including the
authority to conduct periodic regulatory audits of all aspects of Vestin
Mortgages operations. 8




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##### Table of Contents



We and Vestin Mortgage are also subject to the Equal Credit Opportunity Act of
1974, which prohibits creditors from discriminating against loan applicants on
the basis of race, color, sex, age or marital status, and the Fair Credit
Reporting Act of 1970, which requires lenders to supply applicants with the
name and address of the reporting agency if the applicant is denied credit. We
are also subject to various other federal and state securities laws regulating
the issuance and sale of securities, as well as the Employee Retirement Income
Security Act of 1974. Investment capital raised by us is subject to the Mortgage Program Guidelines
of the North American Securities Administrators Association (NASAA). These
guidelines are adopted by various state agencies charged with protecting the
interest of the investors. Administrative fees, loan fees, and other
compensation paid to Vestin Mortgage and its affiliates are generally limited
by guidelines set forth the NASAA program guidelines. These guidelines also
include certain investment procedures and criteria which are required for new
loan investments. Because our business is regulated, the laws, rules and regulations applicable
to us are subject to regular modification and change. There can be no assurance
that laws, rules or regulations will not be adopted in the future that could
make compliance much more difficult or expensive, restrict our ability to
broker or service loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans brokered by us, or otherwise
adversely affect our business or prospects. Employees We do not have any employees. Our Manager, Vestin Mortgage, and its parent
company, Vestin Group, provide all of the employees necessary for our
operations. As of September 13, 2004, those entities had a total of 70
full-time and no part-time employees. All employees are at-will employees and
none are covered by collective bargaining agreements. Available Information Our Internet website address
is www.vestinfundII.com. We make available free
of charge through www.vestingroup.com our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission. 
 ITEM 2. PROPERTIES Our Manager, Vestin Mortgage, operates from its executive offices at 8379 West
Sunset Road, Las Vegas, Nevada 89113. We do not have any separate offices. Our Manager shares office facilities of approximately 41,614 square feet with
its parent corporation, Vestin Group, which in turn leases its principal
executive offices from Vestin Fund III. The lease agreement governing this
property expires in March 2014 and the base rent is approximately $72,824
per month. 
 ITEM 3. LEGAL PROCEEDINGS Legal Matters Involving Our Manager Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly
owned by Michael Shustek, the largest shareholder and CEO of Vestin Group, are
defendants in a civil action entitled Desert Land, L.L.C. et al. v. Owens
Financial Group, Inc. et al (the Action). The Action was initiated by Desert
Land, L.L.C. (Desert Land) on various loans arranged by Del Mar Mortgage,
Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District
Court for the District of Nevada (the Court) entered judgment jointly and
severally in favor of Desert Land against Vestin Group, Vestin Mortgage and Del
Mar Mortgage, Inc. Judgment was predicated upon the Courts finding that Del
Mar Mortgage, Inc. received an unlawful penalty fee from the plaintiffs. Defendants subsequently filed a motion for reconsideration. The Court denied
the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
and Del Mar Mortgage, Inc. are jointly and severally liable for the judgment in
the amount of $5,683,312 (which amount includes prejudgment interest and
attorneys fees). On August 27, 2003, the Court stayed execution of the
judgment against Vestin Group and Vestin Mortgage based upon 9




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##### Table of Contents



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. We are not a party to the Action. Our Manager is involved in a number of legal proceedings concerning matters
arising in connection with the conduct of its business activities. Our Manager
believes it has meritorious defenses to each of these actions and intends to
defend them vigorously. Our Manager believes that it is not a party to any
pending legal or arbitration proceedings that would have a material adverse
effect on our Managers financial condition or results of operations or cash
flows, although it is possible that the outcome of any such proceedings could
have a material impact on our Managers net income in any particular period. Legal Matters Involving the Company The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to us, Vestin Group, Vestin Fund I and Vestin Fund III. The staff of
the SEC has not identified the reasons for its inquiry, which remains ongoing
as of September 13, 2004. We believe that we have complied with SEC disclosure
requirements and are cooperating with the inquiry. We cannot at this time
predict the outcome of the inquiry. We are involved in a number of legal proceedings concerning matters arising in
connection with the conduct of our business activities. We believe we have
meritorious defenses to each of these actions and intend to defend them
vigorously. We believe that we are not a party to any pending legal or
arbitration proceedings that would have a material adverse effect on the our
financial condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a material impact
on our net income in any particular period. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES Market Information  There is no established public trading market for the trading of Units. Holders  As of June 30, 2004, approximately 5,601
Unit holders held 36,804,169
Units of interest in the Company. Dividend Policy  We generally distribute to Unit holders on a monthly basis most of our
Net Income Available for Distribution (as defined in our Operating
Agreement). Net Income Available for Distribution is based upon cash
flow from operations, less certain reserves, and may exceed net income as
calculated in accordance with GAAP. Our Operating Agreement also permits
distributions of capital. We made distributions of approximately
$29,097,371 (prior to reinvested distributions) during the fiscal year ended June
30, 2004, all of which was paid from Net Income Available for
Distribution. We distributed $34,688,196 during the fiscal year ended
June 30, 2003, of which $10,916,892 represented a return of capital. It
is our intention to continue to distribute most of our Net Income
Available for Distribution to our Unit holders. Issuer Purchases of Equity
Securities Maximum Number (orTotal Number of
    
    Approximate DollarUnits Purchased as
    
    Value) of UnitsPart of Publicly
    
    that May Yet beTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased under thePeriod
    
    Units Purchased
    
    per Unit
    
    Programs
    
    Plans or ProgramsApril 2004
    
    
    21,285
    
    
    $
    10.00
    
    
    None
    
    NoneMay 2004
    
    
    28,194
    
    
    $
    10.00
    
    
    None
    
    NoneJune 2004
    
    
    4,365
    
    
    $
    10.00
    
    
    None
    
    NoneTotal
    
    
    53,844
    
    
    $
    10.00
    
    
    None
    
    None
 Recent Sales of Unregistered Securities None. Equity Compensation Plan Information None. 11




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA You should read the
following selected financial data in conjunction with our financial
statements and related notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Report. Vestin Fund II, LLC June 30,2004
    
    June 30,2003
    
    June 30,2002
    
    June 30,2001Balance Sheet Data:Investments in mortgage loans (net of
allowance)
    
    $
    303,853,086
    
    
    $
    338,681,325
    
    
    $
    222,058,326
    
    
    $
    8,473,473Cash, cash equivalents, certificates
of deposits and short-term
investments
    
    $
    14,361,734
    
    
    $
    16,815,806
    
    
    $
    8,623,542
    
    
    $
    2,107,602Interest and other receivables
    
    $
    4,223,499
    
    
    $
    3,898,231
    
    
    $
    2,189,631
    
    
    $
    8,086Due from Vestin Fund I
    
    
    2,987,340
    
    
    
    216,171
    
    
    $
    
    
    
    $
    Real estate held for sale
    
    $
    33,971,610
    
    
    $
    15,833,099
    
    
    $
    
    
    
    $
    Note receivable Vestin Fund I
    
    
    4,278,322
    
    
    
    
    
    
    $
    
    
    
    $
    Assets under secured borrowing
    
    $
    61,924,186
    
    
    $
    26,729,643
    
    
    $
    
    
    
    $
    Other assets
    
    $
    
    
    
    $
    
    
    
    $
    255,637
    
    
    $
    Total assets
    
    $
    425,599,777
    
    
    $
    406,773,467
    
    
    $
    233,127,136
    
    
    $
    Liabilities
    
    $
    64,530,466
    
    
    $
    31,367,689
    
    
    $
    650,765
    
    
    $
    Members capital
    
    $
    361,069,311
    
    
    $
    375,189,607
    
    
    $
    232,476,371
    
    
    $
    10,589,161Total
liabilities and members capital
    
    $
    425,599,777
    
    
    $
    406,557,296
    
    
    $
    233,127,136
    
    
    $
    10,589,161
 12 months ended
    
    12 months ended
    
    12 months ended
    
    12 months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2002
    
    June 30, 2001(unaudited)
    
    (unaudited)Income Statement Data:Revenues
    
    $
    43,469,293
    
    
    $
    40,312,535
    
    
    $
    15,290,345
    
    
    $
    15,405Expenses
    
    $
    11,738,534
    
    
    $
    16,541,231
    
    
    $
    868,021
    
    
    $
    20Net income
    
    $
    31,730,759
    
    
    $
    23,771,304
    
    
    $
    14,422,324
    
    
    $
    15,385Net income
allocated to members
    
    $
    31,730,759
    
    
    $
    23,771,304
    
    
    $
    14,422,324
    
    
    $
    15,385Net income
allocated to members per
weighted average membership units
    
    $
    0.86
    
    
    $
    0.76
    
    
    $
    1.19
    
    
    $
    0.01Cash distributions
    
    $
    29,097,371
    
    
    $
    34,688,196
    
    
    $
    15,739,698
    
    
    $
    Cash distributions per weighted
average membership units
    
    $
    0.79
    
    
    $
    1.10
    
    
    $
    1.30
    
    
    $
    Weighted average membership units
    
    
    36,714,812
    
    
    
    31,430,793
    
    
    
    12,114,955
    
    
    
    1,157,378
 12




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##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We commenced the offering of our Units in June 2001. Our offering terminated
June 12, 2004. Our financial results reflect the amount of capital we had
available for investment in mortgage loans. Our past performance may not be
indicative of future results. This discussion should be read in conjunction
with our financial statements and accompanying notes and other detailed
information regarding the Company appearing elsewhere in this Form 10-K. RESULTS OF OPERATIONS OVERVIEW Our primary business objective is to generate monthly income by investing in
mortgage loans. We believe there is a significant market opportunity to make
mortgage loans to owners and developers of real property whose financing needs
are not met by traditional mortgage lenders. The loan underwriting standards
our Manager utilizes are less strict than traditional mortgage lenders. In
addition, one of our competitive advantages is our ability to approve loan
applications more quickly than traditional lenders. As a result, in certain
cases, we may make mortgage loans which are riskier than mortgage loans made by
commercial banks. However, in return we seek a higher interest rate and our
Manager takes steps to mitigate the lending risks such as imposing a lower loan
to value ratio. While we may assume more risk than traditional mortgage
lenders, in return, we seek to generate higher yields from our mortgage loans. Our operating results are affected primarily by: (i) the amount of capital we
have to invest in mortgage loans, (ii) the level of real estate lending
activity in the markets we service, (iii) our ability to identify and work with
suitable borrowers, (iv) the interest rates we are able to charge on our loans
and (v) the level of foreclosures and related loan losses which we may
experience. These funds, subject to a 3% reserve, will constitute the bulk of
the funds we have available for investment in mortgage loans. We do not have
any arrangements in place to materially increase the funds we will have
available to invest from any other sources. See discussion under Capital and
Liquidity. Our operating results during the past several years have been adversely
affected by the fact that interest rates are at a 40-year low. The low
interest rates diminish the interest rates we can charge on our loans. The
average interest rate on our loans at June 30, 2004 was 10.9% as compared to
12.5% at June 30, 2003. In addition, our operating results have been adversely
affected by the increase in our non-performing assets. Non-performing assets
totaled approximately $80.0 million or 17% of our total assets as of June 30,
2004 as compared to $50.8 million or 11% of our total assets as of June 30, 2003. A
weakening economy and poor credit decisions by our Manager may result in an
increase in non-performing assets. If the economy weakens and our borrowers
who develop and sell commercial real estate projects are unable to complete
their projects or obtain takeout financing or are otherwise adversely impacted,
we may experience an increase in loan defaults which may reduce the amount of
funds we have for distribution to our members. Such conditions may also
require us to restructure loans in order to enhance their collectibility. In
this regard, it should be noted that the weighted average term of our
outstanding loans as of June 30, 2004 was 15 months, compared to 12.9 months at
June 30, 2003. We seek to maintain a low loan-to-value ratio which, as of June 30, 2004, was
61% on a weighted average basis, generally using appraisals prepared on an
as-if developed basis in connection with the loan origination. In this manner,
we hope to retain sufficient cushion in the underlying equity position to
protect the value of our loan in the event of a default. Nevertheless, no
assurances can be given that a marked increase in loan defaults accompanied by
a rapid decline in real estate values will not have a material adverse effect
upon our financial condition and operating results. 13




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##### Table of Contents



Historically, our Manager has focused its operations on Nevada and certain
Western states. Because our Manager has a significant degree of knowledge with
respect to the real estate markets in such states, it is likely most of our
loans will be concentrated in such states. As of June 30, 2004, 29% of the
principal amount of our loans were secured by real estate in Nevada, while 25%,
14%, 14%, and 11% were secured by real estate in California, Texas, Arizona and
Hawaii, respectively. Such geographical concentration creates greater risk that
any downturn in such local real estate markets could have a significant adverse
effect upon our results of operations. Commercial real estate markets in Nevada
have continued to prosper, with significant borrowing activity, throughout the
current recession. The commercial real estate markets in Hawaii, Texas, Arizona
and California also appear to be relatively strong. Fiscal Year Ended June 30, 2004 Compared To June 30, 2003 RESULTS OF OPERATIONS
    
    FOR THE YEAR ENDED
    
    FOR THE YEAR ENDEDJUNE 30, 2004
    
    JUNE 30, 2003Total revenues
    
    $
    43,469,293
    
    
    $
    40,312,535Total expenses
    
    $
    11,738,534
    
    
    $
    16,541,231Net income
    
    $
    31,730,759
    
    
    $
    23,771,304Net income allocated to members perweighted average membership units
    
    $
    31,730,759
    
    
    $
    23,771,304Annualized rate of return to members(a)
    
    
    8.6
    %
    
    
    7.6
    %Weighted average membership units
    
    
    36,714,812
    
    
    
    31,430,793
  (a)
    
    The annualized rate of return to members is calculated based upon
the net income allocated to members per weighted average units as of
June 30, 2004 and 2003 divided by ten (the $10 cost per unit). Total Revenues. For the fiscal year ended June 30, 2004, total revenues were
approximately $43.5 million compared to $40.3 million for the fiscal year ended
June 30, 2003, an increase of $3.2 million or 8%. Growth in revenue was
primarily due to the following:  
    
    A fee of approximately $2.3 million related to the sale of real
estate in February of 2004.
    
    An increase in interest income related to secured borrowings of
approximately $1.5 million.
    
    These additions to revenue were partially offset by the declining amount of
investments in mortgage loans from approximately $347.9 million as of June
30, 2003 to approximately $319.1 million at June 30, 2004, a decrease of
approximately $28.8 million or 8%. The decrease is primarily related to
member redemptions for the year ended June 30, 2004. In addition, the
average interest rate on our loans as of June 30, 2004 was 10.9%, compared
to 12.5% at June 30, 2003. While there has been some movement in the economy
towards higher interest rates, it is not clear if or when any such rate
increases will impact our business. The overall decline in interest rates over the past several years may have
diminished the interest rates we can charge on our loans. The weighted average
interest rate on our loans at June 30, 2004 was 10.9%, as compared to 12.5% at
June 30, 2003. In addition, there has been an increase in competition from
more conventional mortgage lenders and mortgage loan investors, such as
commercial banks, thrifts, and mortgage brokers, due to the overall decline in
interest rates. It is not clear yet if and when the recent, modest increases
in federal funds rates will enable us to charge higher interest rates on our
future loans. Non-performing assets include loans in non-accrual status totaling $46.0
million as of June 30, 2004 compared to $34.9 million as of June 30, 2003 and
real estate held for sale totaling $34.0 million as of June 30, 2004 compared
to
$15.8 million as of June 30, 2003. The increase in non-performing assets may
reflect the risks inherent in our business strategy which entails more lenient
underwriting standards and expedited loan approval procedures, as well as the
effects of a weakening economy. Our revenues will continue to be impacted until
we are able to convert these non-performing assets into interest paying
mortgage loans. We will attempt to accomplish this by working with the borrower
where possible and by foreclosing on the underlying property where necessary.
We intend to sell properties acquired through foreclosure as soon as
practicable, consistent with our objective of avoiding a loss of principal on
our loans. However, we cannot predict how quickly we will be able to sell
foreclosed properties. 14




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##### Table of Contents



As of June 30, 2004, our Manager had granted extensions on 19 loans pursuant to
the terms of the original loan agreements which permit extensions by mutual
consent. Such extensions are generally provided on loans where the original
term was 12 months or less and where a borrower requires additional time to
complete a construction project or negotiate take out financing. The aggregate
amount due to us from borrowers whose loans had been extended as of June 30,
2004 was approximately $104.1 million. At June 30, 2004, all such loans were
performing. Accordingly, our Manager concluded that no additional allowance
for loan losses was necessary with respect to such loans. Total Expenses. In fiscal 2004, total expenses were $11.7 million compared to
$16.5 million for fiscal 2003, a decrease of $4.8 million or 29%. The decrease
in expenses resulted from several factors including the following:  
    
    Provisions for loan losses decreased by $6.1 million to $2.6
million for the year ended June 30, 2004 compared to $8.7 million for
the same period in the prior year. The prior year expense included a
$7.0 million provision on one loan.
    
    Interest expense related to secured borrowing increased by $2.4
million to $5.7 million for the year ended June 30, 2004 compared to
$3.3 million for the same period in the prior year.
    
    We incurred legal fees of approximately $0.5 million for the year
ended June 30, 2004 primarily related to various fees related to public
filings as well as expenses related to foreclosure proceedings and
loan maintenance.
    
    During the year ended June 30, 2003 we elected to fully expense
capitalized costs related to a bond offering. We did not incur such an
expense during the year ended June 30, 2004. Net Income. Overall, net income for the year ended June 30, 2004 was
approximately $31.7 million compared to $23.8 million for the same period in
the 2003, an increase of $7.9 million or 33%. Annualized Rate of Return to Members. For fiscal year 2004, the annualized
rate of return to members was 8.6% compared to 7.6% for fiscal 2003. The
increase in annualized rate of return to members was primarily related to the
increase in total revenues and decrease in total expenses as outlined above. Distributions to Members. For the year ended June 30, 2004, members received
distributions totaling $29,097,371, as compared to distributions totaling
$34,688,196 for the year ended June 30, 2003. Distributions for the year ended
June 30, 2004 were paid entirely from Net Income Available for Distribution as
defined in our Operating Agreement. Of the distributions for the year ended
June 30, 2003, $10,916,892 represented a return of capital and the balance of
the distributions was paid from Net Income Available for Distribution as
defined in our Operating Agreement. Net Income Available for Distribution is
based upon cash flow from operations, less certain reserves, and may exceed net
income as calculated in accordance with accounting principles generally
accepted in the United States (GAAP). Since net income for the year ended
June 30, 2003 was impacted by a significant amount of non-cash expenses
related to valuation allowances on real estate held for sale, Net Income
Available for Distribution exceeded our net income for that year as calculated
pursuant to GAAP. Redemptions. In order to comply with our Operating Agreement and the Internal
Revenue Code, we may redeem no more than 10% of the aggregate members capital
in any calendar year. As of June 30, 2004, redemptions made since inception
totaled $64.4 million. Balances in members capital
accounts as of January 1, 2004 was $394.0 million, which would limit redemptions to $39.4 million for
calendar year 2004. As of June 30, 2004, we had paid approximately $30.3 million in
redemptions in 2004, and had $9.1 million in redemptions that remain to be
fulfilled in 2004. As of June 30, 2004, requests to redeem approximately $35.5
million in 2005, $31.9 million in 2006, $28.7 million in 2007, $29.9 million in
2008, $23.3 million in 2009, $20.9 million in 2010, and $18.8 million in 2011
had been logged. 15




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##### Table of Contents



Fiscal Year Ended June 30, 2003 Compared To June 30, 2002 RESULTS OF OPERATIONS FOR THE YEAR ENDED
    
    FOR THE YEAR ENDEDJUNE 30, 2003
    
    JUNE 30, 2002(unaudited)Total revenues
    
    $
    40,312,535
    
    
    $
    15,290,345Total expenses
    
    $
    16,541,231
    
    
    $
    868,021Net income
    
    $
    23,771,304
    
    
    $
    14,422,324Net income allocated to members per weighted
average membership units
    
    $
    0.76
    
    
    $
    1.19Annualized rate of return to members(a)
    
    
    7.6
    %
    
    
    11.9
    %Weighted average membership units
    
    
    31,430,793
    
    
    
    12,114,955
  (a)
    
    The annualized rate of return to members is calculated based upon the net income
allocated to members per weighted average units as of June 30, 2003 and 2002
divided by ten (the $10 cost per unit). Total Revenues. For the fiscal year ended June 30, 2003, total revenues were
approximately $40.3 million compared to $15.3 million for the fiscal year ended
June 30, 2002, an increase of $25.0 million or 163.6%. Growth in revenue was
mainly due to an increase in our investments in mortgage loans with the
portfolio totaling $352.5 million as of June 30, 2003 compared to $222.6
million as of June 30, 2002. Our average interest yields on our investments in
mortgage loans for the year ended June 30, 2003 was 12.5% compared to 13.4% for
the year ended June 30, 2002. While more money was available to loan as a
result of addition unit sales in fiscal 2003 compared to fiscal 2002, the rates
declined based on overall economic conditions. Total Expenses. In fiscal 2003, total expenses were $16.5 million compared to
$0.9 million for fiscal 2002, an increase of $15.6 million. The increase in
expenses resulted from several factors, including an increase in management
fees due to the higher capital accounts, interest expense related to secured
borrowing, a provision for loan losses, losses on real estate held for sale and
the write-off of deferred offering costs. See also discussion under Asset Quality and Loan
Reserves. Net Income. Overall, net income for fiscal 2003 was $23.8 million compared to
$14.4 million in fiscal 2002, an increase of $9.4 million or 64.8%. Annualized Rate of Return
to Members. For fiscal 2003, the annualized rate of
return to members was 7.6% compared to 11.9% for fiscal 2002. The decrease in
annualized rate of return to members was primarily related to the increase in
total expenses as outlined above. Investments in Mortgage Loans Secured by Real Estate Portfolio Investments in mortgage loans as of June 30, 2004 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance(1)
    
    Interest Rate
    
    Percentage
    
    To Value(2)Acquisition and development
    
    
    9
    
    
    $
    70,320,391
    
    
    
    9.48
    %
    
    
    22.04
    %
    
    
    64.22
    %Bridge
    
    
    17
    
    
    
    52,362,686
    
    
    
    10.11
    %
    
    
    16.41
    %
    
    
    48.03
    %Commercial
    
    
    14
    
    
    
    77,209,538
    
    
    
    12.07
    %
    
    
    24.20
    %
    
    
    65.95
    %Construction
    
    
    7
    
    
    
    58,606,178
    
    
    
    11.95
    %
    
    
    18.37
    %
    
    
    62.49
    %Land
    
    
    8
    
    
    
    60,562,146
    
    
    
    9.95
    %
    
    
    18.98
    %
    
    
    57.31
    %55
    
    
    $
    319,060,939
    
    
    
    10.90
    %
    
    
    100.00
    %
    
    
    60.55
    %
 (1) The following table reconciles the balance of the loan portfolio to the
amount shown on the accompanying Balance Sheet. The contra accounts represent
the amount of real estate held for sale sold to third parties where 16




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##### Table of Contents



we provided financing. GAAP requires the borrower to have a certain
percentage equity ownership (typically 20%) to allow us to record the
sale of a property. In addition, the borrower must maintain a minimum
commitment in the property on a continuing basis. Therefore, until the
borrower meets this requirement, the investment in the new loan is reduced by
the amount originally invested in the real estate held for sale. June 30, 2004
    
    June 30, 2003Balance
    
    BalanceBalance per loan portfolio
    
    $
    319,060,939
    
    
    $
    347,881,325Less:Seller financed loans included in real estate held for sale
    
    
    (5,707,853
    )
    
    
    Allowance for loan losses
    
    
    (9,500,000
    )
    
    
    (9,200,000
    )Balance per Balance Sheet
    
    $
    303,853,086
    
    
    $
    338,681,325
 (2) 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 no greater than 12 months prior to the date of
loan origination and may have been commissioned by the borrower. The appraisals
may be for the current estimate of the as-if developed value of the property,
and which approximates the post-construction value of the collateralized
property assuming that such property is developed. As-if developed values on
raw land loans or acquisition and development loans often dramatically exceed
the immediate sales value and may include anticipated zoning changes, selection
by a purchaser against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability of financing.
As most of the appraisals will be prepared on an as-if developed basis, if a
loan goes into default prior to any development of a project, the market value
of the property may be substantially less than the appraised value. As a
result, there may be less security than anticipated at the time the loan was
originally made. If there is less security and a default occurs, we may not
recover the full amount of the loan. Investments in mortgage loans as of June 30, 2003 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance***
    
    Interest Rate
    
    Percentage
    
    To Value*Acquisition and development
    
    
    5
    
    
    $
    29,147,011
    
    
    
    12.60
    %
    
    
    8.37
    %
    
    
    44.26
    %Bridge
    
    
    6
    
    
    
    17,408,179
    
    
    
    11.92
    %
    
    
    5.00
    %
    
    
    65.99
    %Commercial
    
    
    27
    
    
    
    147,747,322
    
    
    
    11.67
    %
    
    
    42.47
    %
    
    
    64.85
    %Construction
    
    
    16
    
    
    
    116,106,164
    
    
    
    13.34
    %
    
    
    33.38
    %
    
    
    60.05
    %Land
    
    
    10
    
    
    
    24,303,120
    
    
    
    12.70
    %
    
    
    6.99
    %
    
    
    48.15
    %Residential
    
    
    7
    
    
    
    13,169,529
    
    
    
    13.79
    %
    
    
    3.79
    %
    
    
    66.76
    %71
    
    
    $
    347,881,325
    
    
    
    12.53
    %
    
    
    100.00
    %
    
    
    59.47
    %
 *** Please see footnote (1) above.
*Please see footnote (2) above. June 30, 2004
    
    Portfolio
    
    June 30, 2003
    
    PortfolioLoan Type
    
    Balance***
    
    Percentage
    
    Balance***
    
    PercentageFirst mortgages
    
    $
    316,497,670
    
    
    
    99.20
    %
    
    $
    345,887,427
    
    
    
    99.43
    %Second mortgages(3)
    
    
    2,563,269
    
    
    
    0.80
    %
    
    
    1,993,898
    
    
    
    0.57
    %$
    319,060,939
    
    
    
    100.00
    %
    
    $
    347,881,325
    
    
    
    100.00
    %
 *** Please see footnote (1) above.
(3) All of our second mortgages are junior to a first trust deed
position held by either us or our Manager. 17




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##### Table of Contents



The following is a schedule of maturities of investments in mortgage loans as
of June 30, 2004: 2004
    
    $
    134,536,0732005
    
    
    133,515,8232006
    
    
    51,009,043$
    319,060,939
 The following is a schedule by geographic location of investments in mortgage
loans: June 30, 2004
    
    Portfolio
    
    June 30, 2003
    
    PortfolioBalance***
    
    Percentage
    
    Balance***
    
    PercentageArizona
    
    $
    45,321,607
    
    
    
    14.20
    %
    
    $
    54,080,498
    
    
    
    15.56
    %California
    
    
    80,868,704
    
    
    
    25.35
    %
    
    
    45,636,450
    
    
    
    13.12
    %Colorado
    
    
    
    
    
    
    
    
    
    
    4,137,548
    
    
    
    1.19
    %Florida
    
    
    656,063
    
    
    
    0.21
    %
    
    
    4,599,543
    
    
    
    1.32
    %Hawaii
    
    
    34,283,186
    
    
    
    10.75
    %
    
    
    17,537,923
    
    
    
    5.04
    %Nevada
    
    
    91,349,216
    
    
    
    28.63
    %
    
    
    104,308,196
    
    
    
    29.98
    %New York
    
    
    19,998,445
    
    
    
    6.27
    %
    
    
    6,231,259
    
    
    
    1.79
    %North Carolina
    
    
    1,610,058
    
    
    
    0.50
    %
    
    
    
    
    
    
    Ohio
    
    
    
    
    
    
    
    
    
    
    12,629,726
    
    
    
    3.63
    %Oregon
    
    
    
    
    
    
    
    
    
    
    4,395,115
    
    
    
    1.26
    %Texas
    
    
    44,973,660
    
    
    
    14.09
    %
    
    
    94,325,067
    
    
    
    27.11
    %$
    319,060,939
    
    
    
    100.00
    %
    
    $
    347,881,325
    
    
    
    100.00
    %
 *** Please see footnote (1) above. Asset Quality and Loan Reserves Losses may occur from investing in mortgage loans. The amounts of losses will
vary as the loan portfolio is affected by changing economic conditions and the
financial condition of borrowers. The conclusion that a mortgage loan is uncollectible or that collectibility is
doubtful is a matter of judgment. On a quarterly basis, our Manager evaluates
our mortgage loan portfolio for impairment. The fact that a loan is
temporarily past due does not necessarily mean that the loan is impaired.
Rather, all relevant circumstances are considered by our Manager to determine
impairment and the need for specific reserves. Such evaluation, which includes
a review of all loans on which full collectibility may not be reasonably
assured, considers among other matters:  
    
    prevailing economic conditions;
    
    historical experience;
    
    the nature and volume of the loan portfolio;
    
    the borrowers financial condition and adverse situations that
may affect the borrowers ability to pay;
    
    evaluation of industry trends; and
    
    estimated net realizable value of any underlying collateral in relation to the loan amount. Based upon this evaluation, a determination is made as to whether the allowance
for loan losses is adequate to cover any potential losses. Additions to the
allowance for loan losses are made by charges to the provision for loan losses.
Recoveries of previously charged off amounts are credited to the allowance for
loan losses. As of June 30, 2004, our Manager had provided for $2.5 million as
a general allowance for loan losses. At June 30, 2004, five of our loans were
non-performing (more than 90 days past due on principal or interest payments)
totaling $46.0 million as 18




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##### Table of Contents



summarized below. Our Manager evaluated the loans and concluded that the
underlying collateral was sufficient to protect us against further losses of
principal or interest. Our Manager will continue to evaluate these loans in
order to determine if any other allowance for loan losses should be recorded. Balance at June 30,
    
    
    
    
    
    Number of MonthsDescription of Collateral
    
    2004
    
    Maturity Date
    
    Non-Performing126 unit assisted living facility in Phoenix, AZ
    
    $
    13,664,188
    
    
    
    6/25/2005
    
    
    
    2126 unit Ramada Inn Hotel in Mesquite, NV
    
    
    4,599,733
    
    
    
    6/18/2003
    
    
    
    12460 acre subdivision in Lake Travis, TX
    
    
    3,381,354
    
    
    
    3/8/2003
    
    
    
    15Partially completed 18 hole golf course in Lake Travis, TX
    
    
    12,095,763
    
    
    
    8/1/2003
    
    
    
    10Office building in Farmers Branch, TX
    
    
    12,310,430
    
    
    
    6/3/2005
    
    
    
    7$
    46,051,468
 Because of the fact that any decision regarding the allowance for loan losses
reflects a judgment about the probability of future events, there is an
inherent risk that such judgments will prove incorrect. In such event, actual
losses may exceed (or be less than) the amount of any reserve. To the extent
that we experience losses greater than the amount of our reserves, we may incur
a charge to our earnings that will adversely affect our operating results and
the amount of any distributions payable to our members. The following is a rollforward of the general allowance for loan losses for the
year ended June 30, 2004: Balance at June 30,
    
    
    
    
    
    
    
    
    
    Balance at June 30,Description
    
    2003
    
    Provisions
    
    Deductions(2)
    
    2004General ValuationAllowance
    
    $
    1,500,000
    
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    2,500,000Specific allowance
(1)
    
    
    7,700,000
    
    
    
    
    
    
    
    (700,000
    )
    
    
    7,000,000General ValuationAllowance
    
    $
    9,200,000
    
    
    $
    1,000,000
    
    
    $
    (700,000
    )
    
    $
    9,500,000
 (1)In addition to the general allowance for loan losses we have re-evaluated
the underlying collateral for one of the above mentioned loans with a principal
balance of $13.0 million. The collateral is 570 acres of land near Austin,
Texas. We made the loan for construction of an 18-hole golf course and
clubhouse. We have obtained estimates of current value for the partially
completed golf course and estimates of the costs to complete construction.
Based on those estimates, we provided a specific allowance for loan loss of
$7.0 million during the year ended June 30, 2003 related to this impaired loan.
Subsequent to June 30, 2004, we completed foreclosure on this property and took
ownership as real estate held for sale. We are diligently assessing our
options for a sale of the property as quickly as circumstances permit. (2)During the year ended June 30, 2004 we foreclosed on two loans which
consisted of two undeveloped parcels of land in Austin and Cedar Park, Texas
which is discussed in more detail in the investments in real estate held for
sale section below. As a result of the foreclosure we took title to the
properties and reclassified the amount invested to real estate held for sale
which included an allowance for loan losses of $700,000. Consequently we
adjusted our basis in these properties by the $700,000 and removed that amount
from our allowance for loan losses. In addition to the above-mentioned loans, at June 30, 2004, our Manager had
granted extensions on 19 loans pursuant to the terms of the original loan
agreements which permit extensions by mutual consent. Such extensions are
generally provided on loans where the original term was 12 months or less and
where a borrower requires additional time to complete a construction project or
negotiate take out financing. The aggregate amount due to us from borrowers
whose loans had been extended as of June 30, 2004 was approximately $104.1
million. At June 30, 2004, all such loans were performing. Accordingly, our
Manager concluded that no additional allowance for loan losses was necessary
with respect to such loans. 19




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##### Table of Contents



On June 25, 2003, we restructured a $15.2 million note due on August 19, 2003
as a new note with the interest rate reduced from 11.0% to 5.5%. Our investment
in this loan was approximately $13.7 million as of June 30, 2004. No specific
reserve has been provided for this loan based on the underlying collateral
value. The new loan has a term of 24 months. Interest income not recognized
during the year ended June 30, 2004 as a result of the
note restructuring was
$751,532. Investments in Real Estate Held for Sale At June 30, 2004, we held 10 properties with a total carrying value of $33.4
million, which were acquired through foreclosure and recorded as investments in
real estate held for sale. Included in this balance were 4 properties with a
total carrying value of $5.7 million that we have sold. GAAP requires us to include
these properties in real estate held for sale until the borrower has met and
maintained a certain percentage of equity ownership, which is typically 20%. We
may share ownership of such properties with Vestin Fund I, our Manager, or other
unrelated parties. The summary below includes our percentage ownership in each
property. These investments in real estate held for sale are accounted for at
the lower of cost or fair value less costs to sell with fair value based on
appraisals and knowledge of local market conditions. It is not our intent to
invest in or own real estate as a long-term investment. We seek to sell
properties acquired through foreclosure as quickly as circumstances permit. The
following is a rollforward of investments in real estate held for sale for the
year ended June 30, 2004: Percentage
    
    Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDate
    
    of
    
    June 30,
    
    
    
    
    
    
    
    
    
    Valuation
    
    June 30,Description
    
    Acquired
    
    Ownership
    
    2003
    
    Acquisitions
    
    Sales
    
    Adjustments
    
    2004Custom residential
property located in
Santa Fe, New
Mexico
    
    
    3/4/2003
    
    
    
    7
    %
    
    $
    85,727
    
    
    $
    
    
    
    $
    
    
    
    $
    (9,990
    )
    
    $
    75,73740 acres of land
containing 354
residential lots in
Henderson, Nevada
    
    
    2/28/2003
    
    
    
    34
    %
    
    
    4,820,663
    
    
    
    454,160
    
    
    
    (1,763,590
    )
    
    
    
    
    
    
    3,511,233An approximate
200-unit apartment
complex located in
Las Vegas, Nevada
(1) (4)
    
    
    1/27/2003
    
    
    
    98
    %
    
    
    4,772,190
    
    
    
    2,441,746
    
    
    
    (4,000,000
    )
    
    
    
    
    
    
    3,213,93611.42 acres of
vacant land zoned
commercial in
Henderson, Nevada (4)
    
    
    1/28/2004
    
    
    
    100
    %
    
    
    1,990,000
    
    
    
    
    
    
    
    (1,990,000
    )
    
    
    
    
    
    
    Two real estate
parcels in Cedar
Park, Texas (3)
    
    
    3/2/2004
    
    
    
    100
    %
    
    
    
    
    
    
    3,231,899
    
    
    
    
    
    
    
    
    
    
    
    3,231,899A partially
completed golf
course in Mesquite,
Nevada (1)
    
    
    11/6/2002
    
    
    
    36
    %
    
    
    1,208,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,208,738140 Unit/224 bed
senior facility in
Mesa, Arizona (3)
    
    
    5/26/04
    
    
    
    86
    %
    
    
    
    
    
    
    6,033,953
    
    
    
    
    
    
    
    
    
    
    
    6,033,95365 acres of raw
land in Mesquite,
Nevada (2)
    
    
    11/27/2002
    
    
    
    42
    %
    
    
    2,027,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,32874 Unit/90 bed
assisted living
facility in San
Bernadino, California (3)
    
    
    4/6/2004
    
    
    
    100
    %
    
    
    
    
    
    
    7,550,000
    
    
    
    
    
    
    
    
    
    
    
    7,550,000Hotel/Casino in Las
Vegas, Nevada (3)
    
    
    2/2/2004
    
    
    
    28
    %
    
    
    
    
    
    
    6,190,333
    
    
    
    
    
    
    
    
    
    
    
    6,190,333Raw land in
Mesquite, Nevada
(1)
    
    
    11/27/2002
    
    
    
    41
    %
    
    
    928,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    928,453Total
    
    
    
    
    
    
    
    
    
    $
    15,833,099
    
    
    $
    25,902,091
    
    
    $
    (7,753,590
    )
    
    $
    (9,990
    )
    
    $
    33,971,610
 (1)These properties have been sold to independent third parties and we have
provided the financing. GAAP requires the borrower to have a certain
percentage of equity ownership (typically 20%) to allow us to record the sale of a
property and remove it from inventory. In addition, the borrower must maintain
a minimum commitment in the property on a continuing basis. (2)This property includes 37 acres of land, which has been sold to an
independent third party, and we have provided the financing. GAAP requires the
borrower to have a certain percentage of equity ownership (typically 20%) to
allow us to record the sale of a property and remove it from inventory. 20




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##### Table of Contents



(3)Foreclosures for the year ended June 30, 2004  Through foreclosure
proceedings during the year ended June 30, 2004, we assumed ownership of the
following properties: During March 2004, we foreclosed on two loans and took title to the related
properties, which consisted of two undeveloped parcels of land in Austin and
Cedar Park, Texas. The current carrying value of the properties is
$3,231,899. During September 2004, our Manager estimated the current value
of the properties to be $1,650,000 based on updated appraisals.
Subsequently, our Manager agreed to acquire the rights to any future
judgments related to the personal guarantees associated with the loans in
exchange for $3,565,795 which is the estimated deficiency on the value of the
properties. This transaction will result in a net gain of $1,983,896 in the
quarter ending September 30, 2004 which is derived from the
recovery of a previously recorded valuation allowance. During May 2004 we foreclosed on loan secured by a 140 Unit/224 bed senior
facility in Mesa, Arizona. A receiver has been appointed and the business
has continued operations. The property has been listed for sale and, based
on its estimated value and the underlying personal guarantee from the
borrower, no valuation allowance was deemed necessary as of June 30, 2004. During April 2004 we foreclosed on loan secured by a 74 Unit/90 bed senior
facility in San Bernadino, California. A receiver has been appointed and the
business has continued operations. The property has been listed for sale and
based on its estimated value and the underlying personal guarantee from the
borrower, no valuation allowance was deemed necessary as of June 30, 2004. During February 2004, we foreclosed on two loans and took title to the
collateral which consists of a hotel/casino on approximately 25 acres of
land. No specific reserve was provided upon foreclosure based on the
estimated underlying collateral value. (4)Sales of real estate held for sale for the year ended June 30, 2004: During March 2004, we sold 11.42 acres of land in Henderson, Nevada for
approximately $2.0 million which approximated the carrying value of the real
estate. Through foreclosure proceedings in the first calendar quarter of 2003, we
assumed an approximate 98% ownership of a 200-unit apartment complex in Las
Vegas, Nevada. In October 2003, we sold the property to a third party.
However, we financed 100% of the sale. GAAP requires the borrower to have a
certain percentage of equity ownership (typically 20% of the sales price) to be
funded by the buyer to allow us to record a sale. During March 2004, we
received a payoff of $4,000,000 on our loan to the borrower. Since the
payoff resulted from a sale of the note through an intercreditor agreement
and no further cash equity was injected by the buyer, we did not record the
entire sale, only that portion that relates to the loan payoff. Off-Balance Sheet Arrangements We do not have any interests in off-balance sheet special purpose entities nor
do we have any interests in non-exchange traded commodity contracts. Contractual Obligations As of June 30, 2004, we did not have any outstanding contractual obligations. CRITICAL ACCOUNTING ESTIMATES Revenue Recognition Interest income on loans is accrued by the effective interest method. We do not
recognize interest income from loans once they are determined to be impaired. A
loan is impaired when, based on current information and events, it is probable
that we will be unable to collect all amounts due according to the contractual
terms of the loan agreement or when the payment of interest is 90 days past
due. 21




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##### Table of Contents



Investments in Mortgage Loans Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of our mortgage loans require interest only payments with a
balloon payment of the principal at maturity. We have both the intent and
ability to hold mortgage loans until maturity and therefore, mortgage loans are
classified and accounted for as held for investment and are carried at
amortized cost. Loans sold to or purchased from affiliates are accounted for
at the principal balance and no gain or loss is recognized by us or any
affiliate. Loan to value ratios are based on appraisals obtained at the time
of loan origination and may not reflect subsequent changes in value estimates.
Such appraisals are generally dated within 12 months of the date of loan
origination and may be commissioned by the borrower. The appraisals may be for
the current estimate of the as-if developed value of the property, which
approximates the post-construction value of the collateralized property
assuming that such property is developed. As-if developed values on raw land
loans or acquisition and development loans often dramatically exceed the
immediate sales value and may include anticipated zoning changes and timely
successful development by the purchaser. As most of the appraisals will be
prepared on an as-if developed basis, if a loan goes into default prior to any
development of a project, the market value of the property may be substantially
less than the appraised value. As a result, there may be less security than
anticipated at the time the loan was originally made. If there is less
security and a default occurs, we may not recover the full amount of the loan. Allowance for Loan Losses We maintain an allowance for loan losses on our investments in mortgage loans
for estimated credit impairment in our investment in mortgage loans portfolio.
The Managers estimate of losses is based on a number of factors including the
types and dollar amounts of loans in the portfolio, adverse situations that may
affect the borrowers ability to repay, prevailing economic conditions and the
underlying collateral securing the loan. Additions to the allowance are
provided through a charge to earnings and are based on an assessment of certain
factors which may indicate estimated losses on the loans. Actual losses on
loans are recorded as a charge-off or a reduction to the allowance for loan
losses. Subsequent recoveries of amounts previously charged off are added back
to the allowance or included as income. 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. We seek to sell properties acquired through
foreclosure as quickly as circumstances permit. The carrying values of real
estate held for sale are assessed on a regular basis from updated appraisals,
comparable sales values or purchase offers. Secured Borrowing Loans that have been participated to third party investors through
intercreditor agreements (Agreements) are accounted for as secured borrowings
in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities(SFAS No. 140). The
Agreements provide us additional funding sources for mortgage loans whereby a
third party investor (the Investor) may participate in certain mortgage loans
with us and/or Vestin Fund I and/or Vestin Fund III (collectively, the Lead
Lenders). In the event of borrower non-performance, the intercreditor
agreements provide that the Lead Lenders must repay the Investors loan amount
either by (i) continuing to remit to the Investor the interest due on the
participated loan amount; (ii) substituting an alternative loan acceptable to
the Investor; or (iii) repurchasing the participation from the Investor for the
outstanding balance plus accrued interest. Additionally, an Investor may participate in certain loans with the Lead
Lenders through participation agreements. Pursuant to the participation
agreements, the Investor may invest in certain loan or loans with the Lead
Lenders. In the event of borrower non-performance, the participation agreement
allows the Investor to be repaid up to the amount of the Investors investment
prior to the Lead Lenders being repaid. Mortgage loan financing under the
participation agreements are also accounted for as a secured borrowing in
accordance with SFAS No. 140. 22




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##### Table of Contents



FACTORS AFFECTING OUR OPERATING RESULTS Our business is subject to numerous factors affecting our operating results. In
addition to the factors discussed above, our operating results may be affected
by: Risks of Investing in Mortgage Loans  
    
    Our underwriting standards and procedures are more
lenient than conventional lenders in that we will invest in
loans to borrowers who will not be required to meet the
credit standards of conventional mortgage lenders.
    
    We approve mortgage loans more quickly than other
mortgage lenders. Due to the nature of loan approvals, there
is a risk that the credit inquiry our Manager performs will
not reveal all material facts pertaining to the borrower and
the security.
    
    Our results of operations will vary with changes in
interest rates and with the performance of the relevant real
estate markets.
    
    If the economy is healthy, we expect that more people
will borrow 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 we will have fewer loans to acquire,
thus reducing the revenues and the distributions to our
members.
    
    If, at a time of relatively low interest rates, a
borrower should prepay obligations that have a higher
interest rate from an earlier period, investors will likely
not be able to reinvest the funds in mortgage loans earning
that higher rate of interest. In the absence of a prepayment
fee, the investors will receive neither the anticipated
revenue stream at the higher rate nor any compensation for
their loss. This in turn could harm our reputation and make
it more difficult for us to attract investors willing to
acquire interest in mortgage loans. Risk of Defaults Our performance will be directly impacted by any defaults on the loans in our
portfolio. As noted above, we may experience a higher rate of defaults than
conventional mortgage lenders. We seek to mitigate the risk by estimating the
rate of the underlying collateral and insisting on low loan to value ratios.
However, no assurance can be given that these efforts will fully protect us
against losses on defaulted loans. Moreover, during the period of time when a
defaulted loan is the subject of foreclosure proceedings, it is likely that we
will earn less (if any) income from such loans, thereby reducing our earnings. Risks of Interest Rate Changes Our results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets. If the economy is healthy, we expect that more people will be borrowing money
to acquire, develop or renovate real property. However, if the economy grows
too fast, interest rates may increase too much and the cost of borrowing may
become too expensive. This could result in a slowdown in real estate lending
which may mean we will have fewer loans to acquire, thus reducing its revenues
and the distributions to members. 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, our loan documents permit us to raise the interest rate
we charge on extended loans anywhere from between 3/4% to 3% from the
then-current rate on the loan. This creates three risks for us: (i) There can be no assurance that this permitted rate increase will be
adequate if interest rates have increased beyond the range contemplated by our
loan documents. 23




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(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
we place 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 our business reputation. Competition for Borrowers We consider our competitors for borrowers to be the providers of
non-conventional mortgage loans, that is, lenders who offer short-term,
equity-based loans on an expedited basis for higher fees and rates than those
charged by conventional lenders and mortgage loans investors, such as
commercial banks, thrifts, conduit lenders, insurance companies, mortgage
brokers, pension funds and other financial institutions that offer conventional
mortgage loans. Many of the companies against which we compete have
substantially greater financial, technical and other resources than we do.
Competition in our market niche depends upon a number of factors including
price and interest rates of the loan, speed of loan processing, cost of
capital, reliability, quality of service and support services. Effect of Fluctuations in the Economy Our sole business, making loans secured by real estate, is particularly
vulnerable to changes in macroeconomic conditions. Any significant decline in
economic activity, particularly in the geographical markets in which we
concentrate our loans, could result in a decline in the demand for real estate
development loans. In order to stay fully invested during a period of declining
demand for real estate loans, we may be required to make loans on terms less
favorable to us or to make loans involving greater risk to us. Declines in
economic activity are often accompanied by a decline in prevailing interest
rates. Although our lending rates are not directly tied to the Federal Reserve
Boards discount rate, a sustained and widespread decline in interest rates
will impact the interest we are able to earn on our loans. Since our loans
generally do not have prepayment penalties, declining interest rates may also
cause our borrowers to prepay their loans and we may not be able to reinvest
the amounts prepaid in loans generating a comparable yield. Moreover, any
significant decline in economic activity could adversely impact the ability of
our borrowers to complete their projects and obtain take out financing. This in
turn could increase the level of defaults we may experience. CAPITAL AND LIQUIDITY Liquidity is a measure of a companys ability to meet potential cash
requirements, including ongoing commitments to fund lending activities and for
general operating purposes. Subject to a 3% reserve, we use all of our
available funds to invest in mortgage loans. Income generated from such loans
is paid out to our members unless they have elected to reinvest their
dividends. We do not anticipate the need for hiring any employees, acquiring
fixed assets such as office equipment or furniture, or incurring material
office expenses during the next twelve months because Vestin Mortgage will
manage our affairs. We may pay Vestin Mortgage a monthly management fee of up
to 0.25% of our aggregate capital contributions. During the year ended June 30, 2004, cash flows provided by our operating
activities approximated $30.6 million. Our investing activities for the year
ended June 30, 2004 consisted of cash provided from the sale of investments in
loans secured by real estate in the amount of $11.0 million (net of new
investments and purchases of mortgage loans), sales of real estate held for
sale of $3.8 million, and net proceeds from investment in certificates of
deposits, net of new investments, of $8.7 million. Our financing activities
primarily consisted of proceeds from the sale of Units in the amount of $26.7
million offset by member withdrawals of $51.3 million and members
distributions, net of reinvestments, of $21.3 million. At June 30, 2004, we had $11.9 million in cash, $2.4 million in certificates of
deposit, and $425.6 million in total assets. It appears we have sufficient
working capital to meet our operating needs in the near term. 24




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Effective June 2004, we discontinued the offering of our Units. Since we distribute most or all of our operating income, our sources of
liquidity include: repayments of outstanding loans, distribution reinvestments
by our members and arrangements with third parties to participate in our loans. We rely primarily upon repayment of outstanding loans to provide capital for
investment in new loans. Any significant level of defaults on outstanding
loans could reduce the funds we have available for investment in new loans.
Resulting foreclosure proceedings may not generate full repayment of our loans
and may result in significant delays in the return of invested funds. This
would diminish our capital resources and would impair our ability to invest in
new loans. Non-performing assets include loans in non-accrual status totaling
$46.0 million as of June 30, 2004 compared to $34.9 million as of June 30, 2003
and real estate held for sale totaling $28.3 million as of June 30, 2004
compared to $15.8 million as of June 30, 2003. It is possible that no earnings
will be recognized from these assets until they are disposed of, or that no
earnings will be recognized at all, and the time it will take to dispose of
these assets cannot be predicted. Our Manager believes that total
non-performing assets at June 30, 2004 have increased primarily as a result of
factors unique to specific borrowers. Because of the estimated value of the
underlying properties, we do not believe that any losses beyond those already
recognized will be incurred from these assets upon final disposition. However,
it is possible that we will not be able to realize the full estimated carrying
values upon disposition. See discussion under Asset Quality and Loan
Reserves. Any significant level of redemptions by our members would reduce the amount of
capital available for investment. In order to comply with our Operating
Agreement and the Internal Revenue Code, we may redeem no more than 10% of the
aggregate members capital in any calendar year. Our Operating Agreement also
provides other conditions limiting redemptions. As of June 30, 2004,
redemptions made since inception totaled $64.4 million. Balances in members
capital accounts as of January 1, 2004 was $394.0 million, which would limit
redemptions to $39.4 million for calendar 2004. As of June 30, 2004, we had
paid approximately $30.3 million in redemptions in 2004, and had $9.1 million
in redemptions that remain to be fulfilled in 2004. As of June 30, 2004,
requests to redeem approximately $35.5 million in 2005, $31.9 million s in
2006, $28.7 million in 2007, $29.9 million in 2008, $23.3 million in 2009,
$20.9 million in 2010, and $18.8 million in 2011 had been logged. Approximately 2,542 of our members currently reinvest their distributions. The
level of reinvested distributions is likely to be affected by our operating
performance. If our performance does not meet the expectations of our members,
the level of reinvestment may decline. Intercreditor agreements
provide us additional funding sources for
mortgage loans whereby a third party investor (the Investor) may participate
in certain mortgage loans with us, Vestin Mortgage, Vestin Fund I and Vestin Fund III (collectively, the Lead Lenders). In the event of borrower
non-performance, the intercreditor agreements provide that the Lead
Lenders must either (i) continue to remit to the Investor the interest due on the
participation amount; (ii) substitute an alternative loan acceptable to the
Investor; or (iii) repurchase the participation from the Investor for the
outstanding balance of the participation plus accrued interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. Pursuant to the participation agreements,
the Investor may invest in certain loan or loans with the Lead Lenders. 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 June 30, 2004, funds being used under intercreditor and participation
agreements where we have potential obligations as defined above totaled
$61.9 million. We may seek to expand our capital resources through borrowings from
institutional lenders or through securitization of our loan portfolio or
similar arrangements. Other than the line of credit mentioned above, we
currently do not have in place any commitments to borrow any funds or
securitize any of our assets. No assurance can be given that, if we should seek
to borrow funds or to securitize our assets we would be able to do so on
commercially attractive terms. Our ability to expand our capital resources in
this manner is subject to many factors, some of which are beyond our control,
including the state of the economy, the state of the capital markets and the
perceived quality of our loan portfolio. 25




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We do not currently have any interest in any special purpose entities nor do we
have any commitments or obligations which are not reflected on our balance
sheet. We do not have any interest in derivative contracts. We maintain working capital reserves of approximately 3% of aggregate members
capital accounts in cash and cash equivalents, certificates of deposits and
short-term investments. This reserve is available to pay expenses in excess of
revenues, satisfy obligations of underlying security properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of the
working capital. At June 30, 2004, we had $11.9 million in cash, $2.4 million
in certificates of deposit, and $425.6 million in total assets. It appears we
have sufficient working capital to meet our operating needs in the near term. During the year ended
June 30, 2004, we paid off and closed our $3.0 million
line of credit as it was not an integral funding source for our operations. 26




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, primarily from changes in interest rates. We do
not deal in any foreign currencies and do not own any options, futures or other
derivative instruments. We do not have a significant amount of debt. Most of our assets consist of investments in mortgage loans, including those
that are financed under intercreditor agreements. At June 30, 2004, our
aggregate investment in mortgage loans was approximately $303,853,086 with a
weighted average effective interest rate of 10.9%. Loans financed under
intercreditor agreements totaled $61,924,186 at June 30, 2004 and are
classified as assets under secured borrowing. Such financing is at a weighted
average interest rate of 10.9%. These mortgage loans mature within the next 24
months. Most of the mortgage loans have a term of 12 months; the weighted
average term of outstanding loans at June 30, 2004 was 15 months. All of the
outstanding mortgage loans at June 30, 2004 were fixed rate loans. All of the
mortgage loans are held for investment purposes; none are held for sale. We
intend to hold such mortgage loans to maturity. None of the mortgage loans have
prepayment penalties. Market fluctuations in interest rates generally do not affect the carrying
value of our investment in mortgage loans. However, significant and sustained
changes in interest rates could affect our operating results. If interest rates
decline significantly, some of the borrowers could prepay their loans with the
proceeds of a refinancing at lower interest rates. This would reduce our
earnings and funds available for distribution to members. On the other hand, a
significant increase in interest rates could result in a slowdown in real
estate development activity which would reduce the demand for commercial
mortgage loans. As a result, we might encounter greater difficulty in
identifying appropriate borrowers. We are not in a position to quantify the
potential impact on our operating results from a material change in interest
rates. At June 30, 2004, we also had approximately $14.4 million invested in cash and
cash equivalents, and certificates of deposit. Approximately 3% of our assets
will be held in such accounts as a cash reserve; additional deposits in such
accounts will be made as funds are received from new investors and repayment of
loans pending the deployment of such funds in new mortgage loans. We believe
that these financial assets do not give rise to significant interest rate risk
due to their short-term nature. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are indexed in Item 15 of this
report. 
  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROL AND PROCEDURES The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of June 30, 2004 (the Evaluation Date).
Such evaluation was conducted under the supervision and with the participation
of the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO)
of Vestin Mortgage, the Companys Manager, who function as the equivalent
of the CEO and CFO of the Company. Based upon such evaluation, the CEO and CFO
have concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures were effective to ensure that information required to
be disclosed in this report has been properly recorded, processed, summarized
and reported within the required time periods. There have been no significant
changes in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 27




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT We do not have any directors or officers. We are managed by Vestin Mortgage.
Vestin Mortgage is a wholly-owned subsidiary of Vestin Group, Inc., a Delaware
corporation (Vestin Group), whose common stock is publicly held and is traded
on the Nasdaq SmallCap Market under the symbol VSTN. Through its
subsidiaries, Vestin Group is engaged in asset management, real estate lending
and other financial services. The directors and executive officers of Vestin Mortgage are listed below: Name
    
    Age
    
    TitleMichael V. Shustek
    
    
    45
    
    
    Chief Executive Officer, President,
Chairman of the Board and DirectorPeggy M. Shustek
    
    
    35
    
    
    Vice PresidentDaniel B. Stubbs
    
    
    43
    
    
    Executive Vice President, UnderwritingStephen A. Schneider
    
    
    58
    
    
    Vice President of OperationsLance K. Bradford
    
    
    37
    
    
    Chief Financial Officer, Treasurer, Secretary and Director
 The principal occupation and
business experience for each of Vestin Mortgages officers and
directors and key employees, for at least the last five years, are as follows: Michael V. Shustek has been a director of Vestin Mortgage and Chairman of the
Board of Directors, Chief Executive Officer and a director of Vestin Group
since April 1999. In February 2004, Mr. Shustek became the President of Vestin
Group. In 2003, Mr. Shustek became the Chief Executive Officer of Vestin
Mortgage and, in February 2004, he assumed the additional position of President
of Vestin Mortgage. Mr. Shustek also serves on the loan committee of Vestin
Mortgage. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved
in various aspects of the real estate industry in Nevada since 1990. In 1993,
he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial
foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company
that originally specialized in property valuations for third-party lenders or
investors and which continues today as the primary vehicle for his private
investment portfolio. In 1997, Mr. Shustek was involved in the initial founding
of Nevada First Bank, with the largest initial capital base of any new state
charter in Nevadas history. Mr. Shustek co-authored two books entitled Trust
Deed Investments, on the topic of private mortgage lending, and If I Can Do
It, So Can You. Mr. Shustek is a guest lecturer at the University of Nevada,
Las Vegas, where he also teaches a course in Real Estate Law and Ethics. Mr.
Shustek received a Bachelor of Science degree in Finance at the University of
Nevada, Las Vegas. Mr. Shustek is the former husband of Ms. Shustek, who serves
as the Vice President of Vestin Mortgage. Peggy M. Shustek has been with Vestin Group since September 1995, and is
currently Vice President of Vestin Mortgage. From January 2001 until February
2004, Ms. Shustek was the President of Vestin Mortgage. From 1997 to 2000, Ms.
Shustek was the Senior Vice President of Vestin Mortgage. Ms. Shustek is
responsible for all new and existing clients and loan packages, manages
investor relationships and serves as the administrator of the corporate
offices. Ms. Shustek has over ten years of experience in title, escrow and
private lending. Ms. Shustek is the former wife of Mr. Shustek, Vestin
Mortgages Chief Executive Officer, President and Chairman. Daniel B. Stubbs has been the Vice President, Underwriting of Vestin Mortgage
since January 2000. Mr. Stubbs is responsible for analyzing the risks of each
loan as well as prescribing Title Insurance coverage for each individual
transaction. In addition, Mr. Stubbs serves on the loan committee of Vestin
Mortgage and acts as a liaison between Vestin Mortgage and the various banks
that carry its lines of credit. Mr. Stubbs has over 13 years experience in the
Title Insurance industry. Mr. Stubbs received his Bachelor of Arts degree in
Communications Studies from the University of Nevada, in Las Vegas, Nevada. Stephen A. Schneider has been Vice President of Operations of Vestin Mortgage
since January 2001. From July 2000 to December 2000, Mr. Schneider was the
Chief Operation Officer of Vestin Group. Mr. Schneider is responsible for the
maintenance of all banking and financial relationships and also serves on
Vestin Mortgages loan 28




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committee. Mr. Schneider has over 26 years experience in the financial services
industry. He worked at US Bank where he managed the banks business banking
department and underwrote loans for companies with sales of $1 million to $10
million and maintained relationships with the banks business customers. Mr.
Schneider sits on the boards of Focus Las Vegas and Leadership Las Vegas Youth
as well as several other organizations. He is responsible for the Vestin
Foundation, a non-profit organization aimed at funding local charitable
organizations. Mr. Schneider received his Bachelor of Arts degree in Accounting
from the University of New Mexico. Lance K. Bradford has served as Chief Financial Officer, Treasurer, Secretary
and a director of Vestin Mortgage and Treasurer and a director of Vestin Group
since April 1999. Mr. Bradford also served as President of Vestin Group from
January 2001 until February 2004. In addition, Mr. Bradford was appointed as
Chief Financial Officer of Vestin Group in February 2004 and serves on the loan
committee of Vestin Mortgage. Mr. Bradford previously held the office of Chief
Financial Officer of Vestin Group from 1999 to September 2002. Mr. Bradford
also acts as the functional equivalent of a Chief Financial Officer for Vestin
Fund I, Vestin Fund II and Vestin Fund III. Mr. Bradford was also the Corporate
Secretary of Vestin Group from 1999 to 2000. Since 1992, Mr. Bradford has been
a partner in L.L. Bradford & Company, Las Vegas, Nevada, a Certified Public
Accounting firm that he founded. From 1988 to 1991, Mr. Bradford served as an
accountant with Ernst & Young International. Mr. Bradford received a Bachelor
of Science degree in Accounting from the University of Nevada, in Reno, Nevada. Audit Committee The board of directors of Vestin Group, the parent corporation of our Manager,
has a standing Audit Committee established in accordance with Section 3(a)(58)
of the Securities Exchange Act of 1934, as amended (the Exchange Act). The
Audit Committee is responsible for the appointment, compensation, retention and
oversight of our independent accountants. In addition, the Audit Committee
reviews with Vestin Groups management and our independent accountants
financial information that will be provided to our members and others, and our
audit and financial reporting processes. The Audit Committee operates under a
written Audit Committee Charter adopted by Vestin Groups board of directors.
The Audit Committee consists of Robert J. Aalberts, David Chavez and Roland
Sansone. The board of directors of Vestin Group believes that Mr. Chavez is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K.
Mr. Chavez and each of the other members of the Audit Committee is an
independent director as defined in Rule 4200 of the Marketplace Rules of the
National Association of Securities Dealers, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires our executive
officers and directors, and persons who own more than 10% of a
registered class of our equity securities, to file an initial report
of securities ownership on Form 3 and reports of changes in
securities ownership on Form 4 or 5 with the Securities and
Exchange Commission (SEC). Such executive officers,
directors and 10% beneficial owners are also required by SEC rules to
furnish us with copies of all Section 16(a) forms that they
file. We have no executive officers or directors and no person owns
10% or more of our units. We are managed by Vestin Mortgage. Based
solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons that no
Forms 4 or 5 were required for such persons, we believe that for
the reporting period for the fiscal year ending June 30, 2004,
no reports under Section 16(a) were required to be filed. Code of Ethics As we do not have any executive officers we have not adopted a Code of Ethics.
However, the executive officers of Vestin Mortgage, our Manager, are under an
obligation to follow the Code of Ethics of Vestin Group which has been filed as
Exhibit 14.1 to Vestin Groups Form 10-KSB for the year ended December 31,
2003. If our Manager or Vestin Group makes any substantive amendments to the
Code of Ethics or if our Manager grants any waiver, including any implicit
waiver, from a provision of the Code of Ethics to its chief executive officer,
chief financial officer or chief accounting officer, we will disclose the
nature of such amendment or waiver on our website or in a Report on Form 8-K or
quarterly or annual report under the Securities Exchange Act of 1934, as
amended. 
 ITEM 11. EXECUTIVE COMPENSATION Not Applicable. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of June 30, 2004, none of our members were beneficial owners of 5% or more
of our securities. 29




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Equity Compensation Plan Information As of June 30, 2004, we did not have any equity compensation plans. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with the Manager Our Manager is entitled to receive from us a management fee of up to 0.25% of
our aggregate capital contributions, paid monthly in arrears. The amount of
management fees paid to our Manager for the fiscal years ended June 30, 2004
and 2003 approximated $1,025,000 and $793,000, respectively. As of June 30, 2004 and June 30, 2003, we owed our Manager approximately
$1,503,000 and $2,397,000, respectively, generally for foreclosure and property
maintenance costs advanced on our behalf and distributions due related to units
owned by our Manager. As of June 30, 2004, Vestin Mortgage had an investment in us of approximately
$1.1 million, which consists of certain costs paid on our behalf related to the
registration and start-up costs. Vestin Mortgage has received 110,000 units
from us related to this investment. From time to time we may acquire or sell investments in mortgage loans from/to
our Manager or other related parties pursuant to the terms of our Operating
Agreement provided the price does not exceed the original cost. No gain or
loss is recorded on these transactions as it is not our intent to make a profit
on the purchase or sale of such investments. The purpose is generally to
diversify our portfolio by syndicating loans, thereby providing us with
additional capital to make additional loans. During the fiscal year ended June 30, 2003, we sold $500,855 in mortgage loans
to our Manager. During the fiscal year ended June 30, 2003, we purchased $6,816,905 in mortgage
loans from our Manager. During March 2004, we foreclosed on two loans and took title to the related
properties, which consisted of two undeveloped parcels of land in Austin and
Cedar Park, Texas. The current carrying value of the properties is $3,231,899.
During September 2004, our Manager estimated the current value of the
properties to be $1,650,000 based on updated appraisals. Subsequently, our
Manager agreed to acquire the rights to any future judgments related to the
personal guarantees associated with the loans in exchange for $3,565,795 which
is the estimated deficiency on the value of the properties. This transaction
will result in a net gain of $1,983,896 in the quarter ending
September 30, 2004 which is derived from the recovery of a
previously recorded valuation allowance. Transactions with the Funds We buy interests in loans
from, and sell interests in loans to, various related parties,
including Vestin Funds I and III primarily in order to diversify our
loan portfolio by spreading our investments among a broader pool of
loans. Such interests are generally bought and sold at par value, in
other words, we do not seek to profit from a sale to a related party
nor do we purchase loan interests at a mark-up from related parties. During the fiscal years ended June 30, 2004 and 2003, we purchased $10,000,000
and $17,725,212, respectively, in mortgage loans from Vestin
Fund I. During the fiscal years ended June 30, 2004 and 2003, we sold $806,489 and
$15,249,950, respectively, in mortgage loans to Vestin Fund I. During the fiscal year ended June 30, 2004, we sold $10,000,000 in mortgage
loans to Vestin Fund III. Transactions with other related parties During the fiscal year ended June 30, 2003, we purchased $15,023,151 in
mortgage loans from Vestin Group. During the fiscal year ended June 30, 2003, we sold $4,500,000 in mortgage
loans to Vestin Group. During the fiscal year ended
June 30, 2003, we purchased $4,657,844 in mortgage
loans from inVestin Nevada, Inc., a company wholly-owned by our Managers Chief
Executive Officer, and $1,000,000 in mortgage loans from LTD, Inc., a company
wholly-owned by our Managers Chief Executive Officer. 30




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During the fiscal years ended June 30, 2003, we sold $2,674,950 in mortgage
loans to inVestin Nevada, Inc. During the year ended
June 30, 2004, we paid $17,172 for legal fees to a law
firm in which the Secretary of Vestin Group has an equity ownership interest. During the year ended
June 30, 2004, we paid $4,965 to L.L. Bradford &
Company, LLC, a certified public accounting firm for accounting services.
Vestin Mortgages Chief Financial Officer, Treasurer, Secretary and Director is
an equity owner in that firm. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES During the fiscal years ended June 30, 2004 and June 30, 2003, Ernst & Young,
LLP (E&Y) provided various audit, audit related and non-audit services to us
as follows: June 30, 2004
    
    June 30, 2003Audit Fees
    
    $
    
    
    
    $
    113,332Audit Related Fees
    
    $
    
    
    
    $
    0Tax Fees
    
    $
    
    
    
    $
    0All Other Fees
    
    $
    
    
    
    $
    86,279
 During the fiscal year ended June 30, 2004, Moore Stephens Wurth Frazer and
Torbet, LLP (Moore Stephens) provided various audit, audit related and
non-audit services to us as follows: June 30, 2004Audit Fees
    
    $
    21,991Audit Related Fees
    
    $
    21,395Tax Fees
    
    $
    0All Other Fees
    
    $
    1,760
 The Audit Committee of Vestin Group (the Audit Committee) has considered
whether provision of the services described regarding audit related fees, tax
fees and all other fees above were compatible with maintaining the independent
accountants independence and has determined that such services did not
adversely affect E&Ys or Moore Stephens independence. The Audit Committee has direct responsibility to review and approve the
engagement of the independent auditors to perform audit services or any
permissible non-audit services. All audit and non-audit services to be provided
by the independent auditors must be approved in advance by the Audit Committee.
The Audit Committee may not engage the independent auditors to perform specific
non-audit services proscribed by law or regulation. All services performed by
independent auditors under engagements entered into on or after May 6, 2003,
were approved by the Audit Committee pursuant to its pre-approval policy, and
none was approved pursuant to the de minimusexception to the rules and
regulations of the Securities and Exchange Commission on pre-approval. 31




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (a)
    
    The financial statement are contained on Pages F-2 through F-24 on this
Annual Report on Form 10-K, and the list of the financial statements
contained herein is set forth on page F-1, which is hereby incorporated by
reference.(b)
    
    Reports on Form 8-K. The Company did not have any Current Reports on
Form 8-K filing during the fourth fiscal quarter of 2004.(c) EXHIBIT INDEX Exhibit No.
    
    Description3.1(1)
    
    Articles of Organization3.2(2)
    
    Amended and Restated Operating Agreement (included
as Exhibit A to the Companys prospectus)10.1
    
    Assignment Agreement, dated January 23, 2004, by
and between Vestin Mortgage, Inc., Vestin Fund I,
LLC, Vestin Fund II, LLC, Owens Financial Group,
Inc. and Owens Mortgage Investment Fund10.2
    
    Intercreditor Agreement, dated January 17, 2003, by
and among Vestin Mortgage, Inc., Vestin Fund I,
LLC, Vestin Fund II, LLC and Western United Life
Assurance Company10.3
    
    Intercreditor Agreement, dated April 22, 2004, by
and between Vestin Mortgage, Inc. and Owens
Mortgage Investment Fund10.4
    
    Intercreditor Agreement, dated June 24, 2004, by
and between Vestin Mortgage, Inc. and Owens
Mortgage Investment Fund10.5
    
    Participation Agreement, dated May 13, 2004, by and
among Vestin Fund I, LLC, Vestin Fund II, LLC,
Vestin Fund III, LLC and Royal Bank of America31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to U.S.C. 18 Section 1350
  (1)
    
    Incorporated herein by reference to our Form S-11 Registration
Statement filed on December 21, 2000 (File No. 333-52484).(2)
    
    Incorporated herein by reference to Post-Effective Amendment No. 4
to our Form S-11 Registration Statement filed on October 23, 2003
(File No. 333-52484). 32




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION PAGEREPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2FINANCIAL STATEMENTSBalance Sheets
    
    
    F-3Statements of Income
    
    
    F-4Statements of Members Equity
    
    
    F-5Statements of Cash Flows
    
    
    F-6Notes to Financial Statements
    
    
    F-7SUPPLEMENTARY INFORMATIONMortgage Loans on Real Estate:Mortgage Loan Rollforward
    
    
    F-20Mortgage Loans by Type of Property
    
    
    F-21Mortgage Loans by Lien Position
    
    
    F-22Mortgage Loans that Exceed Three Percent of the Portfolio
    
    
    F-23
 F-1




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##### Table of Contents



Report of Independent
Registered Public Accounting Firm Members of Vestin Fund II, LLC We have audited the accompanying balance sheets of Vestin Fund II, LLC (the
Company) as of June 30, 2004 and 2003, and the related statements of income,
members equity, and cash flows for the years ended June 30, 2004, and 2003.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vestin Fund II, LLC as of June
30, 2004 and 2003, and the results of its operations and its cash flows for the
years ended June 30, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The supplemental schedules are
presented for purposes of additional analysis and is not a required part of the
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole. /s/ Moore Stephens Wurth Frazer and Torbet, LLP
Orange, California
September 3, 2004 F-2




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##### Table of Contents



Vestin Fund II, LLC BALANCE SHEETS ASSETS JUNE 30, 2004
    
    JUNE 30, 2003Cash
    
    $
    11,936,734
    
    
    $
    5,740,806Certificates of deposit
    
    
    2,425,000
    
    
    
    11,075,000Interest and other receivables
    
    
    4,223,499
    
    
    
    3,898,231Due from Vestin Fund I
    
    
    2,987,340
    
    
    
    216,171Investment in mortgage loans, net of allowance for loan losses
of $9,500,000 and $9,200,000 at June 30, 2004, and
June 30, 2003, respectively
    
    
    303,853,086
    
    
    
    338,681,325Real estate held for sale
    
    
    33,971,610
    
    
    
    15,833,099Note receivable from Vestin Fund I
    
    
    4,278,322
    
    
    
    4,599,192Assets under secured borrowings
    
    
    61,924,186
    
    
    
    26,729,643$
    425,599,777
    
    
    $
    406,773,467LIABILITIES AND MEMBERS EQUITYLiabilitiesAccounts payable
    
    $
    337,282
    
    
    $
    118,503Due to Manager
    
    
    1,502,964
    
    
    
    2,328,150Due to Vestin Group
    
    
    384,826
    
    
    
    407,564Line of credit
    
    
    
    
    
    
    2,000,000Secured borrowings
    
    
    61,924,186
    
    
    
    26,729,643Deferred income
    
    
    381,208
    
    
    
    Total liabilities
    
    
    64,530,466
    
    
    
    31,583,860Members equity  authorized 50,000,000 units at $10 per unit,
36,804,169 units issued and outstanding at June 30, 2004,
and 38,602,848 units issued and outstanding
at June 30, 2003
    
    
    361,069,311
    
    
    
    375,189,607Total members equity
    
    
    361,069,311
    
    
    
    375,189,607Total liabilities and members equity
    
    $
    425,599,777
    
    
    $
    406,773,467
 The accompanying notes are an integral part of these statements. F-3




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##### Table of Contents



Vestin Fund II, LLC STATEMENTS OF INCOME FOR THE YEAR ENDED JUNE 30,2004
    
    2003
    
    2002(unaudited)RevenuesInterest income from investment in
mortgage loans
    
    $
    38,824,787
    
    
    $
    39,540,998
    
    
    $
    14,798,164Revenue related to the sale of real estate
    
    
    2,333,333
    
    
    
    
    
    
    
    Other income
    
    
    2,311,173
    
    
    
    771,537
    
    
    
    492,181Total revenues
    
    
    43,469,293
    
    
    
    40,312,535
    
    
    
    15,290,345Operating expensesManagement fees
    
    
    1,025,437
    
    
    
    792,758
    
    
    
    323,610Provision for loan losses
    
    
    2,604,766
    
    
    
    8,700,000
    
    
    
    500,000Interest expense
    
    
    5,680,585
    
    
    
    3,307,293
    
    
    
    Write-off of deferred offering costs
    
    
    
    
    
    
    1,094,042
    
    
    
    Valuation adjustments on real estate held for sale
    
    
    9,990
    
    
    
    
    
    
    
    Expenses related to real estate held for sale
    
    
    1,558,903
    
    
    
    2,073,040
    
    
    
    Professional fees
    
    
    676,442
    
    
    
    
    
    
    
    Other
    
    
    182,411
    
    
    
    574,098
    
    
    
    44,411Total operating expenses
    
    
    11,738,534
    
    
    
    16,541,231
    
    
    
    868,021NET INCOME
    
    $
    31,730,759
    
    
    $
    23,771,304
    
    
    $
    14,422,324Net income allocated to members
    
    $
    31,730,759
    
    
    $
    23,771,304
    
    
    $
    14,422,324Net income allocated to members per
weighted average membership units
    
    $
    0.86
    
    
    $
    0.76
    
    
    $
    1.19Weighted average membership units
    
    
    36,714,812
    
    
    
    31,430,793
    
    
    
    12,114,955
 The accompanying notes are an integral part of these statements. F-4




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##### Table of Contents



Vestin Fund II, LLC STATEMENTS OF MEMBERS EQUITY Units
    
    AmountMembers equity at June 30, 2001 (1)
    
    
    1,058,916
    
    
    $
    10,589,161Issuance of units (1)
    
    
    21,941,130
    
    
    
    218,326,665Distributions (1)
    
    
    
    
    
    
    (13,259,687
    )Reinvestments of distributions (1)
    
    
    248,001
    
    
    
    2,480,011Members redemptions (1)
    
    
    (8,210
    )
    
    
    (82,104
    )Net income (1)
    
    
    
    
    
    
    14,422,325Members equity at June 30, 2002
    
    
    23,239,836
    
    
    
    232,476,371Issuance of units
    
    
    15,698,394
    
    
    
    156,983,941Distributions
    
    
    
    
    
    
    (34,688,196
    )Reinvestments of distributions
    
    
    941,883
    
    
    
    9,418,832Members redemptions
    
    
    (1,277,265
    )
    
    
    (12,772,645
    )Net income
    
    
    
    
    
    
    23,771,304Members equity at June 30, 2003
    
    
    38,602,848
    
    
    
    375,189,607Issuance of units
    
    
    2,667,677
    
    
    
    26,676,765Distributions
    
    
    
    
    
    
    (29,097,371
    )Reinvestments of distributions
    
    
    782,333
    
    
    
    7,823,331Members redemptions
    
    
    (5,248,689
    )
    
    
    (51,253,780
    )Net income
    
    
    
    
    
    
    31,730,759Members equity at June 30, 2004
    
    
    36,804,169
    
    
    $
    361,069,311(1)Unaudited transition period
 The accompanying notes are an integral part of these statements. F-5




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##### Table of Contents



Vestin Fund II, LLC

 

STATEMENTS OF CASH FLOWS FOR THEFOR THE
    
    FOR THE
    
    YEAR ENDEDYEAR ENDED
    
    YEAR ENDED
    
    JUNE 30, 2002JUNE 30, 2004
    
    JUNE 30, 2003
    
    (unaudited)Cash flows from operating activities:Net income
    
    $
    31,730,759
    
    
    $
    23,771,304
    
    
    $
    14,422,324Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    2,604,766
    
    
    
    8,700,000
    
    
    
    500,000Writedown of real estate held for sale
    
    
    9,990
    
    
    
    2,073,040
    
    
    
    Change in operating assets and liabilities:Interest and other receivables
    
    
    (444,220
    )
    
    
    (2,070,149
    )
    
    
    (2,181,545
    )Real estate held for sale
    
    
    
    
    
    
    109,696
    
    
    
    Other assets
    
    
    
    
    
    
    (838,405
    )
    
    
    (255,637
    )Due from Vestin Fund I
    
    
    (2,771,169
    )
    
    
    
    
    
    
    Due from related party
    
    
    
    
    
    
    258,575
    
    
    
    Deferred bond offering costs
    
    
    
    
    
    
    1,094,042
    
    
    
    Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    Accounts payable
    
    
    218,779
    
    
    
    118,503
    
    
    
    Due to Manager
    
    
    (1,072,418
    )
    
    
    512,647
    
    
    
    650,765Due to Vestin Group
    
    
    (22,738
    )
    
    
    
    
    
    
    Deferred income
    
    
    381,208
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    30,634,957
    
    
    
    33,729,253
    
    
    
    13,135,907Cash flows from investing activities:Investments in mortgage loans on real estate
    
    
    (215,224,768
    )
    
    
    (273,391,126
    )
    
    
    (278,750,297
    )Purchase of mortgage loans from:Vestin Fund I
    
    
    (10,000,000
    )
    
    
    (17,725,212
    )
    
    
    (21,954,763
    )Manager
    
    
    
    
    
    
    (7,076,770
    )
    
    
    Vestin Group
    
    
    
    
    
    
    (15,023,151
    )
    
    
    (10,000,000
    )Other related party
    
    
    
    
    
    
    (5,657,844
    )
    
    
    Private investor
    
    
    (32,653,318
    )
    
    
    (44,304,265
    )
    
    
    Repayment of secured borrowing
    
    
    (2,441,746
    )
    
    
    
    
    
    
    Proceeds received from sale of mortgage loans to:Vestin Fund I
    
    
    806,489
    
    
    
    15,249,950
    
    
    
    10,000,000Vestin Fund III
    
    
    10,000,000
    
    
    
    
    
    
    
    Manager
    
    
    
    
    
    
    500,855
    
    
    
    4,026,598Vestin Group
    
    
    
    
    
    
    4,500,000
    
    
    
    Other related party
    
    
    
    
    
    
    2,674,950
    
    
    
    Private investor
    
    
    77,928,185
    
    
    
    85,027,158
    
    
    
    26,692,135Proceeds from loan payoff
    
    
    183,047,755
    
    
    
    110,746,534
    
    
    
    55,901,474Capital outlays on real estate held for sale
    
    
    
    
    
    
    
    
    
    
    Assets transferred from Vestin Group
    
    
    
    
    
    
    (2,000,000
    )
    
    
    Purchase of investments in real estate held for sale
    
    
    (454,162
    )
    
    
    
    
    
    
    Proceeds from sale of real estate held for sale
    
    
    3,753,591
    
    
    
    
    
    
    
    Purchase of investment in certificates of deposit
    
    
    (265,239
    )
    
    
    (4,650,000
    )
    
    
    Proceeds from investment in certificates of deposit
    
    
    8,915,239
    
    
    
    
    
    
    
    (6,175,000
    )Net cash provided by (used in) investing activities
    
    
    23,412,026
    
    
    
    (151,128,921
    )
    
    
    (220,259,853
    )Cash flows from financing activities:Proceeds from issuance of membership units
    
    
    26,676,765
    
    
    
    156,983,941
    
    
    
    218,326,665Members distributions, net of reinvestments
    
    
    (21,274,040
    )
    
    
    (25,269,364
    )
    
    
    (10,779,676
    )Members withdrawals
    
    
    (51,253,780
    )
    
    
    (12,772,645
    )
    
    
    (82,103
    )Proceeds from draws on line of credit
    
    
    
    
    
    
    5,000,000
    
    
    
    Payment of line of credit
    
    
    (2,000,000
    )
    
    
    (3,000,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (47,851,055
    )
    
    
    120,941,932
    
    
    
    207,464,886NET CHANGE IN CASH
    
    
    6,195,928
    
    
    
    3,542,264
    
    
    
    340,940Cash, beginning of period
    
    
    5,740,806
    
    
    
    2,198,542
    
    
    
    1,857,602Cash, ending of period
    
    $
    11,936,734
    
    
    $
    5,740,806
    
    
    $
    2,198,542Supplemental disclosures of cash flows information:Non-cash investing and financing activities:Loans funded through secured borrowing
    
    $
    37,636,289
    
    
    $
    26,729,643
    
    
    $
    Real estate held for sale acquired through foreclosure
    
    $
    15,456,184
    
    
    $
    16,046,378
    
    
    $
    Due to Manager assumed through foreclosure
    
    $
    
    
    
    $
    745,159
    
    
    $
    Sale of rights to receive proceeds of guarantee
    
    $
    
    
    
    $
    1,714,926
    
    
    $
    Conversion of debt offering costs to membership units
    
    $
    
    
    
    $
    
    
    
    $
    1,100,000Deferred debt offering cost paid by Manager
    
    $
    
    
    
    $
    
    
    
    $
    255,637Loans
rewritten with the same or similar property as collateral
    
    $
    41,331,273
    
    
    $
    35,582,931
    
    
    $
    
 The accompanying notes are an integral part of these statements. F-6




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##### Table of Contents



NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Organization Vestin Fund II, LLC, a Nevada limited liability company (the Company), is
primarily engaged in the business of mortgage lending. The Company invests in
loans secured by real estate through deeds of trust and mortgages. The Company
was organized in December 2000 and will continue until December 31, 2020 unless
dissolved prior thereto or extended by vote of the members under the provisions
of the Companys Operating Agreement. The manager of the Company is Vestin Mortgage, Inc. (the Manager), a Nevada
corporation engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property. The Manager is a wholly owned
subsidiary of Vestin Group, Inc., a Delaware corporation
(Vestin Group), whose common stock is
publicly held and is traded on the Nasdaq SmallCap Market under the ticker symbol
VSTN. Through its subsidiaries, Vestin Group is engaged in asset management,
real estate lending and other financial services and has originated over $1.8
billion in real estate loans. The Operating Agreement provides that the
Manager controls the daily operating activities of the Company; including the
power to assign duties, to determine how to invest the Companys assets, to
sign bills of sale, title documents, leases, notes, security agreements,
mortgage investments and contracts, and to assume direction of the business
operations. As a result, the operating results of the Company are dependent on
the Managers ability and intent to continue to service the Companys assets.
The Operating Agreement also provides that the members have certain rights,
including the right to terminate the Manager subject to a majority vote of the
members. Vestin Mortgage, Inc. is also the manager of Vestin Fund I, LLC, (Fund I),
Vestin Fund III, LLC (Fund III) and inVestin Nevada, Inc., entities in the
similar business as the Company. See Note H for detail of transactions with the Manager. 2. Management Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. 3. Income Taxes Income tax effects resulting from the Companys operations pass through to the
members individually and, accordingly, no provision for income taxes is
included in the financial statements. 4. Cash and Cash Equivalents Cash and cash equivalents include interest-bearing and noninterest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less (see Note B). 5. Investments in Mortgage Loans Investments in mortgage loans are secured by trust deeds and mortgages.
Generally, all of the Companys mortgage loans require interest only payments
with a balloon payment of the principal at maturity. The Company has both the
intent and ability to hold mortgage loans until maturity and therefore,
mortgage loans are classified and accounted for as held for investment and are
carried at amortized cost. Loans sold to or purchased from affiliates are
accounted for at the principal balance and no gain or loss is recognized by the
Company or any affiliate. Loan to value ratios are based on appraisals
obtained at the time of loan origination and may not reflect subsequent changes
in value F-7




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##### Table of Contents



estimates. Such appraisals, which may be commissioned by the borrower, are
generally dated within 12 months of the date of loan origination. The
appraisals may be for the current estimate of the as-if developed value of
the property, which approximates the post-construction value of the
collateralized property assuming that such property is developed. As-if
developed values on raw land loans or acquisition and development loans often
dramatically exceed the immediate sales value and may include anticipated
zoning changes and timely successful development by the purchaser. As most of
the appraisals will be prepared on an as-if developed basis, if a loan goes
into default prior to any development of a project, the market value of the
property may be substantially less than the appraised value. As a result,
there may be less security than anticipated at the time the loan was originally
made. If there is less security and a default occurs, the Company may not
recover the full amount of the loan. The Company also invests in mortgage loans that have interest reserves. Loans
with interest reserves require the borrowers to maintain interest reserves
funded from the principal amount of the loan for a period of time. At June 30,
2004 and June 30, 2003, the Company had outstanding principal on mortgage loans
that had interest reserves of approximately $93,996,000 and $63,306,000,
respectively, and interest reserves in the amount of approximately $8,807,000
and $3,716,000, respectively. The Company also sells full or partial interests in loans to related and third
parties at the discretion of the Manager. During the fiscal years ended June
30, 2004 and 2003, the Company sold loans to third parties in the amount of
$77,928,000 and $85,027,000, respectively. During the fiscal years ended June
30, 2004 and 2003, the Company sold loans to related parties in the amount of
$12,181,000 and $22,926,000, respectively. During the fiscal years ended June
30, 2004 and 2003, the Company purchased loans from third parties in the amount
of $32,653,000 and $44,533,000, respectively. During the fiscal years ended
June 30, 2004 and 2003, the Company purchased loans from related parties in the
amount of $10,000,000 and $45,254,000, respectively. The sale of all loans
resulted in no gain or loss in the accompanying financial statements. 6. Revenue Recognition Interest is recognized as revenue when earned according to the terms of the
loans, using the effective interest method. The Company does not recognize
interest income on 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. Cash receipts will be allocated to interest
income, except when such payments are specifically designated by the terms of
the loan as principal reduction or when management does not believe the
Companys investment in the loan is fully recoverable. 7. Allowance for Loan Losses The Company maintains an allowance for loan losses on its investment in
mortgage loans for estimated credit losses in the Companys investment in
mortgage loans portfolio. The Managers estimate of losses is based on a number
of factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrowers ability to repay, prevailing
economic conditions and the underlying collateral securing the loan. Additions
to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors which may indicate estimated losses on the loans.
Actual losses on loans are recorded as a charge-off or a reduction to the
allowance for loan losses. Subsequent recoveries of amounts previously charged
off are added back to the allowance or included in income when the property is
sold. 8. Real Estate Held For Sale Real estate held for sale includes real estate acquired through foreclosure and
will be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the propertys estimated fair value, less estimated costs to
sell. 9. Secured Borrowings As of June 30, 2004, the Company had secured borrowings of $61.9 million
related to intercreditor agreements with various loan participants
(Investors). Pursuant to the intercreditor agreements, the Investor may
invest in certain loans with Vestin Mortgage, Fund I, Fund III
and the Company (collectively, the Lead Lenders). In F-8




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the event of borrower
non-performance, the intercreditor agreements provide that the
Lead Lenders must either (i) continue to remit to the Investor the
interest due on the participation amount; (ii) substitute an alternative loan
acceptable to the Investor; or (iii) repurchase the participation from the
Investor for the outstanding balance of the participation plus accrued
interest. Additionally, an Investor may participate in certain loans with Lead Lenders
through participation agreements. Pursuant to the participation agreements,
the Investor may invest in certain loan or loans with the Lead Lenders. In the
event of borrower non-performance, the participation agreement allows the
Investor to be repaid up to the amount of the Investors investment prior to
the Lead Lenders being repaid. Mortgage loan financing under the intercreditor and participation agreements
are accounted for as a secured borrowing in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. 10. Fair Value of Financial Instruments The Financial Accounting Standards Boards Statement No. 107, Disclosures about
Fair Value of Financial Instruments, requires the determination of fair value
of the Companys financial assets. The following methods and assumptions were
used to estimate the fair value of financial statements included in the
following categories:  (a)
    
    Certificate of Deposits and Short Term Investments: The carrying
amount of these instruments are at amortized cost which approximates
fair value.(b)
    
    Investment in Mortgage Loans: The carrying value of these
instruments, net of the allowance for loan losses, approximates the
fair value due to their short-term maturities. Fair values for loans,
which are delinquent and/or in foreclosure are indeterminable at this
time as no ready market exists for these loans, but fair value may be
significantly below the current carrying value.(c)
    
    Assets under Secured Borrowing. The carrying amount of these
instruments approximate fair value. The fair value is estimated based
upon projected cash flows discounted at the estimated current interest
rates at which similar loans would be made. 11. Net Income Allocated to Members Net income allocated to members is computed by dividing income available to
members by the weighted average number of membership units outstanding for the
year. 12. Segments The Company operates as one business segment. 13. Reclassifications Certain reclassifications have been made to the prior years financial
statements to conform with the current year presentation. NOTE B  FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments with concentration of credit and market risk include cash
and loans secured by trust deeds. The Company maintains cash deposit accounts and certificates of deposit which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash. As of June 30, 2004 and 2003, the Company had $11,205,000
and $15,616,000, respectively, in excess of the federally insured limits. As of June 30, 2004, 29% of the Companys mortgage loans were in Nevada
compared to 31% at June 30, 2003 and F-9




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##### Table of Contents



25% of the Companys mortgage loans were in California compared to 13% at June
30, 2003. As a result of this geographical concentration of the Companys
mortgage loans, a downturn in the local real estate markets in Nevada and/or
California could have a material adverse effect on the Company. At June 30, 2004, the aggregate amount of loans to the Companys three largest
borrowers represented 21% of the Companys total investment in mortgage loans.
These mortgage loans consisted of construction, commercial, and bridge loans,
located in Arizona, Nevada and California, with a first lien position, earning
between 10% and 13.5%, outstanding balances of approximately $66,654,000 and
maturing from August 2004 through March 2006. At June 30, 2003, the aggregate
amount of loans to the Companys three largest borrowers represented 17% of the
Companys total mortgage loans. These mortgage loans consisted of construction
and commercial loans, located in Arizona, Nevada, and California, with a first
lien position, earning between 12% and 13.5%, outstanding balances of
approximately $69,334,000 and maturing from August 2003 through November 2003.
Because the Company has a significant concentration of credit risk with its
three largest borrowers, a default by any of such borrowers could have a
material adverse effect on the Company. Substantially all of the Companys mortgage loans will require the borrower to
make a balloon payment of the principal at maturity. The success of a
borrowers ability to repay its mortgage loan obligation in a large lump-sum
payment may be dependent upon the borrowers ability to refinance the
obligation or otherwise raise a substantial amount of cash. An increase in
interest rates over the mortgage rate applicable at origination of the loan may
have an adverse effect on the borrowers ability to refinance. NOTE C  INVESTMENT IN MORTGAGE LOANS The Company has six mortgage loan products consisting of land, construction,
commercial building, bridge, residential, and acquisition and development
loans. Mortgage loans have effective interest rates ranging from 5.5% to 14.5%
and 5.5% to 15% at June 30, 2004 and 2003, respectively. Revenue by product
will fluctuate based upon relative balances during the period. Investments in mortgage loans as of June 30, 2004 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance(1)
    
    Interest Rate
    
    Percentage
    
    To Value(2)Acquisition and development
    
    
    9
    
    
    $
    70,320,391
    
    
    
    9.48
    %
    
    
    22.04
    %
    
    
    64.22
    %Bridge
    
    
    17
    
    
    
    52,362,686
    
    
    
    10.11
    %
    
    
    16.41
    %
    
    
    48.03
    %Commercial
    
    
    14
    
    
    
    77,209,538
    
    
    
    12.07
    %
    
    
    24.20
    %
    
    
    65.95
    %Construction
    
    
    7
    
    
    
    58,606,178
    
    
    
    11.95
    %
    
    
    18.37
    %
    
    
    62.49
    %Land
    
    
    8
    
    
    
    60,562,146
    
    
    
    9.95
    %
    
    
    18.98
    %
    
    
    57.31
    %55
    
    
    $
    319,060,939
    
    
    
    10.90
    %
    
    
    100.00
    %
    
    
    60.55
    %
 (1) The following table reconciles the balance of the loan portfolio to the
amount shown on the accompanying Balance Sheet. The contra accounts represent
the amount of real estate held for sale sold to third parties where the Company
provided financing. GAAP requires the borrower to have a certain percentage
equity ownership (typically 20%) to allow the Company to record the sale of a
property. In addition, the borrower must maintain a minimum commitment in the
property on a continuing basis. Therefore, until the borrower meets this
requirement, the investment in the new loan is reduced by the amount originally
invested in the real estate held for sale. June 30, 2004
    
    June 30, 2003Balance
    
    BalanceBalance per Loan Portfolio
    
    $
    319,060,939
    
    
    $
    347,881,325Less:Seller financed loans included in real estate held for sale
    
    
    (5,707,853
    )
    
    
    Allowance for Loan Losses
    
    
    (9,500,000
    )
    
    
    (9,200,000
    )Balance per Balance Sheet
    
    $
    303,853,086
    
    
    $
    338,681,325
 F-10




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##### Table of Contents



(2) 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 no greater than 12 months prior to the date of
loan origination and may have been commissioned by the borrower. The appraisals
may be for the current estimate of the as-if developed value of the property,
and which approximates the post-construction value of the collateralized
property assuming that such property is developed. As-if developed values on
raw land loans or acquisition and development loans often dramatically exceed
the immediate sales value and may include anticipated zoning changes, selection
by a purchaser against multiple alternatives, and successful development by the
purchaser; upon which development is dependent on availability of financing.
As most of the appraisals will be prepared on an as-if developed basis, if a
loan goes into default prior to any development of a project, the market value
of the property may be substantially less than the appraised value. As a
result, there may be less security than anticipated at the time the loan was
originally made. If there is less security and a default occurs, we may not
recover the full amount of the loan. Investments in mortgage loans as of June 30, 2003 are as follows: Number
    
    
    
    
    
    WeightedLoan
    
    of
    
    
    
    
    
    Average
    
    Portfolio
    
    LoanType
    
    Loans
    
    Balance***
    
    Interest Rate
    
    Percentage
    
    To Value*Acquisition and development
    
    
    5
    
    
    $
    29,147,011
    
    
    
    12.60
    %
    
    
    8.37
    %
    
    
    44.26
    %Bridge
    
    
    6
    
    
    
    17,408,179
    
    
    
    11.92
    %
    
    
    5.00
    %
    
    
    65.99
    %Commercial
    
    
    27
    
    
    
    147,747,322
    
    
    
    11.67
    %
    
    
    42.47
    %
    
    
    64.85
    %Construction
    
    
    16
    
    
    
    116,106,164
    
    
    
    13.34
    %
    
    
    33.38
    %
    
    
    60.05
    %Land
    
    
    10
    
    
    
    24,303,120
    
    
    
    12.70
    %
    
    
    6.99
    %
    
    
    48.15
    %Residential
    
    
    7
    
    
    
    13,169,529
    
    
    
    13.79
    %
    
    
    3.79
    %
    
    
    66.76
    %71
    
    
    $
    347,881,325
    
    
    
    12.53
    %
    
    
    100.00
    %
    
    
    59.47
    %
 *** Please see footnote (1) above.
*Please see footnote (2) above. June 30, 2004
    
    Portfolio
    
    June 30, 2003
    
    PortfolioLoan Type
    
    Balance***
    
    Percentage
    
    Balance***
    
    PercentageFirst mortgages
    
    $
    316,497,670
    
    
    
    99.20
    %
    
    $
    345,887,427
    
    
    
    99.43
    %Second mortgages(3)
    
    
    2,563,269
    
    
    
    0.80
    %
    
    
    1,993,898
    
    
    
    0.57
    %$
    319,060,939
    
    
    
    100.00
    %
    
    $
    347,881,325
    
    
    
    100.00
    %
 *** Please see footnote (1) above.
(3) All of the Companys second mortgages are junior to a first trust deed
position held by either the Company or the Companys Manager. The following is a schedule of maturities of investments in mortgage loans as
of June 30, 2004: 2004
    
    $
    134,536,0732005
    
    
    133,515,8232006
    
    
    51,009,043$
    319,060,939
 F-11




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##### Table of Contents



The following is a schedule by geographic location of investments in mortgage
loans: June 30, 2004
    
    Portfolio
    
    June 30, 2003
    
    PortfolioBalance***
    
    Percentage
    
    Balance***
    
    PercentageArizona
    
    $
    45,321,607
    
    
    
    14.20
    %
    
    $
    54,080,498
    
    
    
    15.56
    %California
    
    
    80,868,704
    
    
    
    25.35
    %
    
    
    45,636,450
    
    
    
    13.12
    %Colorado
    
    
    
    
    
    
    
    
    
    
    4,137,548
    
    
    
    1.19
    %Florida
    
    
    656,063
    
    
    
    0.21
    %
    
    
    4,599,543
    
    
    
    1.32
    %Hawaii
    
    
    34,283,186
    
    
    
    10.75
    %
    
    
    17,537,923
    
    
    
    5.04
    %Nevada
    
    
    91,349,216
    
    
    
    28.63
    %
    
    
    104,308,196
    
    
    
    29.98
    %New York
    
    
    19,998,445
    
    
    
    6.27
    %
    
    
    6,231,259
    
    
    
    1.79
    %North Carolina
    
    
    1,610,058
    
    
    
    0.50
    %
    
    
    
    
    
    
    Ohio
    
    
    
    
    
    
    
    
    
    
    12,629,726
    
    
    
    3.63
    %Oregon
    
    
    
    
    
    
    
    
    
    
    4,395,115
    
    
    
    1.26
    %Texas
    
    
    44,973,660
    
    
    
    14.09
    %
    
    
    94,325,067
    
    
    
    27.11
    %$
    319,060,939
    
    
    
    100.00
    %
    
    $
    347,881,325
    
    
    
    100.00
    %
 *** Please see footnote (1) above. At June 30, 2004, five of the Companys loans were non-performing (more than 90
days past due on principal or interest payments) totaling $46.0 million. The
Manager evaluated the loans and concluded that the underlying collateral was
sufficient to protect against a loss of principal or interest with the
exception of the loans described below. The Manager will continue to evaluate
these loans to determine if an allowance for loan losses should be recorded. Balance at June 30,
    
    
    
    
    
    Number of MonthsDescription of Collateral
    
    2004
    
    Maturity Date
    
    Non-Performing126 unit assisted living facility in Phoenix, AZ
    
    $
    13,664,188
    
    
    
    6/25/2005
    
    
    
    2126 unit Ramada Inn Hotel in Mesquite, NV
    
    
    4,599,733
    
    
    
    6/18/2003
    
    
    
    12460 acre subdivision in Lake Travis, TX
    
    
    3,381,354
    
    
    
    3/8/2003
    
    
    
    15Partially completed 18 hole golf course in Lake
Travis, TX
    
    
    12,095,763
    
    
    
    8/1/2003
    
    
    
    10Office building in Farmers Branch, TX
    
    
    12,310,430
    
    
    
    6/3/2005
    
    
    
    7$
    46,051,468
 Management periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential losses. Additions
to the allowance for loan losses are made by charges to the provision for loan
losses. Recoveries of previously charged off amounts are credited to the
allowance for loan losses or included as income when the property is sold. As
of June 30, 2004, the Manager had provided for $2.5 million as a general
allowance for loan losses. The Manager evaluated the loans and concluded that
the underlying collateral was sufficient to protect the Company against further losses
of principal or interest. The Manager will continue to evaluate these loans in
order to determine if any other allowance for loan losses should be recorded. Because of the fact that any decision regarding the allowance for loan losses
reflects a judgment about the probability of future events, there is an
inherent risk that such judgments will prove incorrect. In such event, actual
losses may exceed (or be less than) the amount of any reserve. To the extent
that we experience losses greater than the amount of our reserves, we may incur
a charge to our earnings that will adversely affect our operating results and
the amount of any distributions payable to the Companys members. F-12




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##### Table of Contents



The following is a rollforward of the general allowance for loan losses for the
year ended June 30, 2004: Balance at June 30,
    
    
    
    
    
    
    
    
    
    Balance at June 30,Description
    
    2003
    
    Provisions
    
    Decuctions(2)
    
    2004General ValuationAllowance
    
    $
    1,500,000
    
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    2,500,000Specific allowance
(1)
    
    
    7,700,000
    
    
    
    
    
    
    
    (700,000
    )
    
    
    7,000,000General Valuation
Allowance
    
    $
    9,200,000
    
    
    $
    1,000,000
    
    
    $
    (700,000
    )
    
    $
    9,500,000
 (1)In addition to the general allowance for loan losses the Company has
re-evaluated the underlying collateral for one of the above mentioned loans
with a principal balance of $13.0 million. The collateral is 570 acres of land
near Austin, Texas. The Company made the loan for construction of an 18-hole
golf course and clubhouse. The Company has obtained estimates of current value
for the partially completed golf course and estimates of the costs to complete
construction. Based on those estimates, the Company provided a specific
allowance for loan loss of $7.0 million during the year ended June 30, 2003
related to this impaired loan. Subsequent to June 30, 2004, foreclosure was
completed on this property and the Company took ownership as real estate held
for sale. The Company is diligently assessing its options for a sale of the
property as quickly as circumstances permit. (2)During the year ended June 30, 2003 the Company foreclosed on two loans
which consisted of two undeveloped parcels of land in Austin and Cedar Park,
Texas which is discussed in more detail in the investments in real estate held
for sale section below. As a result of the foreclosure the Company took title
to the properties and reclassified the amount invested to real estate held for
sale which included an allowance for loan losses of $700,000. Consequently the
basis in these properties was adjusted by the $700,000 and that amount was
removed from the allowance for loan losses. In addition, the Companys Manager granted extensions on 19 loans and 18 loans
as of June 30, 2004 and June 30, 2003, respectively, pursuant to the terms of
the original loan agreements which permit extensions by mutual consent. Such
extensions are generally provided on loans where the original term was twelve
months or less and where a borrower requires additional time to complete a
construction project or negotiate take out financing. However, the Companys
Manager only grants extensions when a borrower is in full compliance with the
terms of the loan, including, but not limited to the borrowers obligation to
make interest payments on the loan. The aggregate amount due to the Company
from borrowers whose loans have been extended as of June 30, 2004 and 2003, was
approximately $104,139,123 and $87,967,000, respectively. On June 25, 2003, the Companys Manager restructured a $15.2 million note due
on August 19, 2003 as a new note with the interest rate reduced from 11.0% to
5.5%. The Companys investment in this loan was approximately $13.7 million as
of June 30, 2004. No specific reserve has been provided for this loan based on
the underlying collateral value. The new loan has a term of 24 months.
Interest income not recognized during the year ended June 30, 2004 as a result
of the note restructuring was $751,532. NOTE D  REAL ESTATE HELD FOR SALE At June 30, 2004, the Company held 10 properties with a total carrying value of
$33.4 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale. Included in this balance were 4
properties with a total carrying value of $5.7 million that the
Company has sold. GAAP
requires the Company to include these properties in real estate held for sale until the
borrower has met and maintained a certain percentage of ownership, which is
typically 20%. The Company may share ownership of such properties with Fund I, the
Manager, or other unrelated parties. The summary below includes the
Company's percentage
ownership in each property. These investments in real estate held for sale are
accounted for at the lower of cost or fair value less costs to sell with fair
value based on appraisals and knowledge of local market conditions. It is not
the Companys intent to invest in or own real estate as a long-term
investment. The Company seeks
to sell properties acquired through foreclosure as quickly as circumstances
permit. The following is a rollforward of investments in real estate held for
sale for the year ended June 30, 2004: F-13




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##### Table of Contents



Percentage
    
    Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDate
    
    of
    
    June 30,
    
    
    
    
    
    
    
    
    
    Valuation
    
    June 30,Description
    
    Acquired
    
    Ownership
    
    2003
    
    Acquisitions
    
    Sales
    
    Adjustments
    
    2004Custom residential
property located in
Santa Fe, New Mexico
    
    
    3/4/2003
    
    
    
    7
    %
    
    $
    85,727
    
    
    $
    
    
    
    $
    
    
    
    $
    (9,990
    )
    
    $
    75,73740 acres of land
containing 354
residential lots in
Henderson, Nevada
    
    
    2/28/2003
    
    
    
    34
    %
    
    
    4,820,663
    
    
    
    454,160
    
    
    
    (1,763,590
    )
    
    
    
    
    
    
    3,511,233An approximate
200-unit apartment
complex located in
Las Vegas, Nevada
(1) (4)
    
    
    1/27/2003
    
    
    
    98
    %
    
    
    4,772,190
    
    
    
    2,441,746
    
    
    
    (4,000,000
    )
    
    
    
    
    
    
    3,213,93611.42 acres of
vacant land zoned
commercial in
Henderson, Nevada (4)
    
    
    1/28/2004
    
    
    
    100
    %
    
    
    1,990,000
    
    
    
    
    
    
    
    (1,990,000
    )
    
    
    
    
    
    
    Two real estate
parcels in Cedar
Park, Texas (3)
    
    
    3/2/2004
    
    
    
    100
    %
    
    
    
    
    
    
    3,231,899
    
    
    
    
    
    
    
    
    
    
    
    3,231,899Partially completed golf
course in Mesquite,
Nevada (1)
    
    
    11/6/2002
    
    
    
    36
    %
    
    
    1,208,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,208,738140 Unit/224 bed
senior facility in
Mesa, Arizona (3)
    
    
    5/26/04
    
    
    
    86
    %
    
    
    
    
    
    
    6,033,953
    
    
    
    
    
    
    
    
    
    
    
    6,033,95365 acres of raw
land in Mesquite,
Nevada (2)
    
    
    11/27/2002
    
    
    
    42
    %
    
    
    2,027,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,027,32874 Unit/90
bed assisted living
facility in San
Bernadino, California (3)
    
    
    4/6//2004
    
    
    
    100
    %
    
    
    
    
    
    
    7,550,000
    
    
    
    
    
    
    
    
    
    
    
    7,550,000Hotel/Casino in Las
Vegas, Nevada (3)
    
    
    2/2/2004
    
    
    
    28
    %
    
    
    
    
    
    
    6,190,333
    
    
    
    
    
    
    
    
    
    
    
    6,190,333Raw land in
Mesquite, Nevada
(1)
    
    
    11/27/2002
    
    
    
    41
    %
    
    
    928,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    928,453Total
    
    
    
    
    
    
    
    
    
    $
    15,833,099
    
    
    $
    25,902,091
    
    
    $
    (7,753,590
    )
    
    $
    (9,990
    )
    
    $
    33,971,610
 (1)These properties
have been sold to independent third parties and the Company has
provided the financing. GAAP requires the borrower to have a certain
percentage equity ownership (typically 20%) to allow the Company to record the sale of a
property and remove it from inventory. In addition, the borrower must maintain
a minimum commitment in the property on a continuing basis. (2)This property includes 37 acres of land, which has been sold to an
independent third party, and the Company has provided the financing. GAAP requires the
borrower to have a certain percentage of equity ownership (typically 20%) to
allow the Company to record the sale of a property and remove it from inventory. (3)Foreclosures for the year ended June 30, 2004  Through foreclosure
proceedings during the year ended June 30, 2004, the Company assumed ownership of the
following properties: During March 2004, the Company foreclosed on two loans and took title to the
related properties, which consisted of two undeveloped parcels of land in
Austin and Cedar Park, Texas. The current carrying value of the properties
is $3,231,899. During September 2004, our Manager estimated the current
value of the properties to be $1,650,000 based on updated appraisals.
Subsequently, the Manager agreed to acquire the rights to any future
judgments related to the personal guarantees associated with the loans in
exchange for $3,565,795 which is the estimated deficiency on the value of the
properties. This transaction will result in a net gain of $1,983,896
in the quarter ending September 30, 2004 which is derived from
the recovery of a previously recorded valuation allowance. During May 2004, the Company foreclosed on loan secured by a 140 Unit/224 bed senior
facility in Mesa, Arizona. A receiver has been appointed and the business
has continued operations. The property has been listed for sale and, based
on its estimated value and the underlying personal guarantee from the
borrower, no valuation allowance was deemed necessary as of June 30, 2004. During April 2004, the Company foreclosed on loan secured by a 74 Unit/90 bed
senior facility in San F-14




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##### Table of Contents



Bernadino, California. A receiver has been appointed and the business has
continued operations. The property has been listed for sale and based on its
estimated value and the underlying personal guarantee from the borrower, no
valuation allowance was deemed necessary as of June 30, 2004. During February 2004, the Company foreclosed on two loans and took title to
the collateral which consists of a hotel/casino on approximately 25 acres of
land. No specific reserve was provided upon foreclosure based on the
estimated underlying collateral value. (4)Sales of real estate held for sale for the year ended June 30, 2004: During March 2004, the Company sold 11.42 acres of land in Henderson, Nevada
for approximately $2.0 million which approximated the carrying value of the
real estate. Through foreclosure proceedings in the first calendar quarter of 2003, the
Company assumed an approximate 98% ownership of a 200-unit apartment complex
in Las Vegas, Nevada. In October 2003, the Company sold the property to a
third party. However, the Company financed 100% of the sale. GAAP requires
the borrower to have a certain percentage equity ownership (typically 20% of
the sales price) to be funded by the buyer to allow the Company to record a
sale. During March 2004, the Company received a payoff of $4,000,000 on its
loan to the borrower. Since the payoff resulted from a sale of the note
through an intercreditor agreement and no further cash equity was injected by
the buyer, the Company did not record the entire sale, only that portion that
relates to the loan payoff. NOTE E  SECURED BORROWINGS As of June 30, 2004 and 2003, the Company had approximately $61,924,000 and
$26,700,000, respectively, in secured borrowings pursuant to an intercreditor
agreement with the related amounts included in assets under secured borrowing.
For the years ended June 30, 2004 and 2003, the Company recorded interest
expense of $5,681,000 and $3,266,000, respectively, related to the secured
borrowing. NOTE F NOTE RECEIVABLE FROM FUND I As of June 30, 2004, the Company is due approximately $4.3 million, net of a
valuation allowance of $0.3 million, from Fund I which foreclosed on its second
mortgage on a building located in Las Vegas, Nevada and obtained ownership to
the property subject to the existing debt which included a note payable
totaling $4.6 million owed to the Company. NOTE G  MEMBERS EQUITY 1. Membership Units As of June 30, 2002, the Manager contributed $1,100,000 to the Company in
connection with offering costs incurred on behalf of the Company in return for
110,000 units. Members contribute to the capital of the Company an amount
equal to $10.00 for each unit subscribed for by each member, with a minimum
subscription of 200 units per member. The total capital contribution of the
members will not exceed $500,000,000, not including reinvested distributions. 2. Allocations and Distributions In accordance with the operating agreement, the Companys profits, gains and
losses are to be credited to and charged against each member in proportion to
their respective capital accounts as of the close of business on the last day
of each calendar month. Interest received on mortgage loans is distributed monthly to members, members
may elect to reinvest their distributions. F-15




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##### Table of Contents



Distributions of proceeds from the repayment of principal on a mortgage loan
will be made to the members pro rata based on their capital accounts. 3. Working Capital Reserves The Company is required by the operating agreement to maintain working capital
reserves of approximately 3% of the aggregate capital accounts of the members.
This reserve is available to pay any future expenses in excess of revenues,
satisfy obligations of underlying security properties, expend money to satisfy
the Companys unforeseen obligations and for other permitted uses of its
working capital. Working capital reserves of up to 3% in cash or cash
equivalents, short-term investments and certificates of deposit are excluded
from the funds committed to mortgage investments in determining what proportion
of the offering proceeds and reinvested distributions have been invested in
mortgage loans. As of June 30, 2003 and 2002, the Company had approximately
$16,816,000 and $8,624,000, respectively, for its working capital reserves. NOTE H  RELATED PARTY TRANSACTIONS Transactions with the Manager The Manager is entitled to receive a management fee of up to 0.25% of our
aggregate capital contribution, paid monthly in arrears. The amount of
management fees paid to the Manager for the fiscal years ended June 30, 2004
and 2003 approximated $1,025,000 and $793,000, respectively. As of June 30, 2004 and June 30, 2003, the Company owed the Manager
approximately $1,503,000 and $2,397,000, respectively, for expenses advanced on
its behalf and distributions due related to units owned by the Manager. As of June 30, 2004, Vestin Mortgage had an investment in us of approximately
$1.1 million, which consists of certain costs paid on the Companys behalf
related to the registration and start-up costs. Vestin Mortgage has received
110,000 units related to this investment. From time to time the Company may acquire or sell investments in mortgage loans
from/to the Manager or other related parties pursuant to the terms of the
operating agreement provided the price does not exceed the original cost. No
gain or loss is recorded on these transactions as it is not the Companys
intent to make a profit on the purchase or sale of such investments. The
purpose is to either free up capital to make new investments or place excess
capital in investments to maximize the use of capital. During the fiscal year ended June 30, 2003, the Company sold $500,855 in
mortgage loans to the Manager. During the fiscal year ended June 30, 2003, the Company purchased $6,816,905 in
mortgage loans from the Manager. During March 2004, the
Company foreclosed on two loans and took title to the related
properties, which consisted of two undeveloped parcels of land in Austin and
Cedar Park, Texas. The current carrying value of the properties is $3,231,899.
During September 2004, the Manager estimated the current value of the
properties to be $1,650,000 based on updated appraisals.
Subsequently, the
Manager agreed to acquire the rights to any future judgments related to the
personal guarantees associated with the loans in exchange for $3,565,795 which
is the estimated deficiency on the value of the properties. This transaction
will result in a net gain of $1,983,896 in the quarter ending September 30,
2004 which is derived from the recovery of a previously recorded
valuation allowance. Transactions with the Funds During the fiscal years ended June 30, 2004 and 2003, the Company purchased
$10,000,000 and $17,725,000, respectively, in mortgage loans from Fund I. During the fiscal years ended June 30, 2004 and 2003, the Company sold $806,489
and $15,249,950, respectively, in mortgage loans to Fund I. F-16




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##### Table of Contents



During the fiscal year ended June 30, 2004, the Company sold $10,000,000 in
mortgage loans to Fund III. Transactions with other related parties During the fiscal year ended June 30, 2003, the Company purchased $15,023,151
in mortgage loans from Vestin Group. During the fiscal year ended June 30, 2003, the Company sold $4,500,000 in
mortgage loans to Vestin Group. During the fiscal year ended
June 30, 2003, the Company purchased $4,657,844 in
mortgage loans from inVestin Nevada, Inc., a company wholly owned by the
Managers Chief Executive Officer, and $1,000,000 in mortgage loans from LTD,
Inc., a company wholly owned by the Managers Chief Executive Officer. During the fiscal year ended
June 30, 2003, the Company sold $2,674,950 in
mortgage loans to inVestin Nevada, Inc. During the year ended June 30, 2004, the Company paid $17,172 for legal fees to
a law firm in which the Secretary of Vestin Group has an equity ownership
interest. During the year ended June 30, 2004, the Company paid $4,965 to L.L. Bradford &
Company, LLC, a certified public accounting firm for accounting services.
Vestin Mortgages Chief Financial Officer, Treasurer, Secretary and Director is
an equity owner in that firm. NOTE I  REVENUE RELATED TO THE SALE OF REAL ESTATE The Company received a promissory note from an unaffiliated party in the amount
of $2.3 million in connection with the sale of real estate located in the City
of Mesquite, Nevada. The note reflected a finders fee by the Company; the
Company did not loan any money to the unaffiliated party with respect to the
$2.3 million note. The note required monthly interest payments at a rate of
8.5% per annum and was payable in full on June 13, 2005. In addition, the
Company loaned $1.5 million to the unaffiliated party and received a mortgage
note due June 13, 2004 in connection with the same sale of real estate. The
Company was using the cost recovery method of accounting for the transaction.
Accordingly, the Company did not recognize any income on the notes until the
principal balance of both notes were paid in full. Under the cost recovery
method, interest payments received by the Company in excess of the principal
balance are not recorded as income until such time as the note is paid off. In
February 2004, the notes were paid off and the Company recorded the $2.3
million as revenue related to the sale of real estate and $0.3 million as
interest income related to interest payments received prior to loan payoff. NOTE J  RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the
Financial Accounting Standards Board (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
FIN 46, also referred to as 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 risk of loss
from the variable interest entitys activities or entitled to receive
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(R) to those entities that are considered to be special-purpose
entities as of the end of the first fiscal year or interim period
ending after December 15, 2003. The adoption of this
interpretation did not have a material effect on the Companys
consolidated financial statements. NOTE K  LEGAL MATTERS INVOLVING THE MANAGER Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly
owned by Michael Shustek, the largest shareholder and CEO of Vestin
Group, are
defendants in a civil action entitled Desert Land, L.L.C. et al. v. Owens
Financial Group, Inc. et al (the Action). The Action was initiated by Desert
Land, L.L.C. (Desert Land) on various loans arranged by Del Mar Mortgage,
Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District
Court for the District of Nevada (the Court) entered judgment jointly and
severally in favor of Desert Land against Vestin Group, Vestin Mortgage and Del
Mar Mortgage, Inc. Judgment was predicated upon the Courts finding that Del
Mar Mortgage, Inc. received an unlawful penalty fee from the plaintiffs. Defendants subsequently filed a motion for reconsideration. The Court denied
the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
and Del Mar Mortgage, Inc. are jointly and severally liable for the F-17




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##### Table of Contents



judgment in the amount of $5,683,312 (which amount includes prejudgment
interest and attorneys fees). On August 27, 2003, the Court stayed execution
of the judgment against Vestin Group and Vestin Mortgage based upon the posting
of a bond in the amount of $5,830,000. Mr. Shustek personally posted a cash bond without any cost or obligation to Vestin Group and
Vestin Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin
Group and Vestin Mortgage for any losses and expenses in connection with the
Action, and Mr. Shustek has guaranteed the indemnification with
his cash bond. On September 12,
2003, all of the defendants held liable to Desert Land appealed the judgment to
the United States Court of Appeals for the Ninth Circuit. The Company is not a party
to the Action. The Companys Manager is involved in a number of legal proceedings concerning
matters arising in connection with the conduct of its business activities.
The Manager believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. The Manager believes that it is not a party
to any pending legal or arbitration proceedings that would have a material
adverse effect on the Managers financial condition or results of operations or
cash flows, although it is possible that the outcome of any such proceedings
could have a material impact on the Managers net income in any particular
period. NOTE L  LEGAL MATTERS INVOLVING THE COMPANY The staff of the Pacific Regional Office of the Securities and Exchange
Commission (SEC) has been conducting an informal inquiry into certain matters
related to the Company, Vestin Group, Vestin Fund I and Vestin Fund III. The
staff of the SEC has not identified the reasons for its inquiry, which remains
ongoing as of September 13, 2004. The Company believes that it has complied with SEC
disclosure requirements and is fully cooperating with the inquiry. The Company
cannot at this time predict the outcome of the inquiry. The Company is involved in a number of legal proceedings concerning matters
arising in connection with the conduct of its 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 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 M  REDEMPTION LIMITATION In order to comply with our operating agreement and the Internal Revenue Code,
we may redeem no more than 10% of the aggregate members capital in any
calendar year. As of June 30, 2004, redemptions made since inception totaled
$64.4 million. Balances in members capital accounts as of January 1, 2004
was $394.0 million, which would limit redemptions to $39.4 million for calendar
2004. As of June 30, 2004, we had paid approximately $30.3 million in
redemptions in 2004, and had $9.1 million in redemptions that remain to be
fulfilled in 2004. As of June 30, 2004, requests to redeem approximately $35.5
million in 2005, $31.9 million s in 2006, $28.7 million in 2007, $29.9 million
in 2008, $23.3 million in 2009, $20.9 million in 2010, and $18.8 million in 2011
had been logged. NOTE N  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following schedule
contains
selected quarterly financial data for fiscal year
ended June 30, 2004: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearRevenues
    
    $
    11,905,509
    
    
    $
    10,464,647
    
    
    $
    11,925,970
    
    
    $
    11,032,574
    
    
    $
    40,312,535Expenses
    
    
    2,447,112
    
    
    
    4,074,992
    
    
    
    2,624,774
    
    
    
    12,670,734
    
    
    
    16,541,231Net income
    
    $
    9,458,397
    
    
    $
    6,389,655
    
    
    $
    9,301,196
    
    
    $
    (1,638,160
    )
    
    $
    23,771,304Net income allocated to members
per weighted average membership
units
    
    $
    0.24
    
    
    $
    0.16
    
    
    $
    0.26
    
    
    $
    (0.04
    )
    
    $
    0.76Weighted average membership units
    
    
    39,971,474
    
    
    
    40,029,576
    
    
    
    35,127,158
    
    
    
    37,143,153
    
    
    
    31,430,793
 F-18




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##### Table of Contents



The following schedule
contains selected quarterly financial data for fiscal year
ended June 30, 2003: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearRevenues
    
    $
    8,853,369
    
    
    $
    10,123,913
    
    
    $
    10,302,679
    
    
    $
    11,032,574
    
    
    $
    40,312,535Expenses
    
    
    1,014,717
    
    
    
    1,261,538
    
    
    
    1,594,242
    
    
    
    12,670,734
    
    
    
    16,541,231Net income
    
    $
    7,838,652
    
    
    $
    8,862,375
    
    
    $
    8,708,437
    
    
    $
    (1,638,160
    )
    
    $
    23,771,304Net income allocated to members
per weighted average membership
units
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    0.26
    
    
    $
    (0.04
    )
    
    $
    0.76Weighted average membership units
    
    
    25,535,977
    
    
    
    29,868,724
    
    
    
    33,277,556
    
    
    
    37,143,153
    
    
    
    31,430,793
 NOTE O  SUBSEQUENT EVENTS During March 2004, the Company foreclosed on two loans and took title to the
related properties, which consisted of two undeveloped parcels of land in
Austin and Cedar Park, Texas. The current carrying value of the properties is
$3,231,899. During September 2004, the Manager estimated the current value of
the properties to be $1,650,000 based on updated appraisals.
Subsequently, the
Manager agreed to acquire the rights to any future judgments related to the
personal guarantees associated with the loans in exchange for $3,565,795 which
is the estimated deficiency on the value of the properties. This transaction
will result in a net gain of $1,983,896 in the quarter ending
September 30, 2004 which is derived from the recovery of a
previously recorded valuation allowance. During August 2004 the Company commenced foreclosure proceedings on a loan in
which the Company has an investment of approximately $20.0 million due to
payment delinquency. Concurrent with foreclosure proceedings, the borrower
filed for bankruptcy protection. The Company is currently exploring various avenues to expedite
collection of the amounts due on this loan. Based on a review of the property, the
Company has determined the loan is sufficiently collateralized and no allowance
is deemed necessary. However, no assurance can be given that the
Company will be able to collect the full amount due it on this loan. F-19




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##### Table of Contents



Schedule I Vestin Fund II, LLC MORTGAGE LOANS ON REAL ESTATE
MORTGAGE LOAN ROLLFORWARD Balance, June 30, 2002
    
    $
    222,558,326Additions during the periodNew mortgage loans
    
    
    308,974,057Mortgage loans bought
    
    
    93,502,169Deductions during the periodCollections of principal
    
    
    146,329,465Foreclosed loans (Real estate held for sale)
    
    
    18,271,656Mortgage loans sold
    
    
    107,952,914129,922,191Balance, June 30, 2003
    
    
    352,480,517Additions during the periodNew mortgage loans
    
    
    256,424,960Mortgage loans bought
    
    
    44,159,399Deductions during the periodCollections of principal
    
    
    220,379,028Foreclosed loans (Real estate held for sale)
    
    
    24,623,896Mortgage loans sold
    
    
    94,708,866(39,127,431
    )Balance, June 30, 2004
    
    $
    313,353,086
 F-20




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##### Table of Contents



Schedule II Vestin Fund II, LLC MORTGAGE LOANS ON REAL ESTATE
MORTGAGE LOANS BY TYPE OF PROPERTY As of June 30, 2004: Carrying
    
    
    
    AmountType of
    
    Interest
    
    Face Amount
    
    amount of
    
    Maturity Date
    
    Subject toProperty
    
    Rate
    
    of Mortgage
    
    mortgage
    
    
    
    DelinquencyCommercial
    
    
    8%-14
    %
    
    $
    101,120,705
    
    
    $
    72,312,216
    
    
    
    8/04-3/05
    
    
    $
    256,467Construction
    
    
    11%-15
    %
    
    $
    105,000,000
    
    
    $
    58,606,178
    
    
    
    8/04-8/05
    
    
    $
    374,245Acquisition and
Development
    
    
    7.5%-13
    %
    
    $
    121,325,000
    
    
    $
    70,320,091
    
    
    
    11/04-1/06
    
    
    $
    Land
    
    
    12%-14
    %
    
    $
    30,630,000
    
    
    $
    12,562,890
    
    
    
    9/04-6/05
    
    
    $
    Bridge
    
    
    6%-14
    %
    
    $
    158,031,750
    
    
    $
    104,259,264
    
    
    
    7/04-4/06
    
    
    $
    125,255
 As of June 30, 2003: Carrying
    
    
    
    AmountType of
    
    Interest
    
    Face Amount
    
    amount of
    
    Maturity Date
    
    Subject toProperty
    
    Rate
    
    of Mortgage
    
    mortgage
    
    
    
    DelinquencyCommercial
    
    
    5.5%-14
    %
    
    $
    237,787,500
    
    
    $
    147,747,321
    
    
    
    12/02-6/05
    
    
    $
    13,995,000Construction
    
    
    12%-15
    %
    
    $
    180,855,000
    
    
    $
    116,106,164
    
    
    
    2/03-3/04
    
    
    $
    16,349,865Acquisition and
Development
    
    
    11%-14
    %
    
    $
    67,825,000
    
    
    $
    29,147,011
    
    
    
    2/02-3/03
    
    
    $
    Land
    
    
    10%-14
    %
    
    $
    36,485,500
    
    
    $
    24,303,121
    
    
    
    8/03-5/04
    
    
    $
    Bridge
    
    
    8%-14
    %
    
    $
    69,600,000
    
    
    $
    22,007,371
    
    
    
    7/03-6/05
    
    
    $
    4,599,192Residential
    
    
    12.5%-14
    %
    
    $
    15,087,500
    
    
    $
    13,169,529
    
    
    
    8/03-8/04
    
    
    $
    
 F-21




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##### Table of Contents



Schedule III Vestin Fund II, LLC MORTGAGE LOANS ON REAL ESTATE
MORTGAGE LOANS BY LIEN POSITION As of June 30, 2004: Carrying
    
    
    
    AmountLien
    
    Face Amount
    
    Interest
    
    amount of
    
    Maturity
    
    Subject toPosition
    
    of Mortgage
    
    Rate
    
    mortgage
    
    Date
    
    Delinquency1st
    
    $
    507,832,455
    
    
    
    5.5%-15
    %
    
    $
    316,497,670
    
    
    
    2/02-3/05
    
    
    $
    755,9682nd
    
    $
    3,775,000
    
    
    
    9.0%-13.0
    %
    
    $
    2,563,269
    
    
    
    12/04-3/05
    
    
    $
    
 As of June 30, 2003: Carrying
    
    
    
    AmountLien
    
    Face Amount
    
    Interest
    
    amount of
    
    Maturity
    
    Subject toPosition
    
    of Mortgage
    
    Rate
    
    mortgage
    
    Date
    
    Delinquency1st
    
    $
    604,809,500
    
    
    
    5.5%-15
    %
    
    $
    350,486,618
    
    
    
    2/02-3/05
    
    
    $
    34,939,0572nd
    
    $
    2,646,000
    
    
    
    9.5%-14.5
    %
    
    $
    1,993,899
    
    
    
    6/02-11/03
    
    
    $
    5,000
 F-22




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##### Table of Contents



Schedule IV Vestin Fund II, LLC MORTGAGE LOANS ON REAL ESTATE
MORTGAGE LOANS THAT EXCEED THREE PERCENT
OF THE PORTFOLIO As of June 30, 2004: Description
    
    Interest
    
    Maturity
    
    Lien
    
    Face Amount of
    
    Carrying Amount of
    
    Amount Subject toof Loan
    
    Rate
    
    Date
    
    Position
    
    Mortgage
    
    Mortgage
    
    DelinquencyBridge
    
    
    10.00
    %
    
    
    3/30/06
    
    
    1st
    
    $
    35,000,000
    
    
    $
    22,857,418
    
    
    $
    Acquisition and Development
    
    
    12.00
    %
    
    
    12/18/04
    
    
    1st
    
    $
    12,365,000
    
    
    $
    9,381,890
    
    
    $
    Construction
    
    
    14.00
    %
    
    
    8/1/03
    
    
    1st
    
    $
    17,500,000
    
    
    $
    12,095,763
    
    
    $
    301,644Commercial
    
    
    12.50
    %
    
    
    11/3/03
    
    
    1st
    
    $
    12,500,000
    
    
    $
    12,310,430
    
    
    $
    256,467Construction
    
    
    13.50
    %
    
    
    8/31/05
    
    
    1st
    
    $
    51,450,000
    
    
    $
    23,478,760
    
    
    $
    Construction
    
    
    12.00
    %
    
    
    8/19/04
    
    
    1st
    
    $
    9,150,000
    
    
    $
    8,966,383
    
    
    $
    Bridge
    
    
    8.00
    %
    
    
    5/20/05
    
    
    1st
    
    $
    18,000,000
    
    
    $
    17,198,913
    
    
    $
    Bridge
    
    
    5.50
    %
    
    
    6/25/05
    
    
    1st
    
    $
    15,500,000
    
    
    $
    13,664,188
    
    
    $
    125,255Acquisition and Development
    
    
    12.00
    %
    
    
    9/8/04
    
    
    1st
    
    $
    23,000,000
    
    
    $
    9,302,719
    
    
    $
    Commercial
    
    
    14.00
    %
    
    
    11/12/04
    
    
    1st
    
    $
    11,500,000
    
    
    $
    11,500,000
    
    
    $
    Acquisition and Development
    
    
    8.00
    %
    
    
    1/25/06
    
    
    1st
    
    $
    35,000,000
    
    
    $
    20,208,700
    
    
    $
    Acquisition and Development
    
    
    9.00
    %
    
    
    1/13/05
    
    
    1st
    
    $
    30,000,000
    
    
    $
    20,281,121
    
    
    $
    Bridge
    
    
    11.00
    %
    
    
    6/28/05
    
    
    1st
    
    $
    26,000,000
    
    
    $
    19,998,445
    
    
    $
    
 As of June 30, 2003: Description
    
    Interest
    
    Maturity
    
    Lien
    
    Face Amount of
    
    Carrying Amount of
    
    Amount Subject toof Loan
    
    Rate
    
    Date
    
    Position
    
    Mortgage
    
    Mortgage
    
    DelinquencyCommercial
    
    
    13.00
    %
    
    
    11/25/03
    
    
    1st
    
    $
    29,000,000
    
    
    $
    22,514,360
    
    
    $
    Commercial
    
    
    5.50
    %
    
    
    6/25/04
    
    
    1st
    
    $
    15,150,000
    
    
    $
    12,664,188
    
    
    $
    Commercial
    
    
    12.50
    %
    
    
    8/3/03
    
    
    1st
    
    $
    12,500,000
    
    
    $
    12,310,430
    
    
    $
    Commercial
    
    
    12.00
    %
    
    
    11/27/03
    
    
    1st
    
    $
    31,000,000
    
    
    $
    21,290,628
    
    
    $
    Acquisition and Development
    
    
    14.00
    %
    
    
    6/28/03
    
    
    1st
    
    $
    32,000,000
    
    
    $
    11,900,893
    
    
    $
    Construction
    
    
    14.00
    %
    
    
    8/1/03
    
    
    1st
    
    $
    17,500,000
    
    
    $
    12,927,598
    
    
    $
    12,927,598Construction
    
    
    13.50
    %
    
    
    8/30/03
    
    
    1st
    
    $
    48,000,000
    
    
    $
    25,528,760
    
    
    $
    Construction
    
    
    13.00
    %
    
    
    3/31/04
    
    
    1st
    
    $
    13,500,000
    
    
    $
    12,629,726
    
    
    $
    
 F-23




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. Vestin Fund II, LLCBy:
    Vestin Mortgage, Inc., its sole managerBy:
    /s/ Michael V. ShustekMichael V. ShustekChief Executive Officer and Director of the Manager
(Principal Executive Officer of Manager)By:
    /s/ Lance K. BradfordLance K. BradfordDirector, Secretary and Treasurer
(Chief Financial Officer of the Manager) Dated: September 13, 2004




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description3.1(1)
    
    Articles of Organization3.2(2)
    
    Amended and Restated Operating Agreement (included
as Exhibit A to the Companys prospectus)10.1
    
    Assignment Agreement, dated January 23, 2004, by
and between Vestin Mortgage, Inc., Vestin Fund I,
LLC, Vestin Fund II, LLC, Owens Financial Group,
Inc. and Owens Mortgage Investment Fund10.2
    
    Intercreditor Agreement, dated January 17, 2003, by
and among Vestin Mortgage, Inc., Vestin Fund I,
LLC, Vestin Fund II, LLC and Western United Life
Assurance Company10.3
    
    Intercreditor Agreement, dated April 22, 2004, by
and between Vestin Mortgage, Inc. and Owens
Mortgage Investment Fund10.4
    
    Intercreditor Agreement, dated June 24, 2004, by
and between Vestin Mortgage, Inc. and Owens
Mortgage Investment Fund10.5
    
    Participation Agreement, dated May 13, 2004, by and
among Vestin Fund I, LLC, Vestin Fund II, LLC,
Vestin Fund III, LLC and Royal Bank of America31.1
    
    Section 302 Certification of Michael V. Shustek31.2
    
    Section 302 Certification of Lance K. Bradford32
    
    Certification Pursuant to U.S.C. 18 Section 1350
  (1)
    
    Incorporated herein by reference to our Form S-11 Registration
Statement filed on December 21, 2000 (File No. 333-52484).(2)
    
    Incorporated herein by reference to Post-Effective Amendment No. 4
to our Form S-11 Registration Statement filed on October 23, 2003
(File No. 333-52484).