SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                    FORM 10-K
              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 2001

                             ----------------------

                         PRIMECORE MORTGAGE TRUST, INC.
             (Exact Name of Registrant as Specified in its Charter)

               Maryland                                     94-3324992
   (State or other jurisdiction of                       (I.R.S. Employer
    incorporation or organization)                     Identification No.)

                                99 El Camino Real
                              Menlo Park, CA 94025
                         (Address of principal offices)

                                 (650) 328-3060
              (Registrant's telephone number, including area code)

                             ----------------------

              Securities registered under Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

         Class A Convertible Preferred Stock, par value $0.01 per share
                                (Title of class)


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 ______X_____ No _____________


<PAGE>



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]


The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is $1.00.


Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock as of the latest  practicable date: 100 Shares of Common
Stock




--------------------------------------------------------------------------------



























                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

The Company and Affiliates

We are a real estate investment trust (REIT) incorporated in Maryland on March
18, 1999. We began operations May 1, 1999. We fund and hold short-term
construction mortgage loans that are made to developers of for-sale,
single-family and multi-unit residential real estate. All loans are secured by
recorded deeds of trust on the property being developed, and title insurance
protecting the position of the deeds of trust is always a condition to making a
loan. Most loans are secured by first deeds of trust on the property being
developed, although, under proper circumstances and where the loan meets our
requirements, we may accept a junior deed of trust. To date, we have made loans
only in Northern California, however, there is no restriction on our ability to
make or fund loans in other areas. We do not engage in any foreign operations or
derive any revenue from foreign operations.

Primecore Funding Group, Inc., an affiliate, pursuant to a management agreement
dated October 1, 2000, manages all of our affairs. We have no employees. Our
manager, or an affiliate of our manager, originates and services all of the
mortgage loans that we make. Our manager bears all operating expenses connected
with originating and managing our mortgage loan portfolio and receives a monthly
management fee. At December 31, 2001, our manager serviced our portfolio of
mortgage loans with an aggregate balance of $308.6 million representing funds
advanced on loan commitments including accrued interest and points totaling
$221.9 million.

Susan Fox, one of our founders,  is the President and sole  shareholder  of
Primecore  Funding  Group,  Inc.  Primecore  Funding  Group,  Inc. is a licensed
California  real estate  broker.  We have  affiliates  with whom we share common
officers  and some  common  directors,  but which have  their  own,  independent
business  purposes.  Our  affiliates  include  Primecore  Properties,  Inc.,  99
Investors, LLC, Eprime, Inc., and 99 El Camino Partners LLC. As described below,
when it has been determined to be in the Company's interest, our affiliates have
assisted in loan workouts and have become borrowers.

We have issued four classes of securities: (1) common stock ; (2) Class A
Convertible Preferred stock; (3) Series A notes; and (4) Series B notes.

Business Strategies

Our investment objective is to make relatively short-term construction loans on
projects that we believe are likely to ultimately sell for an amount well in
excess of the loan principal, plus interest at the agreed upon rate, and
contractual loan fees. We conduct, through our manager, centralized loan
underwriting and pricing, project evaluation, loan funding and loan servicing to
maintain control of the risks of operating a construction mortgage lending
operation and managing a portfolio of short-term construction mortgage loans.
All of our loans are secured by recorded deeds of trust, and are supported by
detailed loan documents that have been designed to protect our investment. Our
manager manages the loans in order to assure that disbursements are proper and
that projects are built, to the maximum extent possible, in accordance with
stated budgets and timelines.

Our manager's business skills, principles, practices and policies make us
different from institutional new-home construction lenders. Nevertheless, our
manager faces some competition in the business of originating and servicing
construction mortgage loans from banks, thrifts and other independent wholesale
mortgage lenders. While most of these entities have significantly greater
resources, we compete effectively due to: (1) our tax advantaged status as a
REIT; (2) our manager's experience in construction lending, (3) freedom from
bureaucracy that allows more flexibility in meeting borrower needs; and (4)
freedom from regulatory-related administrative costs and requirements, which
requirements can result in increased costs to the borrower due to delays in loan
approval, construction or funding of loans.

                                       3
<PAGE>


Dividend Policy and Distributions

In order to maintain our preferred status as a REIT, we are required to
distribute at least 90% of our annual taxable income. We intend to distribute
100% of our annual taxable income to our preferred shareholders. We currently
make dividend distributions monthly, although this is subject to change at the
discretion of our Board of Directors. So long as shares of preferred stock
remain outstanding, only holders of our preferred stock will receive dividends;
and there will be no cash dividends declared or paid on our common stock.

We pay dividends monthly to shareholders of record based on the number of
weighted average shares owned during the preceding calendar month. Since we
began operations on May 1, 1999, we have paid dividends totaling $3.01 per
weighted average share, representing an annualized rate of return of 11.3%

Our Board of Directors determines the amount of dividends. On October 2, 2001,
our Board set the monthly dividend at $0.0875 per weighted average share, equal
to a rate of 10.5% per annum, for dividends declared October 31, 2001 and
thereafter, subject to the Board's future determination of appropriate dividend
rates.

Mortgage Lending

General Business Model. Our business plan is to make and hold to maturity a
portfolio of short-term construction mortgage loans for investment that
generates a net interest margin over time and allows us to take full advantage
of our REIT status. The loans are made to developers of for-sale, single-family
and multi-unit residential real estate. Our loans often include funding for both
land acquisition and development. Most loans are written with 12 to 18 month
maturity dates, which dates may be extended by our manager when deemed to be in
the Company's best interests. Loan interest rates are fixed and have ranged from
11% to 13%. Loan origination fees are charged to borrowers and are typically 4%
of the loan commitment amounts. All loans are secured by recorded deeds of trust
on the property being developed, and title insurance protecting the position of
our deeds of trust is always a condition to making a loan. We expect that in
excess of 85% of our loans will be secured by first deeds of trust on the
property being developed. To date, we have made loans only in Northern
California, however, there is no restriction on our ability to make or fund
loans in other areas.

All approved loans are subject to detailed loan documentation that has been
formulated by legal counsel for our specific purposes. Our manager monitors all
loans to ensure that they are being properly administered and that loan proceeds
are properly disbursed. All loans provide for monthly payments of loan fees and
interest only and a payment of principal in full at the end of the loan term.
Generally, in accordance with our loan documents, we will advance the interest
payments out of available loan proceeds to the developer on a monthly basis,
although our loan documents provide us with a right not to advance or to cease
such payments should our manager determine that conditions require such actions.
Loan fees are advanced out of the loan proceeds at the outset of the loan.
Generally, our loans require the borrower to make a "balloon payment" equal to
the principal amount, accrued interest and fees upon maturity of the loan. The
loan maturity date is the date of sale of the underlying real estate or the date
stated in the loan documents. Although we do not limit the amount of our
investment in any single construction loan, generally our lending criteria is a
65%-70% loan to projected completed value ratio for first deeds of trust, and if
we elect to be in a junior position, 75% loan to value inclusive of all debt.

Management of the Company and Its Loan Portfolio. Primecore Funding Group, Inc.,
our affiliate, manages all of our business, subject to direction from our Board
of Directors. Our manager bears all operating expenses connected with
originating and managing our mortgage loan portfolio, and receives a monthly
management fee that is established by a written management agreement that we
entered into with our manager. Our manager's responsibilities, which may be
satisfied by subcontracts with affiliates or others, include:

     1.       Representing the Company in connection with arranging loans;

     2.       In accordance with the directions of the Company's Board of
              Directors, investing or reinvesting any money of the Company;

                                       4
<PAGE>


     3.       Furnishing  reports and statistical and economic  research to the
              Company  regarding the Company's real estate loan activities and
              the performance of its portfolio of loans;

     4.       Administering the day-to-day operations of the Company and
              performing administrative functions necessary in the management of
              the Company, including the collection of revenues, the payment of
              the Company's expenses, debts and obligations and the maintenance
              of appropriate computer services to perform such administrative
              functions;

     5.       Counseling the Company in connection with policy decisions to be
              made by the Board of Directors;

     6.       Overseeing the servicing of the Company's loans;

     7.       Establishing underwriting, appraisal and quality control
              procedures for the loans made by the Company;

     8.       Providing  the Company  with data  processing,  legal and
              administrative services to the extent required to implement the
              business strategy of the Company;

     9.       Providing all actions necessary for compliance by the Company with
              all federal, state and local regulatory requirements applicable to
              the Company in respect of its business activities, including
              maintaining books and records and preparing or causing to be
              prepared all financial statements required under applicable
              regulations and contractual undertakings;

     10.      Providing all actions necessary to enable the Company to make
              required federal, state and local tax filings and reports and
              generally enable the Company to maintain its status as a REIT,
              including, but not limited to, soliciting stockholders for
              required information to the extent required by the REIT provisions
              of the Code;

     11.      Communicating  on  behalf  of the  Company  with the stockholders
              of the Company as required to satisfy any reporting requirements
              and to maintain effective relations with such stockholders; and

     12.      Performing such other services as may be required from time to
              time for management and other activities relating to the assets
              and growth of the Company as the Board of Directors shall
              reasonably request or the Manager shall deem appropriate under the
              particular circumstances.

Our headquarters are the offices of our manager. We currently do not pay any
rent for our headquarters, as these expenses are borne by our manager. The
headquarters consist of 6,828 square feet of office space at 99 El Camino Real,
Menlo Park, California 94025 leased by our manager from 99 El Camino Partners.
The lease expires on May 31, 2009, but includes two 5 year options expiring on
May 31, 2019. We believe our present facilities are adequate to meet our current
business requirements and those of our manager, and that suitable facilities for
expansion will be available if and when necessary.

Loan Origination. Our manager continuously evaluates prospective construction
loans on our behalf. Our manager, with Primecore Properties, Inc., its real
estate brokerage affiliate, arranges and services all loans on our behalf. Our
manager employs persons skilled in loan underwriting, disbursement and
monitoring, and the various legal issues that may be involved with real estate
lending. Mortgage loan originations are generally generated from new loans made
to existing borrowers, referrals from real estate and mortgage loan brokers and
existing borrowers, and contacts from prospective borrowers. Proposed loans are
evaluated by our manager to determine if the loan is of a type typically made by
us, if the security for the loan and the loan to value ratio meets our
investment standards, and if the loan can be priced in a manner to meet our
investment criteria and objectives. The underwriting decision to provide a loan
to an applicant is based primarily upon the loan to completion value ratio for


                                       5
<PAGE>


the underlying collateral. Our manager will generally rely on analysis by its
representatives and not on third party appraisals in determining whether to
originate a particular construction loan.

Collateral valuation. Collateral valuation receives special attention in the
underwriting of our construction loans. Our manager utilizes the experience of
its employees and employees of its real estate brokerage affiliate to make
assessments of a proposed project's viability and projected value, and to make
sure that a loan meets our loan criteria. In the loan evaluation process,
primary emphasis is placed on the ability of the underlying collateral to
protect against losses in the event of default by the borrower. The evaluation
is based on the projected market value of the proposed project, using various
tools, including comparable sales of similar properties and projections of
market appeal and demand at completion. The goal of the underwriting process is
to achieve a comfort level that the projected completion value of the property
will support full repayment of the outstanding loan balance.

Loan Servicing. Our manager has an established operation for servicing all
construction loans that we make, with the goal being protection of loan funds
and collateral for loans. Servicing involves taking all steps necessary to
administer the loan and collect loan payments, including monitoring the
propriety of loan draw requests, monitoring progress of a project, accounting
for principal and interest, dealing with any delinquent borrowers, arranging
loan workouts or extensions where appropriate, and supervising foreclosures and
property dispositions in the event of defaults. In order to ensure proper use of
loan funds, loan proceeds are disbursed on a course of construction basis, and
only after our manager has received satisfactory documentation and evidence of
construction progress. Using its experience in construction lending and its
knowledge of real estate development, our manager monitors the progress of all
development projects securing our loans, and takes steps to ensure that the
development projects are being built in a timely manner, within an agreed
budget. Before making disbursements of loan proceeds, borrower disbursement
requests are verified by invoices from the developer or its subcontractors, and
by periodic site inspections of progress. In addition, our manager generally
requires the submission of signed labor and material lien releases by the
builder in connection with each completed phase of the project before making any
periodic disbursements of a loan. We believe that the servicing of our mortgage
loans will be the most effective method of managing our credit risk. Our manager
expends substantial resources to protect against or mitigate losses on loans.
Our manager's experience has demonstrated that properly managing loans, from
both an underwriting and a servicing standpoint, is the means of keeping the
level of delinquencies and losses in our portfolio at a minimum.

Sales of construction mortgage loans. We plan to hold mortgage loans to
maturity, and have not embarked on selling loans in any secondary market. Also,
the REIT provisions of the Internal Revenue Code limit in some respects our
ability to sell mortgage loans. We may, however, decide to sell assets from time
to time for a number of reasons, including, without limitation: (1) to dispose
of an asset as to which credit risk concerns have arisen; (2) to reduce interest
rate risk; (3) or to re-structure our balance sheet when our management deems it
advisable. We will select any mortgage loans to be sold according to the
particular purpose the sale is intended to serve. Our Board of Directors has not
adopted a policy that would restrict management's authority to determine the
timing of sales or the selection of mortgage loans to be sold.

Other REIT qualified investments. As part of the acquisition of a particular
loan, or through a foreclosure we may acquire an equity interest in the real
property securing the loan in the form of a shared appreciation interest or
other equity participation. We also may invest our funds directly in real
property, if in the opinion of our Board of Directors it is in our best
interest. We may also purchase the stock of other mortgage REITs or similar
companies if we believe that they will yield attractive returns on capital and
otherwise not violate any requirements for maintaining our status as a REIT. We
do not, however, presently intend to make these investments.

ITEM 2.   PROPERTIES.

We do not own any property for investment purposes. We own certain real property
that we have acquired by way of foreclosure or deed in lieu of foreclosure. Our
policy is to attempt to maximize the value of the property prior to liquidation.

                                       6
<PAGE>

In some cases this may involve completing construction through a subsidiary or
affiliate, and then marketing the property for sale. The following is a list of
real estate owned by us as of December 31, 2001:

<TABLE>
<CAPTION>
                            Property                          Original Loan    Amount        Accrued
       Description           Type(*)     County               Amount           Funded        Income(**)
---------------------------------------------------------------------------------------------------------
     <S>                      <C>         <C>                    <C>            <C>            <C>
Lots 1-5, Kimberly Drive        1       Alameda               $ 1,865,000    $ 1,060,452    $  513,840
189 Gilmartin Drive             3       Marin                   4,600,000      3,173,009     1,754,304
1650 Grandview Drive            4       Alameda                 1,030,000        843,258       260,524
14 Upper Ames Avenue            4       Marin                   3,150,000      2,484,978       920,915
6150 Christie Avenue            1       Alameda                12,500,000      3,594,920     1,020,762
121 Sugarloaf Drive             1       Marin                   3,825,000      1,257,178       618,061
1311 Sherman Avenue             3       San Mateo               1,765,000      1,370,908       316,044
2070 Webster Street             4       Santa Clara             2,845,000      2,394,584       647,209
1339 Orange Avenue              3       San Mateo               1,610,000      1,249,602       242,647
4 Homes-The Preserve            4       Marin                   1,766,000      1,523,174       181,423
                                                           --------------------------------------------
         Total                                               $ 34,956,000   $ 18,952,063    $6,475,729
                                                           ============================================

*Property  Types:  1=Vacant Land or Land with partial or completed site  improvements;  2=Less Than 50%
Completed Home;  3=Greater Than 50% Completed Home; 4=Completed Home

** Accrued income represents loan interest and points earned under our loan agreements but is not recognized
under Generally Accepted Accounting Principles of the United States until the loan has been paid.
</TABLE>

ITEM 3.     LEGAL PROCEEDINGS.

We are not presently subject to any material litigation nor, to our knowledge,
is any litigation threatened against us which collectively is expected to have a
material adverse effect on our cash flows, financial condition or results of
operations.


ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.


No matters were submitted to a vote of our stockholders during the fourth
quarter of the year ended December 31, 2001.


                                     PART II



ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS


There is currently no public trading market for our Class A Convertible
Preferred stock or our common stock. We are authorized to issue up to 50,000,000
shares of stock, of which 40,000,000 shares are designated as Class A
Convertible Preferred Stock and 10,000,000 are designated as Common Stock. At
December 31, 2001, there were issued and outstanding 21,633,864 shares of Class
A Convertible Preferred stock and 100 shares of common stock, issued and
outstanding. The number of outstanding shares is subject to change because of
newly issued shares, shareholder redemptions and dividend reinvestments. We have
also offered and sold Series A and B promissory notes of varying amounts and
maturities.

All sales of stock and issuances of notes to date have been made under exemption
from the registration requirements of the Securities Act of 1933 pursuant to
Regulation D, Rule 506. All sales of stock and notes are made only to accredited

                                       7
<PAGE>

investors, as defined in Regulation D, Rule 501 (a)(4), (5) or (6) under the
1933 Securities Act. Appropriate legends were placed on each stock certificate
and promissory note. No underwriters were involved and no underwriting
commissions were paid in any of the transactions.

We have not paid any cash dividends to holders of our common stock.
The preferred stock has the rights and privileges and is subject to the
conditions set forth in our supplementary articles of incorporation, filed with
the State of Maryland Department of Assessments and Taxation. Subject to the
limitations set forth in the terms of the preferred stock, we may issue
additional preferred stock from time to time in one or more classes or series,
with such distinctive designations, rights and preferences as shall be
determined by the Board of Directors. Additional series of preferred stock would
be available for possible future financings, or acquisitions by us, and for
general corporate purposes without any legal requirement that further
shareholder authorization for issuance be obtained. Our issuance of additional
series of preferred stock could have the effect of making an attempt to gain
control of our company more difficult by means of a merger, tender offer, proxy
contest or otherwise.

The following summary of the rights of the preferred stock and the common stock
is qualified in its entirety by reference to our charter and related
supplementary articles.


Dividends. Holders of our Class A Convertible Preferred stock are entitled to
dividends declared and payable at such times and in such amounts as the Board of
Directors may from time to time determine from amounts legally available for
such distribution. For so long as shares of preferred stock shall remain
outstanding, there shall be no dividends declared or paid nor any distributions
made on the common stock, nor, without the written consent of holders of 66 2/3%
of the outstanding preferred stock, shall any shares of common stock be
purchased or redeemed for a price in excess of their par value.

Redemption Policy. Holders of our Class A Convertible Preferred stock do not
have a vested right to redeem their shares. Our Board of Directors, however,
currently has a stock redemption policy for shareholders who wish to sell their
shares to us. The policy may be modified or terminated at the Board's discretion
at any time. Currently, we will repurchase shares at fair market value, as
determined by our Board of Directors. Although subject to change, we expect the
price to remain at $10.00 per share or as otherwise announced in advance.
Redemption of shares is always subject to availability of funds for redemption
purposes. All redemption requests will be determined and acted upon in
accordance with the best interests of the Company. Availability of funds for
redemption purposes is determined at the Board's sole discretion, and is net of
current expenses, anticipated expenses, dividends, loan commitments and debt
obligations and reserves for operating funds. We will not sell or otherwise
liquidate any portion of our mortgage loan portfolio or other assets to fund a
redemption request. We also reserve the right to limit the number and frequency
of stock redemptions by shareholders.

Conversion. Each share of preferred stock is convertible as described below into
that number of shares of common stock as is determined by dividing the initial
purchase price of such shares by the conversion price in effect at the time of
conversion. Initially, the conversion price will be $10.00 per share and each
share of preferred stock will be convertible into one share of common stock. The
conversion price of each share of preferred stock is subject to adjustment upon
the occurrence of events, including a subdivision or combination of the common
stock, a dividend or distribution to holders of common stock payable in common
stock, a consolidation or merger of our company, or the issuance of shares of
capital stock, other than in a qualified initial public offering, at a price
below the greater of (a) $10.00 or (b) fair market value. Our Articles
Supplementary, as filed, provides that shares of common stock will convert to
common stock upon: (1) the closing of a firm commitment underwritten initial
public offering of the common stock resulting in aggregate gross proceeds to us
of at least $50 million at a share price of at least $10.00, or for such lesser
amount of proceeds or lower price, or both, as is approved by at least
two-thirds of the voting power of the preferred stock; or (2) five years after
the last closing of the initial offering. This provision was included at the
time that the Articles Supplementary was filed in connection with certain
agreements that existed at the time of filing, but which were subsequently
rescinded. Since these agreements are no longer of any effect, and because the

                                       8
<PAGE>

Board of Directors has resolved not to seek any public market for the Company's
stock, the preferred stock will convert to common stock on September 1, 2004.
Since only 100 shares of common stock are outstanding and we have no plans to
sell or issue any additional shares of common stock prior to that date, the
conversion will not have any material impact on the rights of the preferred
shareholders.

Liquidation. Upon the liquidation, dissolution or winding up of our company,
either voluntary or involuntary, the holders of our Class A Convertible
Preferred stock will be entitled to receive out of our assets available for
distribution to our shareholders, an amount per share of up to the original
purchase price per share of $10.00, plus any declared but unpaid dividends,
before any distribution to the holders of our common shares. Thereafter, to the
extent any assets remain in our company, such assets shall be distributed in
equal amounts per share to the holders of common shares and preferred shares on
an "as converted" basis, that is, as if the preferred shares had converted into
shares of common shares. Neither a consolidation or merger with or into another
corporation, nor a merger of any other corporation with us, nor the sale of all
or substantially all of our property or business, other than in connection with
a winding up of our business, will be considered a liquidation, dissolution or
winding up for these purposes.

Merger. In the event of a change in control, a merger, consolidation or other
combination by our company, or transfer of all or substantially all of our
assets, each holder of the preferred shares will have the option to elect to
receive either: (1) what the common shares would have received if conversion had
occurred before the record date, or (2) 100% of the liquidation preference of
the preferred shares as provided under "Liquidation" above.

Voting. Except as provided by law or our charter, the holders of our Class A
Convertible Preferred shares and common shares shall vote together as a class
for the election of directors and on all other matters to be voted on by our
shareholders. Each holder of preferred stock shall be entitled to one vote for
each share of common stock that would be issuable to such holder upon the
conversion of all the shares of preferred stock so held, and each holder of
common stock shall be entitled to one vote per share. Despite these provisions,
(a) the holders of common stock and the holders of preferred stock will be
entitled to vote as separate classes (1) for any proposed merger, consolidation
or sale of the assets of our company as an entirety, but only if at the time of
such proposal, one person or group of persons is the "beneficial owner", as
determined under the rules of Regulation 13D-6 under the Exchange Act, of more
than 66 2/3% of the preferred stock, and (2) for any stock splits, reverse stock
splits, or other amendments to our charter which in any way adversely affects
the preferences, qualifications, special or relative rights or privileges of the
common stock, and (b) the holders of preferred stock will be entitled to vote
separately as a class on the matters described under "Restrictions" below. Our
charter does not provide for cumulative voting and, accordingly, the holders of
a majority of the outstanding shares of capital stock have the power to elect
all directors to be elected each year.

Our founding shareholders held our first annual meeting of shareholders in 1999.
Our first general meeting of preferred shareholders was held on May 25, 2000. We
held our second general meeting of shareholders on May 31, 2001. Special
meetings of preferred shareholders may be called at any time by the President,
by the Chairman of the Board of Directors, by a majority of the Board of
Directors, or by the written request of shareholders entitled to cast a majority
of the votes which all shareholders are entitled to cast at the particular
meeting, addressed to the Secretary and then the Secretary shall proceed to call
a special meeting only as may be required by law. Our charter and bylaws may be
amended in accordance with Maryland law.

Restrictions. Unless a greater percentage vote is required by law or our
charter, and in addition to any other vote required by law, without the prior
consent of holders of 66 2/3% of the outstanding preferred stock voting as a
separate class: (1) we will not create or issue any additional class or series
of capital stock unless such class or series ranks junior to the preferred stock
in respect of dividends and liquidation preference or increase the authorized
amount of preferred stock; and (2) we will not amend the terms of the preferred
stock in any way or our charter in a way which adversely affects the
preferences, qualifications, special or relative rights or privileges of the
preferred stock.

                                       9
<PAGE>

Repurchase of Shares and Restrictions on Transfer. Two of the requirements of
qualification for the tax benefits accorded by the REIT provisions of the
Internal Revenue Code are that (1) during the last half of each taxable year not
more than 50% in value of the outstanding shares may be owned directly or
indirectly by five or fewer individuals, the "50%/5 stockholder test", and (2)
there must be at least 100 stockholders on at least 335 days of each taxable
year of 12 months.

To meet these requirements at all times, our charter prohibits any person,
without the prior consent of the Board of Directors, from acquiring or holding,
directly or indirectly, shares of capital stock in excess of 9.8%, by vote or
value, of the aggregate of the outstanding shares of capital stock or in excess
of 9.8%, by value or number of shares, whichever is more restrictive, of the
aggregate of the outstanding shares of our common stock. For this purpose, the
term "ownership" is defined in accordance with the REIT provisions of the Code
and the constructive ownership provisions of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code.

For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust proportionately
to its stockholders, partners or beneficiaries. These Code provisions also
attribute ownership of securities owned by family members to other members of
the same family and treat securities with respect to which a person has an
option to purchase as actually owned by that person in each case only if to do
so would cause a violation of the 50%/5 test. Further, these Code provisions set
forth rules as to when securities constructively owned by a person are
considered to be actually owned for the further application of such attribution
provisions, referred to as "reattribution". Thus, for purposes of determining
whether a person holds shares of capital stock in violation of the ownership
limitations set forth in our charter, many persons may be deemed to own directly
more than the 9.8% limit because an entities' shares are attributed to its
individual investors. A person will be treated as owning not only shares of
capital stock actually or beneficially owned, but also any shares of capital
stock attributed to such person under the attribution rules described above.
Accordingly, under some circumstances, shares of capital stock owned by a person
who individually owns less than 9.8% of the shares outstanding may nevertheless
be in violation of the ownership limitations set forth in our charter. Ownership
of shares of our capital stock through such attribution is generally referred to
as constructive ownership. Actual, and not constructive, ownership determines
the 100 stockholder test.

Our charter provides that if any transfer of shares of capital stock occurs
which, if effective, would result in any person beneficially or constructively
owning shares of capital stock in excess or in violation of the above transfer
or ownership limitations, then that number of shares of capital stock the
beneficial or constructive ownership of which otherwise would cause such person
to violate such limitations, rounded to the nearest whole shares, shall be
automatically transferred to a trustee, as trustee of a trust, for the exclusive
benefit of one or more charitable beneficiaries, and the intended transferee
shall not acquire any rights in such shares. Shares held by the trustee shall be
issued and outstanding shares of capital stock. The intended transferee shall
not benefit economically from ownership of any shares held in the trust, shall
have no rights to dividends, and shall not possess any rights to vote or other
rights attributable to the shares held in the trust. The trustee shall have all
voting rights and rights to dividends or other distributions with respect to
shares held in the Trust, which rights shall be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid
to the intended transferee before our discovery that shares of common stock have
been transferred to the trustee shall be paid with respect to such shares to the
trustee by the intended transferee upon demand and any dividend or other
distribution authorized but unpaid shall be paid when due to the trustee. Our
Board of Directors may, in their discretion, waive these requirements on owning
shares in excess of the ownership limitations.

Within 20 days of receiving notice from us that shares of capital stock have
been transferred to the trust, the trustee shall sell the shares held in the
trust to a person, designated by the trustee, whose ownership of the shares will
not violate the ownership limitations set forth in our charter. Upon such sale,
the interest of the charitable beneficiary in the shares sold shall end and the
trustee shall distribute the net proceeds of the sale to the intended transferee
and to the charitable beneficiary as follows. The intended transferee shall
receive the lesser of (1) the price paid by the intended transferee for the
shares or, if the intended transferee did not give value for the shares in
connection with the event causing the shares to be held in the trust, for

                                       10
<PAGE>

example, in the case of a gift, devise or other such transaction, the market
price, as defined below, of the shares on the day of the event causing the
shares to be held in the trust and (2) the price per share received by the
trustee from the sale or other disposition of the shares held in the trust. Any
net sales proceeds in excess of the amount payable to the intended transferee
shall be immediately paid to the charitable beneficiary. In addition, shares of
capital stock transferred to the trustee shall be deemed to have been offered
for sale to us, or our designee, at a price per share equal to the lesser of (1)
the price per share in the transaction that resulted in such transfer to the
trust, or, in the case of a devise or gift, the market price at the time of such
devise or gift, and (2) the market price on the date we, or our designee,
accepts such offer. We shall have the right to accept such offer until the
trustee has sold shares held in the trust. Upon such a sale to us, the interest
of the charitable beneficiary in the shares sold shall end and the trustee shall
distribute the net proceeds of the sale to the intended transferee.

The term "market price" on any date shall mean, with respect to any class or
series of our outstanding shares of stock, the closing price, as defined below,
for such shares on such date. The "closing price" on any date shall mean the
last sale price for such shares, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
for such shares, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE or, if such shares are not listed or admitted to trading on
the NYSE, as reported on the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which such shares are listed or admitted to trading or, if such shares are
not listed or admitted to trading on any national securities exchange, the last
quoted price, or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System of, if such system is no
longer in use, the principal other automated quotation system that may then be
in use or, if such shares are not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in such shares selected by the Board of Directors or, if no
trading price is available for such shares, the fair market value of the shares,
as determined in good faith by the Board of Directors.

Every owner of more than 5%, or such lower percentage as required by the Code or
the regulations promulgated thereunder, of all classes or series of our stock,
within 30 days after the end of each taxable year, is required to give written
notice to us stating the name and address of such owner, the number of shares of
each class and series of our stock beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to us with
such additional information as we may request to determine the effect, if any,
of such beneficial ownership on our status as a REIT and to ensure compliance
with the ownership limitations.

Subject to limitations, the Board of Directors may increase or decrease the
ownership limitations. In addition, to the extent consistent with the REIT
provisions of the Code, the Board of Directors may waive the ownership
limitations for and at the request of purchasers in this private placement or
subsequent purchasers.

The provisions described above may inhibit market activity and the resulting
opportunity for the holders of our capital stock to receive a premium for their
shares that might otherwise exist in the absence of such provisions. Such
provisions also may make us an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of
capital stock.

Before the listing of our stock for trading on a national exchange, we will not
permit a qualified plan, for this purpose only, the term "qualified plan" also
includes IRAs, entities whose assets include plan assets by reason of a plan's
investment in such entity, and other employee benefit plans described in Section
3(3) of ERISA, whether or not subject to Title I of ERISA, to acquire our stock,
either directly from us or by transfer from an existing shareholder, if such
proposed transfer would cause the ownership of any class of our stock by
qualified plans in the aggregate to equal or exceed 25%. As a result, we retain
the right not to approve of the purchase of stock by or on behalf of a qualified
plan transferee or purchaser of shares. This restriction could adversely affect
the ability of a shareholder to sell his or her stock.

                                       11
<PAGE>

ITEM 6.   SELECTED FINANCIAL INFORMATION.

You should read the following financial and operating data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements included elsewhere in this Form
10-K.

Capitalization

Our capitalization, as of December 31, 2001, was as follows:


 Borrowings:
   Short term unsecured notes                                        $17,312,526
   Secured line of credit                                             15,000,000
                                                             -------------------

            Total borrowings                                          32,312,526
                                                             -------------------

 Capital Stock
   Class A Convertible preferred stock
          - 21,633,864 shares outstanding                            216,157,968
   Common stock - 100 shares outstanding  (1)                                  1
                                                             -------------------

            Total borrowings and capital stock                      $248,470,495
                                                             ===================

(1) Our founders have purchased a total of 100 shares of common stock at $.01
    per share.

The selected financial data set forth below for the period from inception (March
18, 1999) through December 31, 1999 has been derived from our audited financial
statements included in our registration statement on Form 10-12/A filed July 11,
2000. The data for the twelve months ended December 31, 2000 and December 31,
2001 has been derived from our audited financial statements included elsewhere
in this Form 10-K.

<TABLE>
<CAPTION>
                                      December 31, 2001      December 31, 2000       December 31, 1999
                                      -----------------      -----------------       -----------------
     <S>                                    <C>                     <C>                    <C>
                                                 (In thousands, except per share amounts)

  Total assets.......................   $194,065               $216,545                 $186,224
  Total short-term debt..............     32,313                 45,432                    9,039
  Convertible preferred stock........    216,158                199,286                  189,851
  Retained deficit...................    (57,573)               (34,122)                 (16,085)

                                                                                  Period from inception
                                             Year Ended             Year Ended      (March 18, 1999) to
                                      December 31, 2001      December 31, 2000        December 31, 1999

  Operating Results under Generally
       Accepted Accounting Principles
       in the United States:
         Revenues....................     12,588                 15,140                    2,583
         Net Income (loss)...........        667                  3,572                   (2,987)

  Loss allocable to each common
     share:
       Basic and Diluted.............   (234,510)              (180,375)                (160,845)


                                                       12
<PAGE>

  Cash flows from (used by):
       Operating activities..........     (3,156)                 6,076                   (1,434)
       Investing activities..........     26,463                (29,985)                 (26,887)
       Financing activities..........    (20,601)                23,234                   28,997

  Tax Basis Operating Results:

       Tax basis net income..........     23,013                 21,988                   11,127

  Preferred stock dividends per
     share...........................   $   1.12                $  1.14                 $   0.75
</TABLE>


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

General

Our material financial transactions have been purchasing and holding a portfolio
of construction mortgage loans.

Statements contained in this Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K,
which are not historical facts, may be forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Investors are cautioned not
to attribute undue certainty to these forward-looking statements, which speak
only as of the date of this Form 10-K. We undertake no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, other than as required by law.

Overview

Subject to the direction and oversight of our Board of Directors, our day-to-day
operations are managed by our manager. We have no employees.

We began operations on May 1, 1999, concurrent with the first interim closing of
a private offering of 14,575,664 shares of our Class A Convertible Preferred
stock at $10 per share primarily in exchange for beneficial interests in trust
deeds on real property securing loans and accrued interest totaling
$145,756,640. Purchasers of our shares were primarily investors in trust deeds
managed by Primecore Funding Group, Inc. who invested in those trust deeds
before our formation and exchanged their interests for our stock at $10 per
share on a dollar for dollar basis. Since that time we have sold our Preferred
Stock through various private placements in order to raise cash to fund our
loans and for working capital purposes.

We currently have an ongoing equity private placement offering of 20,000,000
shares of Preferred Stock at $10.00 per share. This placement was undertaken to
purchase and fund additional and existing construction mortgage loans and for
working capital purposes. The placement is presently scheduled to close on March
31, 2002, however we anticipate extending the closing date until all shares have
been sold, at which point we may announce an additional placement.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and as such, are required to distribute at least 90
percent of our taxable income annually, subject to adjustments. Our manager
expects that the cash for such distributions will be generated from our
day-to-day operations, although we may also borrow funds to make distributions.

                                       13
<PAGE>

We may experience high volatility in financial reporting net income from quarter
to quarter and year to year, primarily as a result of fluctuations in timing of
completion of our investments in real estate under development, interest rates,
and general economic conditions in the greater San Francisco Bay Area. Our
operating results will depend, in part, upon our ability to manage our interest
rate and credit risks while maintaining our REIT status.


Results of Operations

The year 2001 was a challenging year for businesses in general, and businesses
located in the San Francisco Bay Area in particular. The residential real estate
market experienced a quick and sharp reduction in demand and prices after the
"dot.com" bubble burst in the 3rd quarter 2000. With the vacuum created by the
absence of the "dot.com" millionaires, homes priced above $5 million quickly
lost the value gains made in 2000, and suffered perhaps the worst price erosions
among all price segments, in some cases up to 40% from the previous high.
Inventory exploded in the first two quarters of 2001 to levels up to 2.5 times
the previous 3-year average as sellers sensed the market had peaked and tried to
capture the prices of late 2000. Interestingly, the volume of sales remained
quite steady throughout the year albeit at a slower pace than the previous year.

We were not immune from the effects of the economic downturn and experienced a
39% decrease in loan repayments for the year ended December 31, 2001 to 41 loans
representing approximately $100 million paid, down from 66 loans representing
approximately $165 million in the year ended December 31, 2000 and 62 loans
representing approximately $97 million in the period from inception (March 18,
1999) to December 31, 1999. Income from our loans, although accrued and earned
under our loan documents, is only recognized for financial reporting purposes
after we receive payment from our borrowers. Since loan repayments decreased in
2001, our income from completed real estate developments decreased for the year
ended December 31, 2001 compared with the year ended December 31, 2000. For the
year ended December 31, 2001, the income we recognized was 12.5% of the total
loan repayments compared with 9.2% for the year ended December 31, 2000 and 2.6%
for the period from inception (March 18, 1999) to of December 31, 1999. As we
would expect, the amount of accrued income as a percentage of the total amount
receivable has increased as our loans have aged. As of December 31, 2001, our
accrued income of $61.0 million was 25% of our total investments in real estate
including investments held for sale, compared with $39.1 million representing
15%, at December 31, 2000. As these loans payoff, we will recognize
proportionately more income per dollar received than we have in previous years.
Therefore, while we project the amount of our loan repayments in 2002 to be
similar to that of 2001, we project our income will increase.

Two factors contributed to the decrease in loan repayments in 2001 from 2000:
the number of defaulted loans, and the number of loans outstanding on projects
that were completed but not sold. In 2001 we recorded notices of default on 24
loans totaling $62.6 million in commitments compared with 2 loans totaling $19.9
million in 2000. The following table summarizes our loan status at December 31,
2001:

                                                     Amount           Accrued
  Loan Status      Number       Commitment           Funded            Income
                ----------  ---------------   --------------- ----------------

  Performing           62      282,971,140       157,704,089       50,033,624
  Defaulted            14       24,625,000        14,293,381        4,570,709
  Foreclosed           10       34,956,000        18,952,064        6,475,729
                ----------  ---------------   --------------- ----------------

  Total                86      342,552,140       190,949,534       61,080,062
                ==========  ===============   =============== ================


The relatively large number of defaults and subsequent foreclosures compared
with prior years resulted from aggressive intervention on our part in order to
protect the security for our loans during the difficult economy we faced in
2001. With the economy slowing and sales values decreasing, we had to make sure
our investments were managed in a manner consistent with these new economic
realities. In cases where we felt borrowers did not recognize these realities,

                                       14
<PAGE>

or where projects could not be completed in a timely manner or within budget, we
took the steps necessary to enforce our contractual rights in order to minimize
any damage to the value of our collateral. The foreclosure process was always
used as a last resort, and we generally strived to keep dialogue open with our
borrowers during the process in an effort to find a solution short of
foreclosure.

In some cases we had no alternative but to proceed to a foreclosure sale and
protect our interest. As a result we took title to 12 properties during 2001.
Two of the properties sold prior to the end of the year, and we are preparing
the remaining properties for disposition in a manner that we feel will maximize
their value. One of the attributes that makes our company unique is the
experience of our management team in real estate development. Taking title to
property through foreclosure is never a desired outcome, however, our manager
has the experience and resources to enable us to complete and sell foreclosed
property, rather than selling the property at distressed prices to another real
estate developer, which allows us to obtain the maximum value outcome of such a
situation. A banking industry publication reports that the collection rate,
which is the amount collected divided by the balance due, for defaulted loans
fell to 55% in 2001 from the historical average of 69%. We believe that either
amount is unacceptably low. For loans that have paid as of December 31, 2001 for
which we have filed a notice of default, our collection rate, including accrued
interest and points, is 96%. While we cannot guarantee our collection percentage
on defaulted loans will remain this high, especially in light of the current
economic climate, our business model along with our experienced manager lends
itself to a high collection rate for defaulted loans.

On October 2, 2001, our Board of Directors voted to adjust our monthly dividend
rate to $0.0875 per share, which represents an annual rate of return of 10.5% on
Preferred Stock investments, beginning with dividends paid in November 2001
compared with an average rate of 11.4% paid in 2000. In adjusting the dividend
policy, the Board considered the following factors: the downward pressure on
interest rates over the last six months of 2001; the San Francisco Bay Area real
estate market conditions; the economic uncertainties arising from the events of
September 11, 2001; and the potential implications of the foregoing on our
portfolio. By taking such action, the Board adopted a rate that it believes
should be sustainable in the foreseeable future. The Board will continue to
review and reassess the dividend policy as new information becomes available. In
the fourth quarter 2001, we tracked a significant decrease in the inventory of
homes in the markets where we lend, which leads us to believe that we will not
see further material price erosion.

We pay management fees based on the amount of loan commitments outstanding at
the end of each month. Our loan commitments have decreased since December 2000
as we began to rein in the amount of new loan commitments we made in order to
assess the direction of the real estate market and to increase liquidity. Our
average commitments outstanding for the year ended December 31, 2001 decreased
to $378.2 million from an average of $415.4 million for the year ended December
31, 2000 after increasing from an average of $299.8 million for the period from
inception (March 18, 1999) to December 31, 1999. Management fees were
$11,345,585 for the year ended December 31, 2001 compared with $10,967,249 and
$5,276,938 for the year ended December 31, 2000 and for the period from
inception (March 18, 1999) to December 31, 1999, respectively. The increase in
management fees resulted from an increase in the contractual rate, approved by
the Board of Directors, effective January 1, 2001 from .22% per month to .25%
per month of the total loan commitment amount. As we continue to remain cautious
about the market and seek to further increase our liquidity, we project that our
average loan commitments may decease in 2002, resulting in a decrease in
management fees.

Interest cost associated with our borrowings was $4,358,952 for the year ended
December 31, 2001, compared with $4,680,818 for the year ended December 31, 2000
and $241,152 for the period from inception (March 18, 1999) to December 31,
1999. Since December 31, 1999 all interest costs have been capitalized as a cost
of our investments in real estate under development and investments in real
estate under development by affiliates. Our interest costs decreased in 2001
compared with 2000 as we paid down our secured and unsecured debt to an average
of $36.4 million in 2001 from an average of $42.7 million in 2000. We project
that interest costs will continue to decrease in 2002 as we seek to maintain our
unsecured notes payable balances at their existing reduced level of
approximately $17.3 million, and by decreasing the average interest rate on such
notes from the 2001 average of 11.53% to less than 10%. We also will seek to
decrease the utilization of our line of credit from the current $15 million
available balance.

                                       15
<PAGE>

We have no employees, and our general and administrative and other expenses
consist primarily of professional fees, directors' fees and insurance costs.
General administrative and other expenses were $502,080 for the year ended
December 31, 2001, compared with $600,776 for the year ended December 31, 2000
and $51,866 for the period from inception (March 18, 1999) to December 31, 1999.
General and administrative expenses decreased primarily due to nonrecurring
costs related to becoming an SEC registrant in 2000, as well as our manager's
retention of an in-house attorney at the beginning of 2001 to perform some of
the functions previously provided for us by outside attorneys.

Liquidity and Capital Resources

Liquidity means the need for, access to and uses of cash. Our principal demands
for liquidity are cash for operations, funds that are required to satisfy
obligations under existing loan commitments, management fees, interest expense
associated with our indebtedness, debt repayments and dividend distributions to
shareholders. In the near term, our principal sources of liquidity are the
repayments of our real estate investments, funds received from issuance of
unsecured notes payable, our line of credit and sales of preferred stock.

Sources of cash

The year 2000 was a banner year for real estate in the San Francisco Bay Area in
general and for Primecore in particular. During that period we raised $99.3
million in new capital and originated $272.1 million in new loans. We also
received $164.8 in loan repayments. In 2001, as the economy went into recession
and exuberance died with the collapse of the "dot.com" economy, our sources of
cash and liquidity tightened. Sales of our stock as well as loan repayments
slowed compared with the year 2000 levels. During the same period we had to meet
loan funding commitments and short term notes payable maturities. However, by
increasing our line of credit facility by $5 million to $15 million, extending
the maturity date to May 2003 and working diligently with our borrowers, we were
able to meet our loan commitments and debt obligations. Notwithstanding the
difficult economy, during 2001, we funded $74million in loan commitments and
through loan repayments and renegotiations reduced our unfunded commitment
balance to approximately $45 million, from approximately $120 million at the
beginning of the year. In addition, we were able to reduce our short-term notes
by $21.5 million from $38.8 million at the beginning of the year to $17.3
outstanding at December 31, 2001. At December 31, 2001, we had approximately
$2.7 million cash in the bank.

By far, the largest source of our liquidity is the repayment of our investments
in real estate. As of December 31, 2001 we had $244.8 million, including accrued
income, invested in real estate construction projects that were contractually
obligated to repay by December 31, 2002. Because we must rely on the sale of the
project before can collect the amount owed, our repayment is largely dependent
on the state of the real estate market. We therefore keep close track of the
market where we lend in order to spot trends and make appropriate adjustments to
our forecasts. We have identified three price sectors for home sales in the
markets where we lend: $2 million and under; $2 million to $5 million and over
$5 million. The market for homes under $2 million remained quite strong
throughout 2001, and we expect it to continue, or even increase, in 2002 as the
economy strengthens. About 32% of our investments are expected to sell at prices
in this sector.

The middle sector, between $2 million and $5 million, did weaken in 2001
compared with 2000 as the new wealth created by the IPOs in 1999 and 2000
disappeared as the high-tech bubble burst. We saw average days on the market
increase from approximately 90 days in 2000 to approximately 120 days in 2001.
Buyers were more cautious about purchasing decisions and some waited to see
where the market would settle. Although buyers took longer to purchase in this
sector, prices remained quite steady and average prices in this sector actually
increased by almost 7% over 2000 levels. About 29% of our investments are
expected to sell at prices in this middle sector.

The third sector, with homes selling at prices over $5 million, suffered the
greatest deterioration in 2001compared with 2000. Average days on the market
doubled from 77 to 154 days as the number of buyers able to afford these high
priced homes fell. With the vacuum created by the absence of the high-tech

                                       16
<PAGE>

millionaires, prices adjusted accordingly. On average prices in this sector fell
10% in 2001 from 2000 levels, although in certain sub-markets year over year
price decreases of up to 30% were noted. Since approximately 39% of our
portfolio value is in homes in this sector , we are carefully watching the
sector for any changes. While we have seen a decrease in inventory levels across
all price sectors, with sales levels increasing in the lower two sectors over
the fourth quarter of 2001, the over $5 million sector continues to show
weakness and timing of sales remains difficult for us to gauge. Our target
balance for our portfolio among these sectors is 40% in the under $2 million;
35% in the $2 million to $5 million sector; and 25% in the $5 million and over
sector. In order to achieve this balance we will concentrate our future lending
activity to properties expected to sell under $2 million and allow payoffs of
homes priced over $5 million to reduce the portfolio balance in that sector to
our targeted level.

Our liquidity is further affected by the number of our investments in
foreclosure. Foreclosure can add from four months to twelve months to the
production cycle of our investments. The relatively large number of investments
in foreclosure at December 31, 2001 indicates that our repayments in 2002 may be
lower than we would otherwise expect. With these facts in mind we have adopted a
very conservative loan repayment assumption. Even with our conservative
assumptions, we believe that as a result of the steps taken in 2001 we are well
positioned to take advantage of opportunities as they become available in 2002.

Our liquidity is also enhanced through sales of our Preferred Stock and issuance
of notes payable to investors. Our Preferred Stock is sold through private
placements which are continuous and ongoing. For the year ended December 31,
2001 we sold 2.80 million shares of Preferred Stock for proceeds of $28.0
million compared with 2.84 million shares for proceeds of $28.2 million for the
five month period from August 1 to December 31, 2000 when we opened our first
private placement after registration of our Preferred Stock with the Securities
and Exchange Commission. The rate of our Preferred Stock sales fell during 2001
from a monthly average of nearly 300,000 shares in the first three quarters to
approximately 79,000 in the fourth quarter. While stock sales during the year
were trending downward before the fourth quarter, the events of September 11
caused a sudden and noticeable decline in stock sales. We project that sales
will remain at relatively low levels during the first half of 2002 as investors
continue to remain cautious about the economy as the after-effects of September
11 and instability throughout the world continue to impact the national psyche.
As the economy begins to improve, we expect sales of Preferred Stock to increase
as well.

We issue a limited amount of short term notes payable as an investment
alternative to our Preferred Stock. Originally conceived as a means to fund our
portfolio growth during the economic boom in 1999 and 2000 during the period we
registered our Preferred Stock, we issued $19.3 million in notes during the year
ended 2001 compared with $61.2 million issued during the year ended 2000. This
was a planned reduction on our part as we sought to limit the amount of our
short-term indebtedness. While we continue to issue notes payable on a limited
basis, we have severely limited the issuances of new notes, and in those cases
where we do issue new notes, they are for longer terms and lower rates than in
the past. Our objective for 2002 and beyond is to maintain our existing notes
payable balances at their current levels both through extension of existing
notes and issuance of new notes to replace maturities of existing notes.

Uses of Cash

The following table sets forth the timing and amount of our obligations over the
next two years:

  Obligation                           Total              2002             2003
  -------------------------  ----------------  ----------------  ---------------

  Investment fundings           $ 45,000,000      $ 30,000,000     $ 15,000,000
  Line of credit                  15,000,000                --       15,000,000
  Short term notes payable        17,312,526        17,312,526                0
  Dividend payments               40,000,000        20,000,000       20,000,000
                             ----------------  ----------------  ---------------

  Total                        $ 117,312,526      $ 67,312,526     $ 50,000,000
                             ================  ================  ===============

                                       17
<PAGE>

Investment fundings are our largest use of our cash. At January 1, 2001 we had
an unfunded loan commitment obligation of approximately $120 million. By
limiting new loan commitments at the beginning of 2001 and funding our existing
commitments, we reduced the amount of the obligation to $45 million at December
31, 2001. The remaining commitments will be funded as construction progresses on
our investments. The exact timing of the investment fundings is dependent on
several factors including weather, governmental regulation and developer related
issues, so the timing of investment fundings in the above table is an estimate
based on information available to us at this time.

We reduced short-term notes payable in 2001 from $38.8 million at the beginning
of the year to $17.3 million at December 31, 2001. We continue to offer notes to
investors but at a greatly reduced level. We believe that the market for notes
will continue to exist at a price which affords our shareholders the benefit of
some leverage while allowing us to maintain much desired capital. We will also
seek to extend the maturities of both existing and new borrowings to time
horizons that match the investment period of our assets.

Although dividend payments are not contractual obligations we have included
their impact on our liquidity since they are a fundamental component of our
business. Because of our REIT status, we must distribute dividends equal to at
least 90% of our taxable income. Failure to do so would jeopardize our REIT
status and could substantially reduce the rate of return we pay to our
shareholders.

In addition to the above, we expect to pay management fees to our manager as
described under Results of Operations above, and make periodic payments of
interest on our short term notes payable based upon balances outstanding.

We redeemed $17.1 million in preferred stock during the year ended December 31,
2001 compared with $24.7 million redeemed in 2000 and $5.9 million for the
period from inception (March 18, 1999) to December 31, 1999. We began the year
with outstanding redemption requests of $5.8 million. By the end of the year,
redemption requests were approximately $38.0 million. The increase in redemption
requests in 2001 was primarily attributable to non-recurring factors, including
fears about the real estate economy, liquidity issues of some investors
resulting from the drop in portfolio values of other securities and the economic
uncertainties resulting from the September 11 terrorist attack. We believe the
factors creating the higher level of redemption requests during the year ended
December 31, 2001 were extraordinary, and not likely to be repeated in 2002. In
order to address outstanding redemption requests, we have budgeted a greater
amount of cash for the year ended December 31, 2002 to apply to redemption
requests. We are also exploring other options for reducing the backlog of
redemption requests. The funds for our increased commitment to satisfying
redemption requests will come from our decreased notes payable obligations and
loan funding commitments. While redemptions are not a contractual obligation, we
intend to continue to address redemption requests in accordance with our
redemption policy and to continue to evaluate and determine our redemption
policy in the best interests of the Company and its shareholders.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of
Operations covers our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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. On an on-going basis, management evaluates its
estimates and judgments, including those related to the valuation of our assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of its financial statements.

Valuation and Realizability of Investments. All of our loans are classified for
financial reporting purposes as investments in real estate under development or
investments in real estate under development by affiliates (see Notes 3 and 4 to

                                       18
<PAGE>

the financial statements). We have foreclosed on some loans that are classified
as investments in real estate held for sale (Note 5). Such investments include
capitalized interest and are stated at the lower of cost or net realizable
value. Management conducts a review for impairment on an
investment-by-investment basis whenever events or changes in circumstances
indicate that the carrying amount of an investment may not be recoverable. An
impairment is recognized when estimated expected future cash flows (undiscounted
and without interest charges), typically from the sale of a completed property,
are less than the carrying amount of the investment, plus estimated costs to
complete. The estimation of expected future net cash flows is inherently
uncertain and relies to a considerable extent on assumptions regarding current
and future economics and market conditions. If, in future periods, there are
changes in the estimates or assumptions incorporated into the impairment review
analysis, the changes could result in an adjustment to the carrying amount of
the investments. To the extent an impairment has occurred, the excess of the
carrying amount of the investment over its estimated fair value, less estimated
selling costs, will be charged to income. In accordance with this policy, we
recorded a provision for impairment of investments in real estate under
development totaling $73,000 in the fourth quarter of 2001. We believe that all
of our investments are carried at realizable values, however conditions may
change and cause our loans to decline in value in a future period.

Loan Accounting. We have applied the guidance of AICPA Practice Bulletin 1,
Purpose and Scope of AcSEC Practice Bulletins and Procedures for Their Issuance,
Exhibit I in accounting for our investment loans as real estate acquisition,
development, or construction (ADC) arrangements. In accordance with the ADC
accounting rules, we do not accrue income for interest and points on our loans
until the sale or refinancing of a property. Revenue from interest and points is
recognized as cash is received from the sale or refinancing of such properties.
Loans are classified as investments in real estate under development,
investments in real estate under development by affiliates and investments in
real estate held for sale (see Notes 3, 4 and 5 to the financial statements) and
include amounts funded under the loan agreements and capitalized interest
expense. If our loans qualified as loans under GAAP, interest and points would
be recognized as income in periods prior to the sale of the underlying property.

REIT status and taxation. As a REIT, we generally will not be subject to
corporate-level federal income tax on net income that we distribute to our
shareholders. As such, no provision for federal income taxes is included in our
financial statements. Such taxes are the responsibility of the individual
shareholders. To maintain our classification as a REIT, we must satisfy tests
concerning the sources of our income, the nature and type of our assets, the
amount of our distributions to shareholders, and concentration of the ownership
of our stock. If we fail to qualify as a REIT in any taxable year, we will be
subject to federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and may not be able to qualify as a REIT for
four subsequent taxable years. Even if we qualify for taxation as a REIT, we may
be subject to certain state and local taxes on our income and property and to
federal income and excise taxes on our undistributed taxable income. Regular
federal and state income taxes would be included in our statements of operations
if we fail to qualify as a REIT. We distribute preferred stock dividends at a
level sufficient to satisfy specified return targets for our investors. As a
result, actual dividends may be in excess of taxable income. Rates of return are
subject to adjustment by our Board of Directors based upon prevailing market and
company specific conditions. timely payment of preferred stock dividends could
be adversely effected if we experience a slow down in the repayment of our
loans. It is possible that dividends could be significantly reduced if there was
a decline in the value of our loan portfolio.

Item 7A.  Qualitative and Quantitative Disclosures About Market Risk

An investment in our stock involves a high degree of risk. Among other things,
some of the principal risks are: the real estate lending business may be
adversely affected by periods of economic slowdown, which may be accompanied by
declining real estate values on properties securing repayment of loans;
construction mortgage loans involve greater risks of repayment than loans
secured by property that has already been improved since completion market
valuation of a given project can be highly speculative and subject to
unanticipated conditions; there is no public market for our securities, and
liquidity is not assured; under our business model, loan commitments will
generally exceed immediately available cash resources, and failure to obtain
repayment of loans in our portfolio, or a failure to maintain sufficient equity

                                       19
<PAGE>

would affect our ability to fund commitments; since we have no employees, if our
manager refused or became unable to continue to serve us, and a proper
replacement were not found, this would materially impact our business.


In addition to the foregoing, and other information contained or incorporated
into this Form 10-K, the following is a discussion of risk factors that we
believe are material at this time

General Risks Related to Construction Mortgage Lending

Real estate security. Our securities are subject to risks inherent in real
estate lending. Many of the risks of holding mortgage loans are similar to the
risks of investing directly in the real estate securing the mortgage loans. This
may be especially true in the case of a relatively small or less diverse pool of
mortgage loans. If there is a default on the mortgage loan, the ultimate extent
of our loss, if any, may only be determined after a foreclosure of the mortgage
encumbering the property and, if we take title to the property, upon liquidation
of the property. Factors such as the title to the property or its physical
condition, including environmental considerations and state of construction, may
make a third party unwilling to purchase the property at a foreclosure sale or
for a price sufficient to satisfy the obligations with respect to the related
mortgage loan. Foreclosure laws may protract the foreclosure process. In
addition, the condition of a property may deteriorate during the pendency of
foreclosure proceedings. Some borrowers may become subject to bankruptcy
proceedings, in which case the amount and timing of amounts due may be
materially adversely affected. Even if the real property provides adequate
security for the mortgage loan, substantial delays could be encountered in
connection with the liquidation of a defaulted mortgage loan and a corresponding
delay in the receipt and reinvestment of principal and interest payments could
occur.

Real estate market conditions. The real estate lending business may be adversely
affected by periods of economic slowdown or recession, which may be accompanied
by declining real estate values. Any material decline in real estate values
reduces the ability of borrowers to use real estate equity to support borrowings
and increases the loan-to-value ratios of mortgage loans previously made,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. In addition, delinquencies, foreclosures and losses
generally increase during economic slowdowns and recessions.

Loans on properties not yet constructed. A mortgage loan made to finance a
property that is not yet constructed will generally involve greater risks than a
mortgage loan on property that has been constructed. In the case of a property
already constructed, market value at the time the loan is made is more readily
ascertainable from current market valuations. In the case of a property not
already constructed, there can be no assurance that the improvements to be
constructed can be accomplished with available funds or in a timely manner. Sale
or refinancing of the completed project generally provides the funds for
repayment of a construction mortgage loan. While analyses are made to predict
the completed market value of the development project, such analyses are subject
to unanticipated changes over which we may have no control. Since market value
cannot be determined until a property is actually sold in the marketplace, the
market valuation of a proposed construction project can be especially
speculative.

Economic conditions. The performance of a mortgage loan portfolio will depend
on, among other things, the level of net interest income generated by the
mortgage loans, the market value of the mortgage loans and the supply of and
demand for construction mortgage loans. Prepayment rates, interest rates,
borrowing costs and credit losses depend upon the nature and terms of the
mortgage loans, the geographic location of the properties securing the mortgage
loans, conditions in financial markets, the fiscal and monetary policies of the
United States government and the Board of Governors of the Federal Reserve
System, international economic and financial conditions, competition and other
factors, none of which can be predicted.

Changes in interest rates. The levels of and fluctuations in interest rates,
which affect the ability to earn a spread between interest received on loans and
the costs of borrowings, may directly affect profitability. Profitability is
likely to be adversely affected during any period of unexpected or rapid changes
in interest rates. For example, a substantial or sustained increase in interest
rates could adversely affect the interest rate differential between newly
originated loans and the cost of borrowing. A significant decline in interest
rates could decrease the size of our loan portfolio by increasing the level of
loan prepayments as our loans carry fixed rates of interest. While we monitor
the interest rate environment, and generally should earn a positive spread
between interest paid on borrowed funds and interest earned on mortgage loans,

                                       20
<PAGE>

there can be no assurance that our profitability, and thus our dividend rate,
would not be adversely affected during any period of changes in interest rates.

Environmental liabilities. In the event that hazardous substances are found to
have contaminated properties secured by mortgage loans, the value of the real
property may be diminished. If forced to foreclose on a defaulted mortgage loan
on a contaminated property, we might potentially become subject to environmental
liabilities even if we were not responsible for the contamination. While we
intend to exercise due diligence to discover potential environmental liabilities
before the acquisition of any property through foreclosure, hazardous substances
or wastes, contaminants or pollutants may be discovered on properties during our
ownership or after a sale of the property to a third party. If hazardous
substances are discovered on a property, we may be required to remove those
substances or sources and clean up the property. We may also be liable to
tenants and other users of neighboring properties. In addition, we may find it
difficult or impossible to sell the property before or following any clean up.

Legislation and regulation. The mortgage loan and REIT areas are subject to
extensive regulation, supervision and licensing by federal, state and local
governmental authorities and to various laws and judicial and administrative
decisions imposing requirements and restrictions. Laws and regulations may be
subject to legislative, administrative and judicial interpretation, especially
laws and regulations that have been infrequently interpreted or only recently
enacted. Infrequent interpretations of laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Ambiguity under regulations to which our manager or we are subject may lead to
regulatory investigations or enforcement actions and private causes of action.
Failure to comply with regulatory requirements can lead to loss of approved
status, lawsuits and administrative enforcement actions. There can be no
assurance that we or our manager will maintain compliance with these
requirements in the future without additional expenses, or that more restrictive
local, state or federal laws, rules and regulations will not be adopted or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which would make compliance more difficult for us and our manager.

Specific Risks of Investment in Our Securities

Restrictions on transferability and lack of liquidity of shares. Shares of our
Class A Convertible Preferred stock have been privately placed solely with
accredited investors who have acquired them for investment purposes only and not
with a view toward transfer, resale, exchange or distribution. There currently
is no public market for our shares of Preferred stock and transfer is subject to
significant restrictions under federal and state law. Accordingly, the
transferability of such shares of stock is limited. Additionally, the shares may
not be readily accepted as collateral for a loan. Holders of our Class A
Convertible Preferred stock do not have a vested right to redeem their shares,
and therefore may not be able to liquidate their investment in the event of an
emergency or otherwise. Our Board of Directors currently has a stock redemption
policy for shareholders who wish to sell their shares to us. The policy may be
modified or terminated at the Board's discretion at any time, subject to the
exercise of their prudent business judgment. In addition, redemption requests
are only honored where there is cash available for redemption purposes, and
shareholders may therefore not have their redemption requests honored in as
timely a manner as they may wish, especially during economic times when loan
repayments are slowed. Also, a change in the redemption policy, which would be
effected solely for the benefit of the Company, could affect a shareholder's
ability to liquidate their investments.

Dependence on manager. We do not have any employees. All of our day-to-day
operations are conducted on our behalf by our manager and affiliate, Primecore
Funding Group, Inc. Primecore Funding Group, Inc. provides services to us
pursuant to a written management agreement. If our manager refused or became
unable to perform services on our behalf, and if a substitute manager could not
be found, this would materially and adversely impact on our ability to continue
to do business.

Balloon loans. The loans in our portfolio will typically require the borrower to
make a "balloon payment" on the principal amount upon maturity of the loan. To
the extent that a borrower has an obligation to pay a mortgage loan in a large

                                       21
<PAGE>

lump sum payment, their ability to satisfy this obligation may be dependent upon
their ability to obtain suitable refinancing or otherwise raise a substantial
cash amount. An increase in market interest rates over the mortgage rates
available at the time the loan was originated may have an adverse effect on the
borrower's ability to obtain refinancing or to pay required monthly payments. As
a result, these loans may involve a higher risk of default than fully amortizing
loans.

Lack of geographic diversification. Properties securing repayment of the
mortgage loans are currently located in the San Francisco Bay Region of Northern
California. Since the properties secured by the mortgage loans are located in
the same geographic region, these mortgage loans may be subject to a greater
risk of delinquency, default and potential loss if economic or political
conditions or real property values in the region deteriorated substantially.
Also, since borrowers will not be required to purchase earthquake insurance, and
properties are in the San Francisco Bay Area, known for its earthquake activity,
mortgage loans are subject to greater risk of loss than properties located in
more stable geologic areas.

Funding of loan commitments. We use our capital to invest in mortgage loans with
outstanding balances generally less than the outstanding commitment amounts.
This is because disbursements under the commitments occur over time in
conjunction with the construction progress of any particular construction
mortgage loan. We cannot predict with certainty the total amount of our future
capital, however, we expect that proceeds generated from completed real estate
developments and additional equity placements and note issuances, and borrowings
will be sufficient to fund all loan commitments. If, however, for some reason we
were unable to obtain loan payoffs or raise additional capital through the sale
of equity and debt securities or the sale of assets to meet our funding
commitments, and if we were unable to borrow sufficient funds, we might then be
unable to fund all of our existing loan commitments. Borrowers might then be
unable to complete their projects if they could not obtain financing from other
sources, and we conceivably could incur damages. Also, if we became unable to
meet our contractual obligations, our reputation would likely suffer, and we
might be unable to attract new borrowers, resulting in the loss of future
business. This might have a materially adverse effect upon our financial
condition, cash flows and results of operations.

Manager Relationship. Some of our directors and executive officers are also
executive officers, employees and shareholders of our manager. Under a
management agreement, our manager earns a management fee based upon the dollar
amount of our construction mortgage loan portfolio. In evaluating construction
mortgage loans, if our manager were to place an undue emphasis on maximizing
income at the expense of other criteria, such as preservation of capital, to
increase compensation for our manager, this could result in increased exposure
to losses on our mortgage loan portfolio.

Affiliate Loans and Defaulted Loans. Because of our past policy not to take
title to real property through foreclosure or otherwise, we previously relied on
our affiliates to assume defaulted loans. Some of our directors and executive
officers are principals of our affiliates, and have personally guaranteed the
assumed obligations. We do not anticipate that our affiliates will continue to
assume defaulted loans, and therefore all risk of losses on any defaulted loans
will be borne solely by us. As with other loans made to unaffiliated borrowers,
due to changes in the scope of construction and general cost increases during
development of a project, additional funds or time may be needed to complete a
project. As with other unaffiliated loans, we will grant an additional extension
of credit or time if our management believes repayment of the loan is adequately
secured. In the case of an affiliate, the principals of the affiliates, who are
also our management and some of the member of our board, will be involved in
making the decision on our behalf, creating a conflict of interest. Also, in the
event of a default on an affiliate loan, there would be a conflict of interest
in connection with decisions on how to proceed.

On occasion, we may decide to make new loans to affiliates. While these loans
are subject to the same underwriting criteria as any other loan, and have
generally been made on equivalent, if not superior terms for the REIT, as
compared with loans made to other borrowers, decisions are made, in part, by
interested persons.

Discretion of Board of Directors. Management has established our operating
policies and strategies. These policies and strategies may be modified or waived
by the Board of Directors, without shareholder approval. The ultimate effect of
any such changes may adversely affect our operations.

                                       22
<PAGE>

Competition. We feel that we offer our borrowers superior service, and that our
manager enjoys an established record and reputation that benefits our business.
Nevertheless, as with any business, we may face competition, primarily from
commercial banks, savings and loans, other independent mortgage lenders, and
other mortgage REITs. Also, if we expand into particular geographic markets in
order to increase geographic diversity and take advantage of opportunities in
such markets, we may face competition from lenders with established positions in
these locations. Competition can take place on various levels, including
convenience in obtaining a mortgage loan, service, marketing, origination
channels and pricing. Although we do not know of any particular competitor that
dominates our market, many of our competitors in the financial services business
are substantially larger and have more capital and other resources. There can be
no assurance that we will be able to compete successfully in this market
environment. Any failure in this regard could have a material adverse effect on
our results of operations and financial condition.

Borrowing. We may employ a financing strategy to increase the size of our
mortgage loan portfolio by borrowing a portion of the market value of our
mortgage loans. The costs of those borrowings vary depending upon the lender,
the nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors. If the
returns on the mortgage loans purchased with borrowed funds fail to cover the
cost of the borrowings, we will experience net interest losses and may
experience net losses. In addition, we may not be able to achieve the degree of
leverage we believe to be optimal, which may cause us to be less profitable than
we might be otherwise. We may finance some of the mortgage loans that we hold
through interim financing facilities such as bank credit lines. We will be
dependent upon a few lenders to provide the primary credit facilities for our
mortgage loans. Any failure to renew or obtain adequate funding under these
financings, or any substantial reduction in the size of or pricing in the market
for our mortgage loans, could have a material adverse effect on our operations.
We have not made any agreements under which a lender would be required to enter
into new borrowing agreements during a specified period of time; however, we may
make such agreements if deemed favorable. We will face competition for financing
sources, and the effect of the existence of additional mortgage REITs may be to
deny us access to sufficient funds to carry out our business plan or to increase
the cost of funds to us. Our goal is to strike a balance between the
under-utilization of leverage, which reduces potential returns to shareholders,
and the over-utilization of leverage, which could reduce our ability to meet our
obligations during adverse market conditions.

Our ability to achieve all of our investment objectives may depend not only on
our ability to borrow money in sufficient amounts and on favorable terms but
also on our ability to renew or replace on a continuous basis our maturing
short-term borrowings. In the event we are unable to renew or replace maturing
borrowings, we could be required to sell mortgage loans under adverse market
conditions and could incur losses as a result. A sharp rise in interest rates or
increasing market concern about the value or liquidity of a type or types of
mortgage loans in which our portfolio is concentrated will reduce the market
value of the mortgage loans, which would likely cause lenders to require
additional collateral. A number of those factors in combination may cause
difficulties for us, including a possible liquidation of a major portion of our
mortgage loans portfolio at disadvantageous prices with consequent losses, which
could have a material adverse effect on our solvency.

Future offerings. We may increase our capital resources by making additional
offerings of equity and debt securities, including classes of preferred stock,
common stock, commercial paper, medium-term notes, mortgage-backed obligations
and senior or subordinated debt. All debt securities will be and some classes of
preferred stock could potentially be senior to the Class A Convertible Preferred
stock we are offering under this placement memorandum in the event of our
liquidation. Additional equity offerings may dilute the equity of our
shareholders or reduce the price of shares of our outstanding securities, or
both.

Deficiency upon liquidation of our mortgages. The market value of our mortgage
assets may fluctuate significantly. If we need to sell assets to repay our
outstanding notes or other borrowings or commitments, our mortgage assets may
prove to be illiquid. Even if sold at a discount, the proceeds of sale might be
less than the outstanding principal amount of, and interest payable on, our
notes.

                                       23
<PAGE>

Operating history. The Company was organized in March 1999, and has been
operating since May 1, 1999. Our prior results will not necessarily be
indicative of our future results. Furthermore, although the principals of
Primecore Funding Group, Inc., our manager, have experience in construction
mortgage lending that predates organization of the Company, there can be no
assurance that the past experience of our manager will be indicative of our
future results.

Public market price volatility. We have made a business decision not to list our
securities for trading on any public market in order to avoid the price
volatility to which publicly-traded securities may be subject. It is possible
that future events could result in a determination to change such business
decision. In the event a public market for our securities did develop, the
market price of the securities might increase or decrease for reasons unrelated
to our operating performance. In particular, general market price movements,
interest rate changes and credit quality trends might affect the price of
securities related to the specialty finance and real estate industries market
segments. Also, market prices might be influenced by any variation between the
net yield on our mortgage loan portfolio and prevailing market interest rates
and by the market's perception of our ability to achieve earnings growth. In
addition, if the market price of other REIT stocks declined for any reason, or
if there was a broad-based decline in real estate values or in the value of our
portfolio of mortgage loans, the market price of the securities and
transferability could be adversely affected.

Restrictions on ownership of capital stock. Subject to the limitations set forth
in the articles supplementary creating our preferred stock, our charter
authorizes our Board of Directors to reclassify any of the unissued shares of
authorized capital stock into a class or classes of preferred stock. The
issuance of additional preferred stock could have the effect of making more
difficult any attempt to gain control of us by means of a merger, tender offer,
proxy contest or otherwise. To comply with the requirements for qualification as
a REIT at all times, our charter prohibits any person, absent a waiver from the
Board of Directors, from acquiring or holding, directly or indirectly, shares of
capital stock (including warrants and options), in excess of 9.8% of the vote,
value or aggregate number of the outstanding shares of capital stock or common
stock. See the section "Description of Capital Stock" for a more detailed
description of these limitations on ownership. If a public market were to be
established for our stock, which we presently do not anticipate for reasons set
forth above, these provisions might inhibit market activity and the resulting
opportunity for the holders of our capital stock to receive a premium for their
securities that might otherwise exist in the absence of those provisions. Those
provisions also may make us an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of
capital stock.

In addition, provisions of Maryland law relating to "business combinations" and
a "control share acquisition" and of our charter and bylaws, particularly the
staggered terms for directors, may also have the effect of delaying, deterring
or preventing a takeover attempt or other change in control which would be
beneficial to shareholders and might otherwise result in a premium over then
prevailing market prices.

Every owner of more than 1% (or such lower percentage as required by the Code or
related regulations) of all classes or series of our stock, within 30 days after
the end of each taxable year, is required to respond in writing to our annual
request for stock ownership information, or to include such information on their
tax return, including by stating the name and address of such owner, the number
of shares of each class and series of our stock beneficially owned and a
description of the manner in which such shares are held. Each such owner shall
provide to us such additional information as we may request to determine the
effect, if any, of such beneficial ownership on our status as a REIT and to
ensure compliance with the ownership limitations.

Investment by tax-exempt entities. A fiduciary of a pension, profit-sharing,
stock bonus plan or individual retirement account, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the prohibited transaction provisions of the Internal Revenue Code or
the fiduciary responsibility provisions or "prudent man" rule of the Employee
Retirement Income Security Act of 1974, known as "ERISA", should consider:

          (a) whether the ownership of our securities is in accordance with the
     documents  and  instruments  governing the employee benefit plan,

                                       24
<PAGE>

          (b) whether the ownership of our securities is consistent with the
     fiduciary's responsibilities and satisfies the applicable requirements of
     ERISA, in particular, the diversification, prudence and liquidity
     requirements of section 404 of ERISA,

          (c) the prohibitions under ERISA on improper delegation of control
     over, or responsibility for "plan assets" and ERISA's imposition of
     co-fiduciary liability on a fiduciary who participates in, or permits, by
     action or inaction, the occurrence of, or fails to remedy, a known breach
     of duty by another fiduciary with respect to plan assets, and

          (d) the need to value the assets of the employee benefit plan
     annually.

A plan fiduciary should understand the illiquid nature of an investment in our
securities and that no secondary market will exist for them, and should review
both anticipated and unanticipated liquidity needs for the plan and conclude
that an investment in our securities is consistent with the plan's foreseeable
future liquidity needs.

REIT status and taxation. We intend to continue to operate as a REIT for federal
income tax purposes. We elected to be subject to tax as a REIT when we filed our
first federal income tax return for 1999. To maintain our classification as a
REIT, we must satisfy tests concerning the sources of our income, the nature and
type of our assets, the amount of our distributions to shareholders, and
concentration of the ownership of our stock. If we fail to qualify as a REIT in
any taxable year and the relief provisions of the Code do not apply, we would be
subject to federal income tax as a regular, domestic corporation, and our
shareholders would be subject to tax as shareholders of such a corporation.
Distributions to shareholders in any year in which we fail to qualify as a REIT
would not be deductible in computing our taxable income. As a result, we could
be subject to income tax liability and the cash available for repayment of our
short term notes or distribution to our shareholders would be significantly
reduced or eliminated. Further, we could also be disqualified from re-electing
REIT status for the four taxable years following the year during which we became
disqualified.

REIT qualification requirements with respect to (1) our source of income, the
nature of our assets and distribution of dividends may limit operational and
financial opportunities otherwise available to us and (2) shareholder
diversification may limit our access to certain otherwise interested investors.

There is no assurance that future legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to our qualification as a REIT or with respect to the federal
income tax consequences of that qualification. Any such changes may reduce or
eliminate our competitive advantage over non-REIT competitors.

Investment Company Act exemption. We conduct our business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate." If we should fail to qualify for an exemption from
registration as an investment company, our ability to use leverage would be
substantially reduced and we would be unable to conduct our business.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Required financial statements and supplementary data are included in this Form
10-K commencing on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.

                                       25
<PAGE>

                                    PART III


ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

Our Board of Directors consists of five directors, two of which were elected
after expansion of our Board on March 1, 2001. Our directors, executive officers
and senior officers and their positions are:

    Name                        Position
    ----                        --------

    Susan Fox                   President and Director
    William Whitlow             Chief  Executive Officer and
                                Chairman of the Board
    Michael Rider               Treasurer, Chief Financial Officer and Director
    Robert Puette               Director
    James Barrington            Director
    Ben Hamburg                 Secretary

       The business background and experience of our directors and executive
officers is as follows:

      Susan Fox, age 45, is a co-founder, director and President of the Company.
Ms. Fox is also a  director, President  and sole shareholder  of our  manager,
Primecore Funding Group, Inc., and other affiliated companies. Ms. Fox has been
involved in real estate development and construction  lending for over twenty
years. In 1993, Ms. Fox became a consultant, then employee and President of Jim
Ward & Associates, Inc. Ms. Fox was responsible for dealing with substantial
loan workout situations relating to loans made prior to her retention by Jim
Ward &  Associates. Since 1996, Ms. Fox has been the President of Primecore
Funding Group, Inc., which she formed with Michael Heren. Ms. Fox has overall
management responsibility and primary responsibility for loan underwriting and
managing the loan portfolio.

       William Whitlow, age 48, is Chief Executive Officer and Chairman of the
Board of Directors of the Company, and Chief Operating Officer of Primecore
Funding Group, Inc. Mr. Whitlow received a Masters of Management from the J. L.
Kellogg Graduate School of Management at Northwestern University, and a Masters
of Architecture from the University of Illinois. Prior to joining Primecore, Mr.
Whitlow was Managing Director of Arthur Andersen's Western Region Real Estate
Capital Markets Group based in San Francisco. He was responsible for strategic
capital markets consulting, private placements of debt and equity, portfolio and
company sales, and mergers and acquisitions. Prior to joining Arthur Andersen,
Mr. Whitlow was a Director of PricewaterhouseCoopers' Real Estate Capital
Markets Group, operated his own real estate firm, Alliance Management, was a
Vice President at Pacific Gateway Properties, where he directed the strategic
management and repositioning of the company's real estate portfolio, and was
with Aetna Realty Investors, where he held various positions over a 9-year
period, performing loan production, asset management and dispositions services.
Mr. Whitlow is a member of the Urban Land Institute, PREA, and the National
Association of Real Estate Investment Trusts.

       Michael Rider, age 39, is a co-founder, director, treasurer and Chief
Financial Officer of the Company. Mr. Rider's term of office as a director
expires in 2003. Mr. Rider is a Certified Public Accountant. Mr. Rider was
controller, then Chief Financial Officer for The Plymouth Group  and its
successor, TPG Development Corporation, a San Francisco Bay Area real estate
development company from 1991 until 1998.  Since July 1998,  he has served as
Chief Financial Officer of Primecore Funding Group,  Inc. He is also the Chief
Financial Officer for our affiliates: Eprime, Inc., Primecore Properties, Inc.,
and 99 Investors, LLC.

       Robert L. Puette, 60, has been a member of the Board since March 1, 2001.
Prior to such time, Mr. Puette served as an advisory director to the Company. He
is currently a Partner with WK Technology Fund, a venture capital firm. Between
1997 and 2000, Mr. Puette was the President, Chief Executive Officer, and member
of the Board of Directors of Centigram Communications Corporation (NASDAQ), a
communications technology firm. Prior to his position at Centigram, from 1995 to
1997, Mr. Puette served as President, CEO and Chairman of the Board of Directors
at NetFRAME Systems (NASDAQ), a high-availability computer server company, and

                                       26
<PAGE>

from 1990 to 1993, Mr. Puette served as President of Apple USA, Apple
Corporation (NASDAQ). Prior to 1990, Mr. Puette served as a Group General
Manager of Hewlett-Packard Corporation (NYSE). Mr. Puette is also on the Board
of Cupertino Electric Corporation (Private) and the Magis Network Corporation
(Private), and is a former director of Cisco Systems (NASDAQ). Mr. Puette holds
a BSEE degree from Northwestern University and a MSOR degree from Stanford
University.

     James  Barrington, 60, has been a director since March  2001.From 1965 to
1999, Mr. Barrington was with Arthur Andersen LLP, serving primarily as an audit
and business advisory  partner. In his capacity as a partner of Arthur Andersen
LLP, Mr. Barrington did not personally provide any services to the Company.  Mr.
Barrington received a B.S. in accounting from San Jose State University and a
M.B.A. from the University of California at Berkeley.

     Ben Hamburg, 48, is secretary of the Company, and Executive Vice President
and General Counsel of Primecore Funding Group, Inc. Mr. Hamburg graduated from
the  University of California, Los Angeles, and earned his law degree from the
University of California, Berkeley, Boalt Hall School of Law in 1979. Mr.
Hamburg served as a law clerk to the Honorable Ira A. Brown, Jr., Judge of the
San Francisco Superior Court. Since 1981, Mr. Hamburg has been in private
practice, most recently  with the San  Francisco law firm of Freeland Cooper &
Hamburg, and has  specialized in real estate and commercial matters. Prior to
becoming General Counsel, Mr. Hamburg represented Primecore Funding Group as its
outside legal counsel.

Compensation of Directors

None of the directors of the Company who also serve as executive officers or
employees of our affiliates receives any separate compensation for service on
our Board of Directors or on any Board committee. Although all directors are
entitled to receive reimbursement of reasonable out-of-pocket expenses incurred
in connection with meetings of the Board of Directors, to date, no director has
requested compensation for out of pocket expenses. Messrs. Puette and
Barrington, who are not employed by our affiliates or us, each receive annual
compensation totaling $25,000. Our charter obligates us to indemnify our
directors and officers and to pay or reimburse expenses for such individuals in
advance of the final disposition of a proceeding to the maximum extent permitted
from time to time by Maryland law. The Maryland General Corporation Law, the
"Maryland GCL", permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (1) was committed in bad faith, or (2) was a result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.

Terms of Directors and Officers

Our Board of Directors  consists of the number of persons as shall be fixed
by the Board of  irectors  rom time to time by  resolution  to be divided into
three classes, designated Class I, Class II and Class III, with each class to be
as nearly equal in number of directors  as  possible. Currently  there are five
directors.  Ms. Fox is a Class I director. Ms. Fox was re-elected as a director
at the annual meeting in 2001, and her term expires in 2004. Mr. Whitlow and Mr.
Puette are Class II directors, and their terms expire in 2002. Mr. Rider and Mr.
Barrington are Class III directors, and their terms expire in 2003. At each
annual meeting, the successors to the class of directors whose term expires at
that time are to be elected to hold office for a term of three years, and until
their successors are elected and qualified, so that the term of one class of
directors expires at each annual meeting.

For any vacancy on the Board of Directors, including a vacancy created by an
increase in the number of directors, the vacancy may be filled by election of
the Board of Directors or the shareholders, with the director so elected to
serve until the next annual meeting of shareholders, if elected by the Board of
Directors, or for the remainder of the term of the director being replaced, if
elected by the shareholders; any newly-created directorships or decreases in
directorships are to be assigned by the Board of Directors so as to make all
classes as nearly equal in number as possible. Directors may be removed only for

                                       27
<PAGE>

cause and then only by vote of a majority of the combined voting power of
shareholders entitled to vote in the election for directors. Subject to the
voting rights of the holders of the preferred stock, the charter may be amended
by the vote of a majority of the combined voting power of shareholders, provided
that amendments to the article dealing with directors may only be amended if it
is advised by at least two-thirds of the Board of Directors and approved by vote
of at least two-thirds of the combined voting power of shareholders. The effect
of these as well as other provisions of our charter and bylaws may discourage
takeover attempts and make more difficult attempts by shareholders to change
management.

Executive officers are appointed by the Board of Directors, serve at the Board's
pleasure and may be removed from office at any time without cause. There are no
family relationships among any of our directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Each of Susan Fox, William Whitlow, Michael Rider, James Barrington, Robert
Puette and Ben Hamburg filed a report on Form 5 reporting beneficial ownership
of common and/or Class A Convertible Preferred Shares. The total number of such
shares held by each of them is set forth under Item 12 below

ITEM 11.     EXECUTIVE COMPENSATION.

None of the executive officers of the Company receive compensation from us for
their services. All are paid directly by our manager as part of and not in
addition to the management fee. We do not have a stock option or deferred
compensation plan.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table presents information regarding the beneficial ownership of
our capital stock as of December 31, 2001 of: (1) each person known by us to own
beneficially five percent or more of our outstanding capital stock; (2) each of
our directors and executive officers; and (3) all of our directors and executive
officers as a group. Unless otherwise indicated in the footnotes to the table,
the beneficial owners named have, to our knowledge, sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws where applicable.


                                                  Number              Percent
  Title of Class            Beneficial Owner      of Shares           of Class

  Class A
    Convertible Preferred    Susan Fox             22,715                 *
                             Michael Rider          5,000                 *
                             Ben Hamburg            5,028                 *
                             Robert Puette        404,776               1.9
                                                 --------              ----

                                      Total       437,519               2.0
                                                 ========              ====

  Common                     William Whitlow           40                40
                             Susan Fox                 40                40
                             Michael Rider             20                20
                                                 --------              ----

                             Total                    100               100
                                                 ========              ====

   * Less than one percent of our outstanding capital stock.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Primecore Funding Group, Inc., our affiliate, manages all of our business,
subject to direction from our Board of Directors. Our manager bears all
operating expenses connected with originating and managing our mortgage loan
portfolio, and receives a monthly management fee that is established by a
written management agreement that we entered into with our manager. Primecore
Funding Group, Inc. is licensed by the California Department of Real Estate as a

                                       28
<PAGE>

real estate corporation. Our headquarters are the offices of our manager. We
currently do not pay any rent for our headquarters, as these expenses are borne
by our manager.

We have other affiliates, which are entities with whom we share common officers
and some common directors, but which have their own business purposes. The
following is a list of other affiliates:

Primecore  Properties,  Inc. is a California  corporation,  incorporated in
1997.  Ms.  Fox is its  sole  shareholder  and one of its  directors.  Primecore
Properties,  Inc. is licensed by the  California  Department of Real Estate as a
real estate corporation. Primecore Properties, Inc. provides some services to us
through an  agreement  with our manager.  Primecore  Properties,  Inc.  does not
receive any compensation from us.

Eprime, Inc. is a California corporation,  incorporated in 2000. Ms. Fox is
the sole shareholder and director.  She is the president and secretary,  and Mr.
Rider is the chief financial officer.  Eprime, Inc. does not have any employees,
does not provide any services to us and does not receive any  compensation  from
us.

99 Investors,  LLC, a California limited liability  company,  was formed in
1996.  Ms.  Fox is its sole  member.  It does not have any  employees,  does not
perform any services for us and does not receive any compensation from us.

99 El Camino Partners, LLC, a California limited liability company, was formed
in 1996. Ms. Fox is its sole member. The partnership has no employees, does not
provide any services to us and does not receive any compensation from us. 99 El
Camino Partners owns the property at 99 El Camino Real, Menlo Park, California,
our principal place of business and that of our affiliates.

Because of our prior policy not to take title to real property through
foreclosure or otherwise, we previously relied on our affiliates to assume
defaulted loans. Our prior policy was modified in 2001. We presently anticipate
that we or a wholly-owned subsidiary will take title to property acquired
through foreclosure or otherwise.

With respect to our prior policy, in exchange for our affiliates' assumption of
defaulted loans, our affiliates agreed to bear the risk of loss on the assumed
loans, and also received any benefit of any profits to be realized from the
successful development and ultimate sale of the completed properties. See Note 4
and Schedule 4 of our financial statements for further detail on investments in
real estate under development by affiliates.

                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K


a. Financial Statements. The following financial information is included as a
separate section of this Annual Report on Form 10-K:

   1.  Report of Independent Public Accountants
   2.  Balance Sheets As of December 31, 2001 and 2000
   3.  Statements of Operations for the years ended December 31, 2001, and 2000,
       and for the period from inception (March 18, 1999) to December 31, 1999
   4.  Statements of Shareholders' Equity for the years ended December 31, 2001
       and 2000, and for the period from inception (March 18, 1999) to December
       31, 1999
   5.  Statements of Cash Flows for the years ended December 31, 2001 and 2000,
       and for the period from inception (March 18, 1999) to December 31, 1999
   6.  Notes to Financial Statements December 31, 2001, 2000, and 1999
   7.  Schedule IV - Mortgage loans on real estate at December 31, 2001

                                       29
<PAGE>

     b.  Exhibits


     Exhibits submitted with this Form 10-K, as filed with the Securities and
     Exchange Commission, or those incorporated by reference to other filings
     are:


     Exhibit No.    Description of Exhibit


     3(i)           Articles of Incorporation of the Company is incorporated by
                    reference to Exhibit 3(i) to the Company's Form 10-12 G/A,
                    previously filed on April 28, 2000

     3(ii)          Bylaws, Amended March 30, 2000 is incorporated by reference
                    to Exhibit 3(ii) to the Company's Form 10-12 G/A, previously
                    filed on April 28, 2000

     3(ii)a         Bylaws, Amended March 1, 2001 is incorporated by reference
                    to Exhibit 3(ii) to the Company's Form 10-K, previously
                    filed on March 30, 2001

     3(iii)         Articles Supplementary of the Company is incorporated by
                    reference to Exhibit 99.1 to the Company's Form 10-12 G/A,
                    previously filed on April 28, 2000

     3(iv)          Specimen Stock Certificate, is incorporated by reference to
                    Exhibit 99.2 to the Company's Form 10-12 G/A, previously
                    filed on April 28, 2000

     4.1            Registration Rights Agreement is incorporated by reference
                    to Exhibit to the Company's Form 10-12 G/A, previously filed
                    on April 28, 2000

     4.2            Founder's Registration Rights Agreement is incorporated by
                    reference to Exhibit to the Company's Form 10-12 G/A,
                    previously filed on April 28, 2000

     4.3            Management Agreement dated March 30, 1999 is incorporated by
                    reference to Exhibit 10 to the Company's Form 10-12 G/A,
                    previously filed on April 28, 2000

     4.4            Management Agreement dated October 1, 2000 is incorporated
                    by reference to Exhibit 10 to the Company's Form 10-K,
                    previously filed on March 30, 2001

    11.1            Statement regarding computation of per share earnings


c.       Reports on Form 8-K

The Company filed a report on Form 8-K on October 3, 2001 relating to the Board
of Director's decision to adjust our monthly dividend rate to $0.0875 per share,
representing an annual rate of return of 10.5% on Preferred Stock investments,
beginning with dividends declared as of October 31, 2001.



                                       30
<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereto duly authorized on March 20, 2002.

               |-----------------------------------|
               |   PRIMECORE MORTGAGE TRUST, INC.  |
               |-----------------------------------|
               |                                   |
               |   By:      /s/SUSAN FOX           |
               |       _________________________   |
               |-----------------------------------|
               |            Susan Fox, President   |
               |-----------------------------------|



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|--------------------------|-----------------------------------|---------------|
| Signature                |   Capacity                        | Date          |
|--------------------------|-----------------------------------|---------------|
| /s/SUSAN FOX             |                                   |               |
|_________________________ |   President and Director          |March 20, 2002 |
|--------------------------|-----------------------------------|---------------|
|Susan Fox                 |                                   |               |
|--------------------------|-----------------------------------|---------------|
|                          |                                   |               |
| /s/WILLIAM E. WHITLOW    |   Chief Executive Officer and     |               |
|_________________________ |   Chairman of the Board           |March 20, 2002 |
|--------------------------|-----------------------------------|---------------|
|William E. Whitlow        |                                   |               |
|--------------------------|-----------------------------------|---------------|
|                          |                                   |               |
| /s/MICHAEL RIDER         |   Chief Financial Officer and     |               |
|_________________________ |   Director                        |March 20, 2002 |
|--------------------------|-----------------------------------|---------------|
|Michael Rider             |                                   |               |
|--------------------------|-----------------------------------|---------------|
| /s/ROBERT PUETTE         |                                   |               |
|_________________________ |   Director                        |March 20, 2002 |
|--------------------------|-----------------------------------|---------------|
|Robert Puette             |                                   |               |
|--------------------------|-----------------------------------|---------------|
| /s/JAMES BARRINGTON      |                                   |               |
|_________________________ |   Director                        |March 20, 2002 |
|--------------------------|-----------------------------------|---------------|
|James Barrington          |                                   |               |
|--------------------------|-----------------------------------|---------------|






















                                       31
<PAGE>




                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

                                                                        Page No

Report of independent public accountants                                  F-1


Balance sheets as of December 31, 2001 and 2000                           F-2

Statements of operations for the years ended
December 31, 2001 and 2000, and for the period from
inception (March 18, 1999) to December 31, 1999                           F-3


Statements of shareholders' equity for the years ended
December 31, 2001 and 2000 and for the period from
inception (March 18, 1999) to December 31, 1999                           F-4


Statements of cash flows for the years ended December
31, 2001 and  2000, and for the period from inception
(March 18, 1999) to December 31, 1999                                     F-5


Notes to financial statements                                             F-7


Schedule IV--Mortgage loans on real estate-December 31, 2001              F-16








<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
Primecore Mortgage Trust, Inc.

We have audited the accompanying balance sheets of Primecore Mortgage Trust,
Inc. (a Maryland Corporation), as of December 31, 2001, and 2000, and the
related statements of operations, shareholders' equity, and cash flows for the
years ended December 31, 2001 and 2000, and for the period from inception (March
18, 1999) to December 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 Primecore Mortgage Trust, Inc.
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 2001and 2000 and for the period from
inception (March 18, 1999) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

As further discussed in Note 2 to the accompanying financial statements, the
Company changed its method of accounting for interest expense effective January
1, 2000.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements and schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.





                                                       ARTHUR ANDERSEN




San Francisco, California
February 8, 2002




                                      FS-1

<PAGE>



                                        PRIMECORE MORTGAGE TRUST, INC.

                                                BALANCE SHEETS
                                       As of December 31, 2001 and 2000
<TABLE>
<CAPTION>



                                                                                               2001                 2000
                                                                                -------------------- --------------------
     <S>                                                                                  <C>                 <C>
ASSETS:
Investments in real estate under development .................................      $   131,759,510       $  174,362,219
Investments in real estate under development by affiliates....................           40,237,961           42,050,737
Investments in real estate held for sale......................................           18,952,063                   --
Cash and cash equivalents.....................................................            2,706,204                   --
Other assets, net.............................................................              408,905              132,135
                                                                                -------------------- --------------------

        Total assets..........................................................      $   194,064,643      $   216,545,091
                                                                                ==================== ====================


LIABILITIES AND SHAREHOLDERS' EQUITY:

Notes payable (including $0, and $7,622,535 to affiliates at December 31, 2001
   and 2000, respectively)....................................................       $   17,312,526       $   38,787,264
Secured line of credit........................................................           15,000,000            6,644,692
Accrued expenses and other....................................................            1,232,022              723,512
Bank overdraft................................................................                   --            3,086,941
Preferred stock dividends payable.............................................            1,903,928            1,901,863
Payable to affiliate..........................................................               31,193              236,972
                                                                                -------------------- --------------------

        Total liabilities.....................................................           35,479,669           51,381,244
                                                                                ==================== ====================
Commitments and contingencies (see note 9)....................................

Preferred stock: par value $0.01, 40,000,000 shares authorized; 21,633,864 and
      19,946,445 shares issued and outstanding at December 31, 2001 and 2000,
      respectively; entitled to $10 per share in liquidation before any
      distributions to common.................................................          216,157,968          199,285,861
Common stock: par value $0.01, 10,000,000 shares authorized; 100 shares
      issued and outstanding at December 31, 2001 and 2000....................                    1                    1
Retained deficit..............................................................          (57,572,995)         (34,122,015)
                                                                                -------------------- --------------------

        Total shareholders' equity............................................          158,584,974          165,163,847
                                                                                -------------------- --------------------

        Total liabilities and shareholders' equity............................      $   194,064,643      $   216,545,091
                                                                                ==================== ====================



                                The accompanying notes are an integral part of these statements.
</TABLE>



                                                          FS-2
<PAGE>



                                        PRIMECORE MORTGAGE TRUST, INC.

                                           STATEMENTS OF OPERATIONS
                                       For the years ended December 31,
                                2001 and 2000 and for the period from inception
                                    (March 18, 1999) to December 31, 1999


<TABLE>
<CAPTION>
                                                                                                               Period from
                                                                                                          Inception (March
                                                               Year Ended           Year Ended                18, 1999) to
                                                               December 31, 2001    December 31, 2000    December 31, 1999
                                                             -------------------- -------------------- --------------------
     <S>                                                              <C>                 <C>                  <C>
REVENUES:
Income from completed real estate development
   (including $145,468, $3,040,082 and $38,530 from
   affiliates)............................................          $ 12,519,618         $ 15,103,946          $ 2,566,301
Other.....................................................                68,510               36,390               17,097
                                                             -------------------- -------------------- --------------------
         Total revenues...................................            12,588,128           15,140,336            2,583,398

EXPENSES:
Management fees paid to an affiliate.......................           11,345,585           10,967,249            5,276,938
Interest...................................................                   --                   --              241,152
Provision for impairment of investments in real
   estate under development................................               73,000                   --                   --
General, administrative and other..........................              502,080              600,776               51,866
                                                             -------------------- -------------------- --------------------
         Total expenses....................................          11, 920,665           11,568,025            5,569,956
                                                             -------------------- -------------------- --------------------

         Net income (loss).................................              667,463            3,572,311           (2,986,558)
         Preferred stock dividends.........................          (24,118,443)         (21,609,791)         (13,097,977)
                                                             -------------------- -------------------- --------------------

         Net loss allocable to common......................        $( 23,450,980)        $(18,037,481)       $ (16,084,535)
                                                             ==================== ==================== ====================


Basic and diluted net loss per common share................           $ (234,510)          $ (180,375)          $ (160,845)
                                                             ==================== ==================== ====================

Basic and diluted weighted-average common shares
outstanding................................................                  100                  100                  100
                                                             ==================== ==================== ====================





                                The accompanying notes are an integral part of these statements.
</TABLE>


                                                          FS-3

<PAGE>



                                          PRIMECORE MORTGAGE TRUST, INC.

                                        STATEMENTS OF SHAREHOLDERS' EQUITY
                                         For the years ended December 31,
                                 2001 and 2000 and for the period from inception
                                        (March 18, 1999) to December 31, 1999


<TABLE>
<CAPTION>

                                             Preferred Stock              Common Stock
                                       ------------------------------- ------------------
                                                                                                 Retained
                                              Shares           Amount   Shares    Amount          Deficit              Total
                                       -------------- ---------------- -------- --------- ---------------- ------------------
     <S>                                     <C>             <C>          <C>      <C>          <C>               <C>
Shareholders' equity at inception
(March 18, 1999).......................           --   $           --       --   $    --   $           --   $             --
   Issuance of common stock............           --               --      100         1               --                  1
   Issuance of preferred stock.........    9,267,896      192,678,960       --        --               --        192,678,960
   Issuance of preferred stock  under
      reinvestment plan                      309,591        3,095,910       --        --               --          3,095,910
   Redemptions of preferred stock......     (592,369)      (5,923,690)      --        --               --         (5,923,690)
   Dividends paid to preferred
      shareholders.....................           --               --       --        --      (13,097,977)       (13,097,977)
   Net loss............................           --               --       --        --       (2,986,558)        (2,986,558)
                                       -------------- ---------------- -------- --------- ---------------- ------------------
Shareholders' equity at
December 31, 1999......................   18,985,118   $  189,851,180      100   $     1   $  (16,084,535)  $    173,766,646

   Issuance of preferred stock, net of
     offering costs of $178,589........    2,841,062       28,232,031       --        --               --         28,232,031
   Issuance of preferred stock under
      dividend reinvestment plan.......      589,684        5,896,840       --        --               --          5,896,840
     Redemptions of preferred stock       (2,469,419)     (24,694,190)      --        --               --        (24,694,190)
   Dividends paid to preferred
      shareholders.....................           --               --       --        --      (21,609,791)       (21,609,791)
     Net income........................           --               --       --        --        3,572,311          3,572,311
                                       -------------- ---------------- -------- --------- ---------------- ------------------
Shareholders' equity at
December 31, 2000......................   19,946,445   $  199,285,861      100   $     1   $  (34,122,015)  $    165,163,847


   Issuance of preferred stock, net of
     offering costs of $2,083..........    2,797,437       27,972,287       --        --               --         27,972,287

   Issuance of preferred stock under
      dividend reinvestment plan.......      599,169        5,991,690       --        --               --          5,991,690
   Redemptions of preferred stock         (1,709,187)     (17,091,870)      --        --               --        (17,091,870)
   Dividends paid to preferred
      shareholders.....................           --               --       --        --      (24,118,443)       (24,118,443)

     Net income........................           --               --       --        --          667,463            667,463
                                       -------------- ---------------- -------- --------- ---------------- ------------------
Shareholders' equity at
December 31, 2001......................   21,633,864   $  216,157,968      100   $     1   $  (57,572,995)  $    158,584,974
                                       ============== ================ ======== ========= ================ ==================

                                   The accompanying notes are an integral part of these statements.
</TABLE>


                                                                 FS-4
<PAGE>




                                        PRIMECORE MORTGAGE TRUST, INC.

                                           STATEMENTS OF CASH FLOWS
                                        For the years ended December 31,
                               2001 and 2000 and for the period from inception
                                    (March 18, 1999) to December 31, 1999
<TABLE>
<CAPTION>
                                                                                                                Period from
                                                                                                           Inception (March
                                                                          Year Ended          Year Ended       18, 1999) to
                                                                        December 31,        December 31,       December 31,
                                                                                2001                2000               1999
                                                                  ------------------- ------------------- ------------------
     <S>                                                                  <C>                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)............................................ $         667,463   $       3,572,311   $     (2,986,558)
   Adjustments to reconcile net income (loss) to net cash provided
      by (used in) operating activities:
        (Decrease) increase in accrued expenses, bank overdraft
        and other.................................................        (2,578,431)          3,595,841            214,612
        (Decrease) increase in payable to affiliate...............          (205,779)         (1,167,718)         1,404,690
        Decrease (Increase) in other assets, net..................           (39,270)             75,299            (66,400)
                                                                  ------------------- ------------------- ------------------
           Net cash provided by (used in) operating activities....        (2,156,017)          6,075,733         (1,433,656)
                                                                  ------------------- ------------------- ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Investments in real estate under development.................       (63,946,574)       (165,778,439)       (99,692,298)
     Investments in real estate under development by affiliates...       (11,050,613)        (30,764,124)       (22,728,985)
     Proceeds from investments in real estate under development...        87,597,220         124,348,190         93,279,846
     Proceeds from investments in real estate under development
      by affiliates...............................................        12,863,389          40,465,714          3,997,140
     Decrease (increase) in receivable from affiliate.............                --           1,743,081         (1,743,081)
                                                                  ------------------- ------------------- ------------------
           Net cash provided by (used in) investing activities....        25,463,422         (29,985,578)       (26,887,378)
                                                                  ------------------- ------------------- ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sales of preferred stock, net of offering costs.         27,972,287          28,082,031         34,193,960
   Redemptions of preferred stock.................................       (17,091,870)        (24,694,190)        (5,923,690)
   Proceeds from sales of common stock............................                --                  --                  1
   Issuance of notes payable......................................        19,345,400          61,199,293          6,734,474
   Additions to notes payable from reinvested interest............           936,447           1,846,881                 --
   Repayment of notes payable.....................................       (41,756,585)        (31,898,384)                --
   Borrowings on secured line of credit...........................         8,355,308           6,644,692          2,195,000
   Repayment of secured line of credit............................                --          (2,195,000)                --
   Payment of preferred stock dividends...........................       (18,124,688)        (15,609,972)        (8,203,183)
   Loan fees paid ................................................          (237,500)           (141,034)                --
                                                                  ------------------- ------------------- ------------------
          Net cash provided by (used in) financing activities.....       (20,601,201)         23,234,317         28,996,562
                                                                  ------------------- ------------------- ------------------

          Net increase (decrease) in cash and cash equivalents....         2,706,204            (675,528)           675,528
          Beginning cash and cash equivalents.....................                --             675,528                 --
                                                                  ------------------- ------------------- ------------------
          Ending cash and cash equivalents........................ $       2,706,204   $              --   $        675,528

Cash paid for interest, net of amounts capitalized of $4,358,952,
   $4,680,818 and $0 for the periods ending December 31, 2001,
   2000 and 1999 respectively..................................... $              --   $              --   $         41,889
                                                                  =================== =================== ==================


                                                               FS-5
<PAGE>

                                        PRIMECORE MORTGAGE TRUST, INC.

                                           STATEMENTS OF CASH FLOWS
                                        For the years ended December 31,
                               2001 and 2000 and for the period from inception
                                    (March 18, 1999) to December 31, 1999
                                                 (continued)


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING                                                      Period from
ACTIVITIES:                                                                                                Inception (March
                                                                          Year Ended          Year Ended       18, 1999) to
                                                                        December 31,        December 31,       December 31,
                                                                                2001                2000               1999
                                                                  ------------------- ------------------- ------------------

Reinvested Preferred Stock dividends.............................. $       5,991,690   $       5,896,840   $      3,095,910

Investments in real estate under development received in exchange
   for issuance of Preferred Stock................................ $              --   $         150,000   $    125,574,517


Investments in real estate under development by affiliates
received in exchange for issuance of Preferred Stock..............                --                  --         32,910,483
Investments in real estate under development received in exchange
   for notes payable..............................................                --             795,000                 --
Investments in real estate under development by affiliates
   received in exchange for notes payable.........................                --                  --            110,000








                                   The accompanying notes are an integral part of these statements.
</TABLE>




















                                                                FS-6

<PAGE>


                         PRIMECORE MORTGAGE TRUST, INC.

                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 2001, 2000 and 1999

1.   ORGANIZATION AND BUSINESS:


Organization

Primecore Mortgage Trust, Inc., a Maryland corporation, was formed on March 18,
1999 (inception) and commenced operations effective May 1, 1999 as a real estate
investment trust (REIT). We are engaged in the business of funding and holding
short-term construction mortgage loans secured by residential real property, as
well as land acquisition and development loans secured by undeveloped real
property located in the greater San Francisco Bay Area. We are managed by
Primecore Funding Group, Inc., a California corporation located in Menlo Park,
California. Our manager, or its affiliate, Primecore Properties, Inc.,
originates and services the construction mortgage loans we invest in for a
monthly management fee.

Capitalization

We have authorized 50,000,000 shares of capital stock with a $0.01 par value;
40,000,000 shares are designated Class A Convertible Preferred (Preferred
Stock), and 10,000,000 shares are designated as common.

At December 31, 2001, there were 100 shares of common stock outstanding, all
held by William Whitlow, Susan Fox and Michael Rider, who are employees and
officers of our manager. Ms. Fox owns all of the stock of our manager.

The 21,633,864, 19,946,445 and 18,985,118 shares of Preferred Stock outstanding
as of December 31, 2001, 2000 and 1999 respectively rank senior to our common
stock as to dividends and liquidation rights. The shares are convertible into,
and have voting rights equal to, the same number of shares of our common stock.
We will not pay any dividends to the holders of the common stock so long as any
Preferred Stock is outstanding.

Preferred stock dividends are paid monthly in arrears and were $1.12 per share
(based on weighted average preferred shares outstanding of 21,450,948) for the
year ended December 31, 2001, compared with $1.14 per share (based on weighted
average preferred shares outstanding of 18,955,134) for the year ended December
31, 2000, and $0.75 per share (based on weighted average preferred shares
outstanding of 17,390,047) for the period from inception (March 18, 1999) to
December 31, 1999. The terms of our dividend reinvestment plan permit our
shareholders to reinvest dividends in additional shares of Preferred Stock,
currently at $10 per share.

Holders of our Preferred Stock do not have a right to redeem their shares. Our
Board of Directors, however, currently has a stock redemption policy for
shareholders who wish to sell their shares to us. The policy may be modified or
terminated at the Board's discretion at any time. Currently, we will repurchase
shares at $10.00 per share if we have cash available for distribution. Cash
available for distribution is determined at the Board of Director's sole
discretion, and is net of current expenses, anticipated expenses, dividends,
debt obligations and reserves for operating funds. We will not sell or otherwise
liquidate any portion of our mortgage loan portfolio or other assets to fund a
redemption request. We also reserve the right to limit the number and frequency
of stock redemptions by any shareholder.

We sell our stock through private placement and have closed three private
placements since our inception issuing 24,466,291 shares at $10.00 per share.
Under our current private placement for 20,000,000 shares of Preferred Stock we
have issued 440,104 shares at $10 per share as of December 31, 2001. We use the

                                      FS-7
<PAGE>

proceeds from issuance of our Preferred Stock primarily to fund additional loans
and also for working capital purposes. In connection with the private placements
in 1999, our manager paid placement costs of $187,829 on our behalf.

Risk Factors

General Economic Conditions in Lending Areas. Properties securing repayment of
the mortgage loans are located in the San Francisco Bay Area, with the majority
in the counties of Santa Clara and San Mateo. Since the properties secured by
the mortgage loans are located in a limited geographical region, these mortgage
loans may be subject to a greater risk of delinquency or default if the
industries concentrated there suffer adverse economic or business developments.

Other. In addition, we are subject to other significant business and financial
risks, including but not limited to liquidity, the prevailing market for
residential real estate, interest rates, dependence on our manager, timely
completion of projects, lack of borrower diversification, and potential
environmental matters relating to properties on which we have made loans.

Retained Deficit

We had a retained deficit as of December 31, 2001 and 2000 because we pay
dividends to the holders of our Preferred Stock based on our taxable income, in
accordance with REIT requirements. Our taxable income differs from income
measured in accordance with generally accepted accounting principles in the
United States due to timing differences in the recognition of income from our
investments in real estate. See Income Taxes in Note 2 below. These dividend
distributions are expected to be matched by revenues from completed real estate
projects in future periods, as described in Notes 2 and 3.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States using the accrual method of
accounting. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.

Change in Accounting for Interest Expense

Effective January 1, 2000, the Company began capitalizing interest expense on
its investments in real estate under development and investments in real estate
under development by affiliates in accordance with Generally Accepted Accounting
Principles in the United States. This change was made to more accurately match
the cost of our investments with the recognition of our revenue.


Investments in Real Estate under Development,
Investments in Real Estate under Development by Affiliates
and Investments in Real Estate Held for Sale

All of our loans are initially classified for financial reporting purposes as
investments in real estate under development or investments in real estate under
development by affiliates (Notes 3 and 4). Such investments include capitalized
interest and are stated at the lower of cost or net realizable value. Management

                                      FS-8
<PAGE>

conducts a review for impairment on an investment-by-investment basis whenever
events or changes in circumstances indicate that the carrying amount of an
investment may not be recoverable. An impairment is recognized when estimated
expected future cash flows (undiscounted and without interest charges),
typically from the sale of a completed property, are less than the carrying
amount of the investment. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economics and market conditions. If, in future
periods, there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could result in an adjustment to the
carrying amount of the investments. To the extent an impairment has occurred,
the excess of the carrying amount of the investment over its estimated fair
value, less estimated selling costs, will be charged to income. During the year
ended December 31, 2001, we charged $73,000 to income for loans we believe are
impaired compared with $0 and $0 during the year ended December 31, 2000 and for
the period from Inception (March 18, 1999) to December 31, 1999.

Cash and Cash Equivalents

Cash and cash equivalents include cash held in financial institutions and other
highly liquid short-term investments with original maturities of three months or
less.

Income from Completed Real Estate Development

Our investment objective is to make construction mortgage loans on projects we
believe are likely to ultimately sell for an amount sufficient to repay the
principal plus accrued interest of those loans at the agreed upon rate. We do
not intend to own or develop property and do not participate in the profit
realized by the borrower, including affiliated borrowers, upon sale of the
property.

We recognize income from our investments in real estate under development upon
the sale or refinancing of the completed real estate to or by a third party. No
income or points are recognized until the property is sold or refinanced. We
compute income as cash received (which includes amounts funded, accrued interest
and points) less the carrying value of the investments at the date of repayment
(which includes amounts funded and capitalized interest cost).

Income Taxes

To continue to qualify as a REIT, we must currently distribute at least 90
percent of our taxable income. As a REIT, we generally will not be subject to
corporate-level federal income tax on net income we distribute our shareholders.
As such, no provision for federal income taxes is included in our financial
statements. Such taxes are the responsibility of the individual shareholders. If
we fail to qualify as a REIT in any taxable year, we will be subject to federal
income taxes at regular corporate rates (including any applicable alternative
minimum tax) and may not be able to qualify as a REIT for four subsequent
taxable years. Even if we qualify for taxation as a REIT, we may be subject to
certain state and local taxes on our income and property and to federal income
and excise taxes on our undistributed taxable income.

Net income for financial reporting purposes differs from net income for tax
reporting purposes primarily due to differences in the method of revenue
recognition for arrangements classified as loans for income tax purposes and
investments in real estate under development for financial reporting purposes
and for interest expense to finance such loans. The following table outlines the
primary differences between financial reporting income and taxable income for
the years ended December 31, 2001 and 2000, and for the period from inception
(March 18, 1999) to December 31, 1999:












                                      FS-9
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Period from
                                                                                            Inception (March
                                                  Year Ended           Year Ended               18, 1999) to
                                                  December 31, 2001    December 31, 2000   December 31, 1999
                                                 ------------------- -------------------- -------------------
     <S>                                                 <C>                 <C>                  <C>

Net income (loss), as reported                          $   667,463          $ 3,572,311        $ (2,986,558)
        Less: Income from completed real estate         (12,446,618)         (15,103,946)         (2,566,301)
              Capitalized interest                       (4,174,852)          (4,680,818)                 --
        Add: Accrued interest income on loans
          and related points earned                      39,228,435           37,975,291          16,680,262
              Other                                        (261,653)             225,000                  --
                                                 ------------------- -------------------- -------------------
Taxable income                                         $ 23,012,775          $21,987,838        $ 11,127,403
                                                 =================== ==================== ===================
Preferred stock dividends                              $ 24,118,443          $21,609,791        $ 13,097,977
                                                 =================== ==================== ===================
</TABLE>

We distribute preferred stock dividends at a level sufficient to satisfy
specified return targets for our investors. As a result, actual dividends may be
in excess of taxable income. Rates of return are subject to adjustment by our
Board of Directors based upon prevailing market and company specific conditions.
timely payment of preferred stock dividends could be adversely effected if we
experience a slow down in the repayment of our loans. It is possible that
dividends could be significantly reduced if there was a decline in the value of
our loan portfolio.

Investments in Real Estate Held for Sale

We may take title to property through foreclosure or by deed in lieu of
foreclosure when a borrower defaults on his loan. Such arrangements cease to be
loans but are accounted for in a manner similar to our investments in real
estate under development and real estate under development by affiliates.
Interest income for tax purposes is not accrued on investments in real estate
held for sale.

Net Loss Per Share of Common Stock

Per share amounts for our common stock are computed using the weighted average
common shares outstanding during the period. Net income (loss) used in the
calculation is reduced by dividends owed to preferred shareholders. The diluted
weighted average common shares outstanding include the dilutive effect of stock
options and other common stock equivalents. There are currently no stock options
or other dilutive common stock equivalents, and as a result, the basic and
diluted weighted average common shares outstanding for the years ended December
31, 2001 and 2000, and the period from inception (March 18, 1999) to December
31, 1999, are the same and are 100 shares.


New Accounting Pronouncement

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" among other
existing authoritative literature. We are required to and will adopt SFAS No.
144 in the first quarter of fiscal 2002. We do not expect adoption to have a
significant effect on our financial position, results of operations and cash
flows.

3.   INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT:

We make loans with maturity dates generally ranging from 12 to 18 months. For
financial reporting purposes, we account for our loans as investments.
Investments in real estate under development represent funds advanced in cash
plus capitalized interest on arrangements in effect at any particular time.


                                     FS-10
<PAGE>

Since real estate under development generates no operating income, we do not
accrue any income for financial reporting purposes until the sale or refinancing
of a property. The income that we ultimately realize is based upon the terms of
the construction mortgage loan. During the year ended December 31, 2001, fixed
interest rates on loans outstanding ranged from 11 percent to 13 percent. In the
case of loans on which the borrower defaulted, the interest rate charged during
the period of default was an additional 5% over the note rate. In addition, we
charged points, which were typically 4 percent of the borrowed amount during
that same period.

























                                     FS-11
<PAGE>


<TABLE>
<CAPTION>

The following table summarizes our portfolio of investments in real estate under development at December 31, 2001:

                                          Base Interest  Maturity Dates           Commitment             Carrying
         Location - County                        Rates                               Amount               Amount
-------------------------------------------------------- ------------------------------------ --------------------
          <S>                                  <C>             <C>                    <C>                  <C>
         Alameda                           11.25-12.00%     06/01-10/01         $  5,700,000         $  1,177,035
         Contra Costa                            11.00%     05/02-05/02            5,610,000            4,668,141
         Marin                             11.25-13.00%     06/01-07/02           29,765,000           19,263,088
         Monterey                          11.50-12.00%     12/01-12/02           27,160,000           12,051,692
         San Francisco                     11.50-12.00%     01/02-10/02           26,935,000           15,363,685
         San Mateo                         11.25-13.00%     09/01-10/02           53,361,140           27,921,345
         Santa Clara                       11.25-13.00%     06/01-08/02           71,075,000           41,699,251
         Other                             11.00-11.50%     06/01-09/01           17,665,000            9,615,273
                                                                        --------------------- --------------------

                                                                                $237,271,140         $131,759,510
                                                                        ===================== ====================
</TABLE>

<TABLE>
<CAPTION>
The following table summarizes our portfolio of investments in real estate under development at December 31, 2000.

                                          Base Interest        Maturity           Commitment             Carrying
         Location - County                        Rates           Dates               Amount               Amount
-------------------------------------------------------- ------------------------------------ --------------------
          <S>                                  <C>             <C>                    <C>                  <C>
         Alameda                           11.00-11.25%     03/01-10/01          $20,930,000          $ 4,849,722
         Contra Costa                      11.00-12.00%     03/01-11/01           16,987,842            2,797,451
         Marin                             11.00-13.00%     01/01-02/02           61,230,000           31,861,815
         Monterey                          11.25-11.50%     04/01-05/02           30,800,000           16,142,512
         San Francisco                     11.25-13.00%     04/01-10/01           35,520,000           14,485,600
         San Mateo                         11.00-13.00%     02/01-05/02           86,635,230           41,342,468
         Santa Clara                       11.00-13.00%     12/00-04/02           92,395,000           53,393,586
         Other                             11.00-11.25%     05/01-06/01           18,035,000            9,489,065
                                                                        --------------------- --------------------
                                                                               $ 362,533,072        $ 174,362,219
                                                                        ===================== ====================
</TABLE>

Earned but unrecognized interest and points on loans outstanding at December 31,
2001 totaled $39,667,545 compared with $31,166,724 at December 31, 2000. These
amounts will be recognized as income from completed real estate development upon
the sale or refinancing of the underlying property.

We will fund unfunded commitments on existing loans from the repayment of other
loans, borrowings on our line of credit (Note 6), issuance of short-term notes
payable or issuance of additional preferred stock. We believe we will have
adequate sources of capital to fund these commitments when and as they become
due.

As of December 31, 2001, we had loans with a carrying amount of $19,218,517,
which had not been paid by their stated maturity dates and which we do not
intend to extend compared with $0 at December 31, 2000. These loans are accruing
interest at the default rate, which is 5 percent higher than the note rate.
Additionally, at December 31, 2001, we had recorded notices of default on loans
with a carrying amount of $14,293,382 compared with $0 at December 31, 2000.
Recording a notice of default begins the process of foreclosure. In many cases
we expect the borrower will have sufficient time to either sell or refinance the
property before the foreclosure period expires. All loans for which a notice of
default has been recorded are charged interest at the default rate.


                                     FS-12
<PAGE>

During the year ended December 31, 2001, we capitalized $3,369,004 of interest
expense to investments in real estate under development compared with $3,562,236
during the year ended December 31, 2000, and $0 during the year ended December
31, 1999.


4.   INVESTMENTS IN REAL ESTATE UNDER DEVELOPMENT BY AFFILIATES:
<TABLE>
<CAPTION>

We have also made loans to affiliates of our manager acting as the developer. These arrangements are accounted for
in a manner identical to that described in Note 3 above. The following table summarizes our portfolio of investments
in real estate under development by affiliates at December 31, 2001:

                                               Interest           Maturity    Commitment Amount             Carrying
         Location - County                        Rates              Dates                                    Amount
---------------------------------------------------------------------------------------------------------------------
          <S>                                  <C>                 <C>                 <C>                   <C>
         San Mateo                         11.25-11.50%        12/01-04/03         $ 14,200,000          $ 8,290,751
         Santa Clara                       11.00-11.50%        12/01-03/03           56,125,000           31,947,210
                                                                            -------------------- --------------------
                                                                                   $ 70,325,000          $40,237,961
                                                                            ==================== ====================
</TABLE>

<TABLE>
<CAPTION>

The following table summarizes our portfolio of investments in real estate under development by affiliates at
December 31, 2000:

                                               Interest           Maturity           Commitment             Carrying
         Location - County                        Rates              Dates               Amount               Amount
---------------------------------------------------------------------------------------------------------------------
          <S>                                   <C>                <C>                 <C>                   <C>
         San Mateo                               11.25%        10/01-12/01           12,100,000            6,374,508
         Santa Clara                       11.00-11.50%        03/01-11/01           61,750,000           35,676,229
                                                                            -------------------- --------------------
                                                                                   $ 73,850,000         $ 42,050,737
                                                                            ==================== ====================
</TABLE>

Earned but unrecognized interest and points on loans outstanding at December 31,
2001 totaled $14,863,787 compared with $7,944,747 at December 31, 2000. Such
amounts will be recognized as income from completed real estate development upon
the sale or refinancing of the underlying property.

During the year ended December 31, 2001, we capitalized $805,848 of interest
expense to investments in real estate under development by affiliates compared
with $1,118,582 during the year ended December 31, 2000, and $0 during the year
ended December 31, 1999.


5.   INVESTMENT IN REAL ESTATE HELD FOR SALE:

During the year ended December 31, 2001, we took title to twelve properties
through foreclosure or by deed in lieu of foreclosure. Two properties were sold
before December 31, 2001 with the following results:

      Net sale proceeds                                    $ 2,597,196
      Carrying amount                                        2,550,958
                                                     ------------------
          Total income reported                              $  46,238
                                                     ==================




                                     FS-13
<PAGE>

The following table summarizes investments in real estate held for sale at
December 31, 2001:

                                              Original
  County                  Number            Commitment               Carrying
                                                Amount                 Amount
  ------------------- ----------- --------------------- ----------------------
  Alameda                      3         $  15,395,000           $  5,498,629
  Marin                        4            13,341,000              8,438,341
  San Mateo                    2             3,375,000              2,620,510
  Santa Clara                  1             2,845,000              2,394,583
                      ----------- --------------------- ----------------------
           Total              10         $  34,956,000          $  18,952,063
                                  ===================== ======================

These properties were initially recorded at their existing carrying amount and
are in various stages of construction and some are complete. They will be sold
in the manner which we believe maximizes their value to us.

6.   NOTES PAYABLE:

We had unsecured borrowings of $17,312,526 at December 31, 2001, compared with
$38,787,264 at December 31, 2000 on notes issued to accredited investors through
private placements. These notes have varying maturities of up to one year from
the date of issuance and bear interest at fixed rates between 9 and 13 percent
(11.529% weighted average in 2001) with interest payable monthly in arrears. We
may call these notes at our option before their stated maturity. At December 31,
2001, none of our unsecured notes payable were held by our officers, directors
or employees of our manager compared with $7,622,535 at December 31, 2000 and
all of the notes mature in 2002. As of December 31, 2001 we estimate that the
carrying amounts of our notes payable approximate their fair value based on
current borrowing rates available to us.


7.   SECURED LINE OF CREDIT:

During the year ended December 31, 2001, we increased our line of credit from
$10,000,000 to $15,000,000. The amount borrowed under the line of credit at
December 31, 2001, was $15,000,000. The line of credit is secured by our assets
and guaranteed by our manager and another affiliate, carries interest at prime
plus 1.50 percent (6.25 percent at December 31, 2001) and matures in May 2003.
The terms of the line of credit require, among other provisions, that we
maintain total equity of no less than $150,000,000, a debt to equity ratio of
less than 1.5 to 1.0 and quarterly taxable income from operations of at least
$500,000. We were in compliance with all covenants at December 31, 2001. We
incurred loan fees and other costs of $237,500 in 2001, which are included in
other assets in the accompanying balance sheets and are being amortized on a
straight-line basis over the life of the facility. Accumulated amortization of
deferred loan fees amounted to $136,245 at December 31, 2001.


8.   TRANSACTIONS WITH AFFILIATES:

Management Fees

A management agreement dated March 30, 1999 and amended on October 1, 2000
between us and our manager provides for a monthly fee payable in arrears equal
to 0.25 percent of the total commitment amount of the loans in our investments
in real estate under development and in our investments in real estate under
development by affiliates.


                                     FS-14
<PAGE>

For the year ended December 31, 2001, the portfolio management fees paid to our
manager were $11,345,585, compared with $10,967,249 for the year ended December
31, 2000, and $5,276,938 for the period from inception (March 18, 1999) to
December 31, 1999.

Payable to Affiliate

The $31,193 and $236,972 payable to affiliate at December 31, 2001 and 2000,
respectively, represents short-term advances to us by our manager to facilitate
our cash management. Our manager charges us an interest rate of 11 percent per
annum on any outstanding balance.

Affiliate Loans
We previously had a policy not to develop real property that might be obtained
through foreclosure or otherwise. Accordingly, prior to 2001, we relied on our
affiliates to assume defaulted loans. Some of our directors and executive
officers are principals of our affiliates, and have personally guaranteed the
assumed obligations. In exchange for our affiliates' past assumption of
defaulted loans, they bore the risk of loss on loans assumed, and in return will
receive the benefit of any profits that might be realized from the successful
development and ultimate sale of the completed properties. Our affiliates are
under no legal obligation to assume defaulted loans, and our principals are
under no legal obligation to guarantee such loans; they have done so for the
primary purpose of allowing us to avoid any risk inherent in real estate
development. Our affiliates do not presently intend to continue to assume
liability for defaulted loans, although circumstances may arise which, because
of the complexity of the REIT tax regulations related to foreclosed real estate,
may necessitate our affiliates taking title to foreclosed properties.

We have also made loans to our affiliates for property to be developed and sold
in a manner similar to unaffiliated borrowers. In the case of an affiliate, the
principals of the affiliates, who are also our management and members of our
board, will be involved in making the decision on our behalf, creating a
conflict of interest. Also, in the event of a default on an affiliate loan,
there would be a conflict of interest in connection with decisions on how to
proceed. As with other loans made to unaffiliated borrowers, due to changes in
the scope of construction and general cost increases during development of a
project, additional funds or extensions of time may be needed to complete a
project. As with other loans, we will grant an additional extension of credit or
time only if our management believes repayment of the loan is adequately
secured. In order to ameliorate these conflicts of interest, repayment of these
affiliate loans is guaranteed by our affiliate and our manager. Because of these
favorable terms, the experience of our affiliates and our success with these
loans in the past, we continue to see a place for these loans in our portfolio
although at a level that does not exceed 10% of our portfolio.

We also face risks of loss if our affiliate is unable to complete a development
project, refinance our loan or sell a completed property because, in the absence
of review by disinterested parties to evaluate whether we should foreclose on a
defaulted project owned or managed by our affiliate, our management would be
faced with a decision to take action that would be adverse to their personal
interests. We could incur liabilities and costs that would have an adverse
affect on our operations from lawsuits by our shareholders and regulatory
actions, if our management fails to exercise prudent business judgment in those
circumstances.

Effective March 1, 2001, our Board of Directors was expanded to include two
independent directors whose responsibilities include oversight of our
investments in properties under development by our affiliates.


                                     FS-15
<PAGE>

9.   COMMITMENTS AND CONTINGENCIES:

Litigation

We are involved in legal actions arising in the normal course of our business.
We are not presently subject to any material litigation nor, to our knowledge,
is any litigation threatened against us which collectively is expected to have a
material adverse effect on our cash flows, financial condition or results of
operations.

General Uninsured Losses

We require that our borrowers carry comprehensive liability, fire, flood,
extended coverage, and rental loss insurance with policy specifications, limits,
and deductibles customarily carried for similar properties. We also carry
insurance to cover losses in case a borrower's policy lapses. There are,
however, certain types of extraordinary losses that may be either uninsurable or
not economically insurable. Further, all of our investments are located in areas
that are subject to earthquake activity. Should an investment sustain damage as
a result of an earthquake, we may incur losses due to insurance deductibles or
co-payments on insured losses, or uninsured losses. Should an uninsured loss
occur, we could lose our investment in, and anticipated profits and cash flows
from an investment.

10.  QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED):

<TABLE>
<CAPTION>

The following tables contain selected unaudited quarterly financial data for fiscal years 2001 and 2000:


                                   Three Months     Three Months          Three Months        Three Months
                                          Ended            Ended                 Ended               Ended
                                 March 31, 2001    June 30, 2001   September 30,  2001   December 31, 2001
                               ----------------------------------------------------------------------------
     <S>                              <C>               <C>                   <C>                  <C>
REVENUES:
Income from completed real
   estate development
   (including $0, $0, $0 and
   $145,468 from affiliates)          3,978,796        2,742,380             1,430,690           4,367,752
Other.........................               81               --                   --               68,429
                               ----------------------------------------------------------------------------
         Total                        3,978,877        2,742,380             1,430,690           4,436,181

EXPENSES:
Management fees paid to an
   affiliate..................        3,122,154        2,989,063             2,808,680           2,425,688
Provision for impairment of
   investments in real estate
   development................               --               --                    --              73,000

General, administrative and
   other......................           44,658          225,053               104,651             127,718
                               ----------------------------------------------------------------------------
         Total expenses               3,166,812         3,214,116           2,913,331            2,626,406
                               ----------------------------------------------------------------------------

         Net income (loss)              812,065          (471,736)         (1,482,641)           1,809,775
         Preferred stock             (5,951,458)       (6,126,847)         (6,288,698)          (5,751,440)
                               ----------------------------------------------------------------------------

         Net loss allocable
         to common                   (5,139,393)       (6,598,583)         (7,771,339)          (3,941,665)
                               =============================================================================
Basic and diluted net loss per
   common share...............          (51,394)          (65,986)            (77,713)             (39,417)
                               ============================================================================
Basic and diluted weighted-
   average common shares                    100               100                 100                  100
                               ============================================================================
</TABLE>


                                                                 FS-16
<PAGE>

<TABLE>
<CAPTION>
                                    Three Months     Three Months        Three Months         Three Months
                                           Ended            Ended               Ended                Ended
                                  March 31, 2000    June 30, 2000  September 30, 2000    December 31, 2000
                               ----------------------------------------------------------------------------
     <S>                              <C>               <C>                   <C>                  <C>
REVENUES:
Income from completed real
   estate development
   (including $526,610,
   $471,390, $511,250 and
   $1,530,832 from affiliates)         2,666,240        4,995,358           2,566,718            4,875,630
Other.........................                32           36,352                   6                   --
                               ----------------------------------------------------------------------------
         Total                         2,666,272        5,031,710           2,566,724            4,875,630

EXPENSES:
Management fees paid to an
   affiliate..................         2,465,052        2,776,935           2,903,744            2,821,518
General, administrative and
   other......................           199,952          129,097             128,953              142,775
                               ----------------------------------------------------------------------------
         Total expenses                2,665,004        2,906,032           3,032,697            2,964,293
                               ----------------------------------------------------------------------------

         Net income (loss)                 1,268        2,125,678            (465,973)           1,911,338
         Preferred stock              (5,366,223)      (5,238,210)         (5,355,477)          (5,649,881)
                               ----------------------------------------------------------------------------

         Net loss allocable to
         common                       (5,364,955)      (3,112,532)         (5,821,450)          (3,738,543)
                               ============================================================================

Basic and diluted net loss per
   common share.........                 (53,650)         (31,125)            (58,214)             (37,385)
                               ============================================================================
Basic and diluted weighted-
   average common shares                     100              100                 100                  100
                               ============================================================================
</TABLE>













                                                             FS-17
<PAGE>


<TABLE>
<CAPTION>
                                                                                                                         Schedule IV
                                                  PRIMECORE MORTGAGE TRUST, INC.

                                                  MORTGAGE LOANS ON REAL ESTATE

                                                       DECEMBER 31, 2001



                                                                                                                           Principal
                                                                                                                           Amount of
                                                                                                                       Loans Subject
                                                           Periodic                        Face      Carrying          to Delinquent
                              Interest    Final Maturity    Payment                   Amount of     Amount of           Principal or
    Description                   Rate              Date      Terms   Prior Liens     Mortgages     Mortgages               Interest
------------------------------------------------------------------------------------------------------------------------------------
     <S>                           <C>            <C>         <C>        <C>             <C>          <C>                    <C>
INVESTMENTS IN REAL ESTATE
  UNDER DEVELOPMENT

  Single Family Attached        11.50%             9/01     Note 1   $        --   $  6,585,000    $  2,317,674         $  2,317,674
  Land Development            11 - 12%      6/01 - 6/02     Note 1            --     11,460,000       8,098,930            4,884,191
  Condominium                 11 - 12%    12/01 - 10/02     Note 1    16,700,000     33,570,000      17,592,364            1,528,490
  Single Family Detached      11 - 13%     6/01 - 12/02     Note 1    21,318,630    185,656,140     103,750,542           24,781,544
                                                                                  --------------------------------------------------

                                                                                   $237,271,140    $131,759,510         $ 33,511,899
                                                                                  ==================================================


INVESTMENTS IN REAL ESTATE
  UNDER DEVELOPMENT BY
  AFFILIATES

  104 Second Street             11.5%             4/02                $       --   $  3,825,000    $  2,867,784         $         --
  Kate and Ascension            11.5%            12/01                        --      7,000,000         749,290                   --
  7 Lots, Los Altos Nursery     11.0%             4/02                 3,927,000     12,800,000      10,425,765                   --
  Quarry Estates Lot 13         11.0%            12/01                 1,366,667      5,000,000       2,584,020                   --
  Quarry Estates Lot 15         11.0%            12/01                 1,366,667      5,000,000       3,463,008                   --
  Quarry Estates Lot 16         11.0%            12/01                 1,366,666      5,000,000       1,973,249                   --
  91 Fleur Place               11.50%             4/03                 3,185,000      7,100,000       4,458,408                   --
  37 Euclid                    11.25%            12/01                 2,000,000      7,100,000       3,832,343                   --
  Affiliate properties         11.00%             3/03                66,037,000     13,500,000       9,884,096                   --
                                                                                  --------------------------------------------------

                                                                                   $ 66,325,000    $ 40,237,963         $         --
                                                                                  ==================================================


</TABLE>










                                                                FS-18