**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10K-SB**





**x
      ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**o
      TRANSITION REPORT UNDER SECTION 13 OR 15
      (d) OF THE**


**SECURITIES
      ACT OF 1934**





**For
      the period ended December 31, 2007**





**Commission
      file number** **000-50893**





**LAKESIDE
      MORTGAGE FUND, LLC**


(Name
      of
      Small Business Issuer in its Charter)





California
            52-2387294(State
                or other jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or organization)
            Identification
                No.)1738
                Yuba Street,Redding,
                California
            96001(Address
                of Principal Executive Office)
            (ZipCode)





(530)
      226-5850


(Issuer’s
      Telephone Number)





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


None





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


Membership
      Interests


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filings requirements for the past 90 days. Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to the Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No
x


State
      issuer's revenues for its most recent fiscal year: $ 1,851,840.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the price at which the common equity
      was sold ($100 per unit), was approximately $
      21,339,283 on December 31, 2007 .





Transitional
      Small Business Disclosure Format (Check one): Yes x ;  No
o





**TABLE
      OF CONTENTS**





PART
                I (Alternative 2)Item
                1
            Description
                of Business
            3Item
                2
            Description
                of Property
            27Item
                3
            Directors,
                Executive Officers and Significant Employees
            28Item
                4
            Remuneration
                of Directors and Officers
            30Item
                5
            Security
                Ownership of Management and Certain Securityholders
            30Item
                6
            Interest
                of Management and Others in Certain Transactions
            31PART
                IIItem
                1
            Market
                Price of and Dividends on the Registrant’s Common Equity and Other
                Shareholder Matters
            32Item
                2
            Description
                of Exhibits
            32Item
                3
            Changes
                in and Disagreements with Accountants
            32Item
                4
            Submission
                of Matters to a Vote of Security Holders
            32Item
                5
            Compliance
                with Section 16(a) of the Exchange Act
            32PART
                F/SAudit
                certificate
            33Financial
                Statements
            34PART
                IIIItem
                1
            Index
                to Exhibits
            50Item
                2
            Description
                of Exhibits
            50SIGNATURES
            51Exhibit
                31.1Exhibit
                31.2Exhibit
                32


2


**FORWARD-LOOKING
      STATEMENTS**




This
      Form
      10-KSB contains “forward-looking statements” relating to Lakeside Mortgage Fund,
      LLC (the “Company” or the “Fund”), which represent the Fund’s current
      expectations or beliefs including, but not limited to, statements concerning
      the
      Fund’s operations, performance, financial condition and growth. For this
      purpose, any statements contained in this Form 10-KSB that are not statements
      of
      historical fact are forward-looking statements. Without limiting the generality
      of the foregoing, words such as “may”, “anticipation”, “intend”, “could”,
“estimate”, or “continue” or the negative or other comparable terminology are
      intended to identify forward-looking statements. These statements by their
      nature involve substantial risks and uncertainties, such as credit losses,
      dependence on management and key personnel, variability of quarterly results,
      and the ability of the Fund to continue its growth strategy and competition,
      certain of which are beyond the Fund’s control. Should one or more of these
      risks or uncertainties materialize or should the underlying assumptions prove
      incorrect, actual outcomes and results could differ materially from those
      indicated in the forward-looking statements.




Any
      forward-looking statement speaks only as of the date on which such statement
      is
      made, and the Fund undertakes no obligation to update any forward-looking
      statement or statements to reflect events or circumstances after the date on
      which such statement is made or to reflect the occurrence of unanticipated
      events. New factors emerge from time to time and it is not possible for
      management to predict all of such factors, nor can it assess the impact of
      each
      such factor on the business or the extent to which any factor, or combination
      of
      factors, may cause actual results to differ materially from those contained
      in
      any forward-looking statements.





**INFORMATION
      REQUIRED IN ANNUAL REPORTS OF**


**TRANSITIONAL
      SMALL BUSINESS ISSUERS**





**PART
      I (Alternative 2: Form 1-A Model B Items 6-11)**





**ITEM 1.**
            **DESCRIPTION
                OF BUSINESS**





**OVERVIEW**





**I.**
            **INTRODUCTION**





**A.**  **General
      Overview.** The
      Registrant is Lakeside Mortgage Fund, LLC (referred to herein as the “Company”,
      or the “Fund”, “we” or “us”), a California limited liability company whose
      manager is Lakeside Financial Group, Inc., a California corporation (the
“Manager”). We have been organized for the purpose of making or investing in
      loans secured by deeds of trust encumbering California real estate, and, to
      a
      limited extent, real estate located in other states. We filed our Articles
      of
      Organization on December 4, 2002. We conducted no business, other than
      organizational, planning and registration activities, until September of 2003,
      which is the first time we took in capital contributions from investors, and
      invested those funds in commercial mortgage loans and other temporary
      investments such as short-term commercial paper. Prior to that, the Company
      worked on raising capital and holding the invested amounts in trust for
      investors prior to meeting its offering minimum of $500,000 in September of
      2003, at which time the proceeds from the minimum offering was transferred
      to
      the Company’s funds available for investment in loans.


3





The
      Company’s business strategy is to generate current income by investing in
      mortgage loans. We make loans to owners and developers of real property who
      seek
      an alternative from traditional mortgage lenders for their financing needs.
      Factors which can cause such borrowers to seek a financing alternative usually
      involve perceived credit risks based on traditional credit evaluations and
      underwriting standards, and the length of time required by conventional mortgage
      lenders such as commercial banks to underwrite such loans. The Company focuses
      its underwriting review on the value of the collateral securing the loan, and
      seeks to underwrite such loans in far less time than conventional lenders.
      In
      return for making our loans to borrowers with higher credit risk, and for
      expeditious underwriting of such loans, we receive a higher interest rate on
      our
      loans than would be charged by conventional lenders.




The
      Company raises capital for its lending activities by selling equity interests,
      in the form of membership interests, to investors. The Company is currently
      offering its membership interests, in the form of Units of Membership Interest
      (“Units”), in an intrastate offering to California residents only. The Company
      is offering 500,000 Units, at a price of $100 per Unit, with a minimum
      investment per investor of 20 Units ($2,000), for a total offering amount of
      $50,000,000. The Company began offering the Units on February 24, 2003, and,
      as
      of December 31, 2007, has raised $25,113,403.





The
      offering of Units is exempt from registration under federal securities laws
      pursuant to Section 3(a)(11) of the Securities Act of 1933, as amended, and
      Rule
      147 promulgated thereunder. Pursuant to California securities laws, the Company
      is offering the Units pursuant to a permit issued by the California Department
      of Corporations, originally issued on February 24, 2003, and renewed annually,
      with the most recent renewal dated February
      29, 2008 .
      (See,
“III. The Offering of Membership Interests”)





Purchasers
      of Units become Members of the Company. From net income earned by the Company,
      Members receive monthly distributions of cash, or they may opt to reinvest
      their
      distributions back into the Company for more Units. Distribution amounts are
      based on amounts earned by the Company and the percentage interests of the
      Members. The rights and duties of Members are set forth in the Operating
      Agreement of the Company. Members do not engage in the management of the
      Company, but certain events (dissolution of the Company, amendment of the
      Operating Agreement, merger of the Company with another entity, and removal
      of
      the Manager) require the approval of a majority interests of the Members. (See,
      “V. Summary of Operating Agreement” for a description of the Operating Agreement
      and the rights and the duties of the Members.)





Investors’
      funds are placed initially in a non-interest-bearing subscription account.
      Within 60 days of being placed in the subscription account, the funds are then
      transferred to the capital of the Company and the investor becomes a Member.
      This transfer occurs at the discretion of the Manager, usually at a time that
      the Company needs additional capital to fund a loan. Investors are notified
      of
      these transfers in the monthly statements which each investor receives from
      the
      time their investment is placed in the subscription account. Upon becoming
      a
      Member, the investor normally begins receiving monthly distributions from the
      Company, if funds are available for such distribution. The amount of the
      distribution is based on the net income generated by the Company from all
      sources, which include real estate loans and other temporary investments such
      as
      short term commercial paper.




The
      Company is managed solely by the Manager. The Manager does not hold a membership
      interest in the Company. The Manager is entitled to receive a monthly management
      fee from the Company (equal to 2.75% of gross assets under management per year),
      payment of which has been partially waived periodically in order to improve
      the
      yield of the Fund to its Members, and a mortgage loan servicing fee (equal
      to
      .25% of
      the
      total unpaid principal balance of each loan serviced  per
      year). Additionally, the Manager acts as the broker between borrowers and the
      Company, and earns brokerage fees for loan transactions (typically 3% to 4%),
      as
      well as loan document preparation fees, with these fees paid by the borrower
      and
      not the Company. For a description of the duties of the Manager, and how the
      Manager performs its functions, see, “IV. The Manager.”


4





**B.**  **Results
      of Operations.** The
      Company was issued its permit to offer and sell its Units by the California
      Department of Corporations, on February 24, 2003. That original permit provided
      for a maximum offering amount of $25,000,000 and a minimum offering amount
      of
      $500,000. We reached the minimum amount and contributed the investor funds
      to
      the capital of the Company, on September 26, 2003. On December 20, 2006, the
      permit was amended to increase the maximum offering amount to $50,000,000,
      and
      as of December 31, 2007, the Company had sold a total of 251,134 units for
      a
      total of $ 25,113,403.





On
      December 31, 2007, the Company had net Members’ contributions of $21,434,879,
      and twenty-eight (28) loans totaling $18,786,848, and four (4) real estate
      owned
      properties amounting to $4,328,871, with the rest of the capital in the form
      of
      cash and other current assets.





As
      of
      December 31, 2007, the Company was invested in the following twenty-eight
      outstanding loans:





Loan
                No.
            
            Principal
            
            Interest
            
            Location
                of Collateral200302
            
            $
            224,390
            
            
            12.0
            %
            
            VA,
                NC, and SC200409
            
            $
            110,476
            
            
            10.9
            %
            
            Yuba
                City, CA200410
            
            $
            978,000
            
            
            12.0
            %
            
            Galt,
                CA200412
            
            $
            500,000
            
            
            09.0
            %
            
            Mountain
                House, CA200502
            
            $
            470,737
            
            
            10.9
            %
            
            Madera,
                CA200504
            
            $
            802,800
            
            
            12.0
            %
            
            Stockton,
                CA200507
            
            $
            257,375
            
            
            12.0
            %
            
            Los
                Banos, CA200510
            
            $
            455,042
            
            
            12.0
            %
            
            Los
                Banos, CA200511
            
            $
            549,240
            
            
            12.0
            %
            
            Homeland,
                CA200601
            
            $
            552,000
            
            
            10.9
            %
            
            Madera,
                CA200602
            
            $
            589,473
            
            
            12.0
            %
            
            Stockton,
                CA200603
            
            $
            2,780,000
            
            
            12.0
            %
            
            Novato,
                CA200608
            
            $
            525,000
            
            
            10.9
            %
            
            San
                Francisco, CA200609
            
            $
            390,580
            
            
            11.9
            %
            
            Desert
                Hot Springs, CA200609.1
            
            $
            345,000
            
            
            10.9
            %
            
            Burney,
                CA200612
            
            $
            570,000
            
            
            11.9
            %
            
            Richmond,
                CA200613
            
            $
            400,000
            
            
            12.5
            %
            
            Le
                Grand, CA200614
            
            $
            380,000
            (const)
            
            12.0
            %
            
            Arnold,
                CA200615
            
            $
            1,100,000
            
            
            11.5
            %
            
            Rio
                Vista, CA200701
            
            $
            1,900,000
            
            
            12.5
            %
            
            Butte
                County, CA200702
            
            $
            737,000
            (const)
            
            11.9
            %
            
            Lake
                Almanor, CA200703
            
            $
            1,200,000
            
            
            11.9
            %
            
            Redding,
                CA200704
            
            $
            683,000
            
            
            11.9
            %
            
            Cottonwood,
                CA200705
            
            $
            1,265,000
            (const)
            
            11.9
            %
            
            Venice,
                CA200706
            
            $
            1,085,000
            
            
            11.9
            %
            
            Diamond
                Springs, CA200707
            
            $
            1,200,000
            (const)
            
            11.5
            %
            
            Modesto,
                CA200708
            
            $
            145,000
            
            
            11.9
            %
            
            Roseville,
                CA200709
            
            $
            411,000
            (const)
            
            15.0
            %
            
            Byron,
                CA


5





Twenty
      four (24) of these loans are made to non related entities ($16,650,630). Of
      the
      above loans, six (6) have matured and remained unpaid at the end of 2007
      ($3,473,270). Interest receivable on matured loans amounted to $45,189 at
      December 31, 2007. In
      addition to the matured loans, six (6) loans ($2,579,064) were in default at
      the
      end of 2007 for non-payment of interest amounting to $24,087. The Fund generally stops accruing interest on loans when
      they become doubtful of collection (generally, default in interest payments
      for
      over 60 days). Non-accrual
      interests on loans in default ranged  between
      3-15 months; one loan that had matured as of December 31, 2007 was subsequently
      paid off in January, 2008 and another loan with past due interest was
      subsequently re-instated by the borrower under a 3-month payment plan for past
      due interest, including penalties and default interest. The
      Manager has pursued the collection or re-structuring of these loans and related
      interest receivables, either through extensions or partial pay downs. When
      such
      default interest is collected, it is applied first to any outstanding accrued
      interest receivables and the balance recognized into income during the period
      it
      was collected.





It
      has
      been the Manager’s experience that loans can sometimes be refinanced or repaid
      before or after the maturity date. Occasionally, the Fund allows borrowers
      to
      continue to make the payments on loans past maturity for periods of time. Such
      loans are believed to be covered by the fair market values of the underlying
      real estate properties, and the Fund does not anticipate that it will incur
      significant losses in cases of these loans; however for accounting purposes,
      the
      Company recognized a reserve for loan losses amounting to $187,512 at December
      31, 2007.





Four
      (4)
      loans have been foreclosed during 2007 when the Borrowers failed to pay off
      the
      loans at maturity. The real estate owned (“REOs”) properties are valued at the
      lower of the estimated net realizable values and carrying costs of the REOs
      ($4,328,871). One (1) loan was a construction loan where the underlying
      collateral consisted of construction of two-single family homes in the City
      of
      Marina, California. The borrower defaulted and the Company took over the
      unfinished project and hired a general contractor to finish the construction
      project. This involved the infusion of additional funds by the Company to finish
      the project (approximately $177,000). The homes are substantially complete
      and
      are currently listed for sale with a real estate broker operating in the Marina
      area. Two (2) of the loans that went into foreclosure were secured by senior
      indebtedness; hence the Company assumed the two senior notes ($1,675,000) at
      the
      time of foreclosure. The remaining property is a commercial real estate that
      was
      operated as an auto repair shop by the borrower. The REOs are listed for sale
      with real estate brokers operating in their respective areas. The Company
      believes that these properties can be sold within 1 year without material loss
      to the Company. The only carrying costs that the Company anticipates in
      connection with holding the properties are real estate property taxes and
      liability insurance. The taxes and insurance premiums are expensed when
      incurred. For accounting purposes, the Company recognized a reserve for losses
      amounting to $100,000 at December 31, 2007.





Of
      the
      four (4) related party loans (see “VII. Potential Conflicts of Interest -- C.
      Company Loans to Related Parties”), two (2) were in default at December 31, 2007
      for non payment of interest ($37,436) for over 60 days. The Manager, through
      its
      Board of Directors, is presently developing plans to cure the default and
      consequently, bring these past due interest current. These (2) notes/investments
      are undivided interests in promissory notes which were originated through
      private placements. One of the notes ($224,390) was subsequently paid off in
      full in January 2008. The remaining two (2) notes were both originated in 2007
      and are current in interest payments.





The
      Company began making monthly distributions to Members in November of 2003 and
      has continued such distributions through 2007. During the fiscal year ended
      December 31, 2007, the Company made the following distributions to its Members,
      most of whom have chosen to reinvest their distributions back into the Company
      (i.e. to compound their investment):


6





Members
            
            Total
                Amt.
            
            Amount
            
            Amount
                of
            
            AnnualizedMonth
            
            Rec.
                Dist.
            
            Distributed
            
            Compounded
            
            Cash
                Dist.
            
            ReturnJanuary
                ’07
            
            
            366
            
            $
            96,374
            
            $
            61,432
            
            $
            34,942
            
            
            6.25
            %February
                ’07
            
            
            376
            
            $
            126,201
            
            $
            80,458
            
            $
            45,743
            
            
            8.10
            %March
                ’07
            
            
            385
            
            $
            133,151
            
            $
            85,552
            
            $
            47,599
            
            
            7.40
            %April
                ’07
            
            
            387
            
            $
            137,401
            
            $
            86,830
            
            $
            50,571
            
            
            7.75
            %May
                ’07
            
            
            387
            
            $
            144,808
            
            $
            91,701
            
            $
            53,107
            
            
            7.75
            %June
                ’07
            
            
            388
            
            $
            138,835
            
            $
            87,179
            
            $
            51,656
            
            
            7.75
            %July
                ’07
            
            
            387
            
            $
            130,717
            
            $
            79,330
            
            $
            51,387
            
            
            7.00
            %August
                ’07
            
            
            391
            
            $
            124,772
            
            $
            73,633
            
            $
            51,139
            
            
            6.62
            %September
                ’07
            
            
            391
            
            $
            133,582
            
            $
            77,142
            
            $
            56,440
            
            
            7.25
            %October
                ’07
            
            
            385
            
            $
            115,636
            
            $
            65,854
            
            $
            49,782
            
            
            6.15
            %November
                ’07
            
            
            386
            
            $
            128,074
            
            $
            71,735
            
            $
            56,339
            
            
            7.00
            %December
                ’07
            
            
            386
            
            $
            114,260
            
            $
            62,854
            
            $
            51,406
            
            
            6.00
            %Year-to-date
                average
            
            
            385
            
            $
            126,984
            
            $
            76,975
            
            $
            50,009
            
            
            7.09
            %





The
      Manager is entitled to certain management fees from the Company, which the
      Manager has waived, in whole or in part, in 2007 and prior years (See, “VI. The
      Manager - A. Compensation to Manager,” for a detailed explanation). If the
      Manager had not waived these fees during the above-mentioned period, the returns
      to investors would have been 3.00%, 5.45%, 3.77%, 5.53%, 5.67%, 3.71%, 4.62%,
      4.51%, 0.64%, 3.17%, 5.29% and 3.45% for the respective periods from January
      2007 through December 2007.




**C.**  **Twelve
      Month Plan of Operation.** As of
      December 31, 2007, we have sold a total of 251,134 Units, at $100 per Unit,
      for
      a total of $25,113,403. After deducting for broker commissions and offering
      expenses, the net proceeds to the Company from these sales have been
      $24,122,086. The Company has $18,786,848 invested in commercial mortgage loans,
      with the remainder in the form of cash and/or other assets. As of December
      31,
      2007, the Company has 386 Members.





During
      the next twelve months, the Manager will continue to underwrite and select
      loans
      for the Company to invest in. The Company will continue to seek additional
      capital with its intrastate offering under the permit from the California
      Department of Corporations. The Manager will continue to manage the Company
      as
      described herein and in the Company’s Operating Agreement. (See, “IV. The
      Manager,” and see “V. Summary of the Operating Agreement” for a discussion of
      the Operating Agreement). The Company will continue to pay the Manager, on
      a
      monthly basis, a management fee (annualized at 2.75% of gross assets under
      management) and loan servicing fee (annualized at 0.25% of loan principal
      amounts) to the extent these fees are not waived by the Manager. The Manager
      accepted only a portion of these fees during 2007 (See, “IV. A. Compensation to
      the Manager”).





**D.**  **Current
      Economic Conditions** .
      The
      Company's sole business, making loans secured by real estate, is particularly
      vulnerable to changes in macroeconomic conditions. Any significant decline
      in
      economic activity, particularly in the geographical markets in which the loans
      are concentrated, results in a decline in the demand for real estate acquisition
      and development loans. Declines in economic activity are often accompanied
      by a
      decline in prevailing interest rates. Although the Company's lending rates
      are
      not directly tied to the Federal Reserve Board's discount rate, a sustained
      and
      widespread decline in interest rates impacts the interest rates the Company
      is
      able to obtain on loans.





The
      housing market has continued to be weak. Although the Company does not make
      residential loans to consumers such as the subprime mortgages, many of our
      borrowers are involved in various stages of the development of residential
      real
      estate. The relatively weak housing market has resulted in a slowing of the
      repayment of many of the Company’s loans, requiring the Company to grant
      extensions on many of its loans, although the collateral for these loans appears
      to remain sound.





While
      the
      Fund does not arrange and does not service traditional “sub-prime” loans, recent
      media attention regarding the increased foreclosures of such loans and the
      resulting failure of many institutional lenders in the sub-prime lending
      industry has and will continue to increase some of the potential risks
      associated with an investment in Units and may have caused a recent increase
      in
      the average foreclosure rates of the Fund and other similarly situated brokers.


7


The
      term
“sub-prime lending” generally refers to loans secured by owner-occupied
      residential properties made or arranged on behalf of lenders who are generally
      in the market of making such loans and selling such loans on the secondary
      market (“Sub-Prime Lenders”). Sub-prime loans differ from traditional
      institutional loans, which are often referred to as “prime loans” or “A-paper”
loans (“Traditional Loans”), for two main reasons: (i) the credit score or
“FICO score” required of the borrower to qualify for a loan is less than that
      required for Traditional Loans; and (ii) the amount of the loan compared to
      the value of the property securing the loan (i.e., the loan-to-value ratio)
      is,
      in most cases, significantly higher than Traditional Loans. While the
      creditworthiness of borrowers on sub-prime loans can be less than Traditional
      Loans, the underwriting of such loans nonetheless are credit based loans that
      rely very little on the equity held in the security property. With the steady
      rise of real estate values over the last ten years it became very common to
      see
      Sub-Prime Lenders offering loans with loan-to-value ratios of 100% (i.e., a
      loan
      equal to the value of the property securing the loan). Therefore, unless there
      is considerable appreciation in the value of the security property, sub-prime
      loans have a higher risk of loss upon default and foreclosure.




Loans
      made and arranged by the Fund are underwritten primarily on an asset basis
      rather than a credit basis. While the Fund may take certain steps to determine
      a
      borrower’s ability to repay the loan according to its terms, such considerations
      are subordinate to a determination that a borrower has sufficient equity in
      the
      security property to satisfy the maximum loan-to-value ratios described below
      in
      the section “Lending Standards and Policies”. The purpose of seeking to
      establish a comfortable ratio of the loan amount to fair market value is to
      avoid any diminution of the fair market value of the security property upon
      foreclosure that will exceed the borrower’s equity. There is no assurance on any
      loan that this objective will be met.




Nonetheless,
      asset based loans involve the various risks set forth herein. Additionally,
      the
      failure of the “sub-prime” market can affect the overall housing market and can
      increase many of these risks. These increased risks include: (i) an increased
      risk of non-availability of credit for the borrower to develop the property
      or
      refinance the secured note at maturity; (ii) an increased risk of foreclosures
      in the area surrounding the security property that would negatively affect
      the
      value of the property securing the loan (iii) increased constraints on consumer
      credit affecting the ability of borrowers to sell completed residential
      projects; (iv) increased risk of defaults by the borrower on other unrelated
      loans and their foreclosures and/or the diminution of the value of a completed
      project causing an abandonment of the project by the borrower.





**II.**
            **COMPANY
                LENDING STANDARDS AND
                POLICIES**





**A.**  **General
      Standards for Mortgage Loans.** The
      Company engages in the business of making loans secured by first and second
      deeds of trust that encumber real estate located primarily in California. We
      make loans for commercial purposes (See, “Types of Loans,” below), and we do not
      make residential loans to consumers. We also make construction loans and loans
      secured by leasehold interests in commercial real property. The Company’s loans
      are not insured or guaranteed by any governmental agency or private entity.
      The
      Company selects loans for investment pursuant to a set of guidelines set forth
      below, which guidelines are designed to set standards for the quality of the
      real property security given for the loans.





**1.**  **Types
      of Loans.** The
      types
      of loans we invest in fall into several categories, determined mainly by the
      type of property securing the loan: commercial property loans, construction
      loans (commercial), construction loans (residential), and unimproved
      land.


8





**a.**  **Commercial
      Property Loans** .
      These
      are loans secured by income-producing commercial properties. These loans provide
      funds to allow property owners the capital needed for their businesses, to
      renovate and upgrade the property, and to address other current capital needs.
      In many cases our loans are bridge loans until other financing is available.
      Many of the commercial property loans provided by the Fund may be secured by
      properties in which the borrowers operate their businesses. We typically loan
      up
      to 80% of the appraised value of the property, and we also take into
      consideration the income from the property and its adequacy to service the
      debt.





**b.**  **Construction
      Loans (Commercial).** We make
      construction loans for the purpose of improving commercial property. The
      loan-to-value ratio on construction loans we make generally will not exceed
      70%
      of the appraised value of the property upon completion of the construction.
      Such
      loans are funded through a series of draws as construction progresses, with
      the
      loan amount increasing as the value of the property increases during the
      construction process.





**c.**  **Construction
      Loans (Residential).** We do
      not make residential loans to consumers. However, we will make construction
      loans to home builders, and builders of multi-unit residential facilities,
      who
      are building for commercial purposes (i.e., to sell or lease the residence).
      Our
      lending criteria generally are the same as for commercial construction
      loans.





**d.**  **Unimproved
      Property** .
      We make
      loans secured by unimproved real property. The valuation of such property is
      much more speculative. Therefore, our loan to value ratio on such property
      generally does not exceed 50%.





**2.**  **Loan
      to Value Ratios.**




Type
                of Property
            
            Maximum
                Loan
              to
                Value RatioCommercial
                Property
            
            
            80
            %Construction
                Loan – Commercial
            
            
            70
            %Construction
                Loan – Residential
            
            
            75
            %Unimproved
                Land
            
            
            50
            %





The
      amount of the Company’s loan, combined with the outstanding debt secured by any
      senior deed of trust on the security property, generally does not exceed the
      percentages stated above, based on the value of the security property as
      determined by written analysis or appraisal at the time the loan is made. This
      loan-to-value ratio may be increased if, in the discretion of the Manager,
      a
      given loan is supported by credit adequate to justify a higher loan-to-value
      ratio or if mortgage insurance is obtained. The foregoing loan-to-value ratios
      do not apply to purchase-money financing offered by the Company to sell any
      real
      estate owned (acquired through foreclosure) or to refinance an existing loan
      that is in default at the time of maturity. In such cases, the Manager is free
      to accept any reasonable financing terms that it deems to be in the best
      interests of the Company, in its sole discretion.




The
      Company obtains a valuation prepared by an independent third party for each
      security property on which it makes or invests in a mortgage loan (a “Market
      Value Analysis”). Although the majority of these have been, and will continue to
      be, full appraisals prepared by licensed appraisers, on certain loans (primarily
      in market areas with which the principals of the Manager have familiarity)
      the
      Company has relied on valuations prepared by independent third parties which
      do
      not contain the level of information of a full appraisal. Generally these are
      valuations prepared by licensed real estate professionals using standard
      appraisal techniques, such as market analysis valuation and income analysis
      valuation, but do not contain the extensive background information often
      associated with full appraisals. Although there may be some added risk
      associated with using other than a full appraisal, it is believed that this
      added risk is offset by the facts that: (i) any Market Value Analysis which
      we
      use will contain the essential information contained in a full appraisal, and
      (ii) avoiding the delay associated with a full appraisal is part of the reason
      the Company can charge the interest rates that it does. Because the Company
      generally makes short-term loans, we do not usually require updates of
      appraisals. The Company decides, on a case-by-case basis, whether to require
      updates on loans which have relatively longer terms. So far the Company has
      required the update of appraisals only in connection with term extensions.


9





The
      Market Value Analysis for construction loans is prepared on an “as completed”
basis, i.e. assuming that the improvements for which the loan is obtained will
      be completed. The Market Value Analysis may also assume that all public
      improvements to be funded by special assessment district bonds will be completed
      as proposed and that the property will be marketed and sold in the manner
      planned by the borrower. In the case of a construction loan, the loan-to-value
      ratio as estimated in the Market Value Analysis and the budget for the project
      may temporarily exceed 70% at times during the term of the loan. This may occur
      because the Market Value Analysis is based upon the value of the property when
      construction is completed; however, during the course of construction, the
      value
      of the property may increase at a slightly different rate than the increase
      in
      the amount of the loan.





**3.**  **Priority
      of Mortgages.** Our
      loans are secured primarily by first deeds of trust on California real
      properties, however the Company may invest in deeds of trust which are junior
      to
      one or more senior encumbrances, i.e., second or even third deeds of trust.
      As
      of December 31, 2007, the Company has outstanding 19 loans secured by first
      deeds of trust, and 9 loans secured by second deeds of trust. If a loan is
      secured by a first deed of trust, the deed of trust is senior to all other
      recorded monetary liens other than liens for taxes or the assessments of special
      assessment districts to fund streets, utilities or other public improvements.
      If
      a Loan is secured by a junior deed of trust (i.e., a second or third deed of
      trust) the obligations secured by the senior lien(s) must not be in default
      at
      the time of the loan closing; however, loan proceeds may be used to cure
      defaults under the senior lien(s). As
      of
      December 31, 2007, a total of $338,909 (loans: $223,217 and real estate owned
      properties: $115,692) have been used to cure senior loans in
      default. Loans
      may also be secured by one or more additional deeds of trust encumbering other
      property owned by the borrower or its affiliates where, in the Manager’s
      reasonable judgment, such cross-collateralization is necessary to meet the
      loan-to-value ratio requirements set forth above or to further enhance the
      security for the loan.





**4.**  **Geographic
      Area of Lending Activity.** The
      Company limits lending activities primarily to deeds of trust on properties
      located in California, although the Company may make loans primarily secured
      by
      out of state properties and may take a security interest in property outside
      California as additional collateral for a Loan. The principal amount of loans
      secured by out of state properties will not exceed 20% of the Company’s loan
      portfolio.





**5.**  **Terms
      of Loans; Balloon Payments.** The
      terms
      of Company loans vary based on the needs of the borrower and the decision of
      the
      Manager. Most Company loans generally have a term of between 6 months to two
      years, and provide for monthly payments of interest only, with a “balloon
      payment” at the end of the term. Other Company loans may have longer terms, but
      generally are not fully amortizing (i.e., the original principal amount of
      the
      loan will be repaid in equal monthly installments of principal and interest
      over
      the term).





**6.**  **Interest
      Rates** .
      We
      generally charge interest rates of between 10% and 12% on our loans. Our
      interest rates are not directly tied to any index rate, and are arbitrarily
      selected by us depending on what we feel the market will bear. If interest
      rates
      rise among the various indexes, the Company may raise its rates.





**7.**  **Escrow
      Conditions** .
      Company
      loans are funded through an escrow account handled by a qualified title
      insurance or escrow company or the Manager. The escrow agent is instructed
      not
      to disburse any funds until the following conditions are met:


10





**(a)**  Satisfactory
      title insurance coverage is obtained for all loans, with the title insurance
      policy naming the Company as the insured and providing title insurance in an
      amount equal to the principal amount of the loan. Title insurance insures only
      the validity and priority of the Company’s deed of trust, and does not insure
      the Company against loss by reason of other causes, such as diminution in the
      value of the security property, over-appraisals, borrower’s defaults, etc. The
      Manager does not arrange for mortgage insurance, which would afford some
      protection against loss if the Company foreclosed on a loan and there was
      insufficient equity in the security property to repay all sums
      owed.





**(b)**  Satisfactory
      fire and casualty insurance is obtained for all loans (or only casualty
      insurance in the event of a loan secured by unimproved land), which names the
      Company as loss payee in an amount equal to the principal amount of the
      Company’s loan. (See, “VI. Risk Factors - K. Uninsured Losses”)





**(c)**  All
      loan
      documents (notes, deeds of trust, construction loan agreements etc.) and
      insurance policies must name the Company as payee and beneficiary or additional
      loss insured, as applicable. In the event the Company purchases loans, the
      Company receives assignments of all beneficial interest in any documents related
      to each Loan so purchased. Company investments in Loans are not held in the
      name
      of the Manager or any other nominee.





**8.**  **Loans
      to Related Parties.** The
      Company may make or invest in loans to persons or entities that are affiliated
      with the Manager or its shareholders. Such loans: (i) will not exceed 20% of
      total Company assets; (ii) must not be more favorable to the borrower than
      similar loans negotiated at arm’s-length; and (iii) must be repurchased by the
      Manager if the loan is in default more than 30 days. Such loans, if made, may
      involve significant conflicts of interest. The last of the three requirements
      for such loans is in recognition of the fact that, if the loan in default is
      to
      a party affiliated with the Manager, and the Company is dependent on the Manager
      to assert its rights with respect to the loan. The duty of the Manager to
      purchase the loan in default is an unsecured obligation of the Manager. As
      of
      December 31, 2007, o f
      the
      four (4) related party loans, two (2) were in default for non payment of
      interest ($37,436) for over 60 days. The Manager, through its Board of
      Directors, is presently developing plans to cure the default and consequently,
      bring these past due interest current. These two (2) notes are undivided
      interests in promissory notes which were originated through private placements.
      One of the notes ($224,390) was subsequently paid off in full in January 2008.
      The remaining two (2) notes were both originated in 2007 and are current in
      interest payments.




**9.**  **Loan
      Diversification.** No
      Company loan (or Company interest in a loan) will exceed the greater of: (i)
      $5,000,000; or (ii) 20% of
      total
      Company capital at the time of the loan. Six
      (6)
      loans totaling $ 3,631,930 have been made to separate entities controlled by
      the
      same person. Each of the various borrowing entities is an independent entity
      organized for a specific project, and the various entities own real property
      in
      various places around California, mostly in the Central Valley. At December
      31,
      2007, these loans represented 19% of the Fund’s total loan portfolio. These
      loans were in default for non payment of interest ranging from 3-15
      months. Five
      (5)
      of the loans matured but remained outstanding at the end of the year. All six
      (6) loans are collateralized by the underlying real estate properties, and
      are
      personally guaranteed by the controlling person.





**10.**  **Reserve
      Fund.** A
      contingency reserve fund may be retained for the purpose of covering unexpected
      cash needs of the Company, if the Manager believes it to be in the best
      interests of the Company. The amount of this reserve fund, if any, is
      established by the Manager. This reserve fund may be held in cash, bank
      accounts, certificates of deposit, money market accounts, short-term bankers
      acceptances, publicly traded bond funds or other liquid assets. Among the
      purposes of the fund are the following: (i) provision for regular expenses
      incurred by the Company such as accounting and legal expenses associated with
      being a reporting company under the Securities Exchange Act, and (ii) provision
      for losses due to nonperforming loans. The creation of this reserve will involve
      diverting funds that would otherwise be available for distribution to Members,
      and will necessarily have the effect of decreasing such distributions.


11





**B.**  **Credit
      Evaluations.**  The
      Manager may consider the income level and general creditworthiness of a
      borrower, and any guarantor, to determine a borrower’s ability to repay the
      Company loan according to its terms, but such considerations are subordinate
      to
      a determination that a borrower has sufficient equity in the security property
      to satisfy the loan-to-value ratios described above. Therefore, the Company
      may
      make loans to borrowers who are in default on certain obligations (e.g., to
      consolidate their debts) or who do not have sources of income that would be
      sufficient to qualify for loans from other lenders such as banks or savings
      and
      loan associations.





**C.**  **Loan
      Servicing.** It is
      anticipated that all Company loans will be “serviced” (i.e., loan payments will
      be collected and other administrative services performed) by the Manager, who
      will also act as a mortgage broker in the initial placement of Company loans.
      The Manager will be compensated by the Company for such loan servicing
      activities, but compensated by borrowers for the initial placement of Company
      loans. (See, “IV. The Manager - A. Compensation to Manager”)




With
      many
      of the Company’s loans, the Manager will require the borrower to provide an
      interest reserve, which will be either financed as part of the loan amount
      or
      provided independently by the borrower, and will be held by the Manager and
      used
      to pay the monthly interest on the loan. In other cases the borrower will be
      required to make monthly interest payments which will involve mailing their
      checks or money orders to the Manager for deposit in the Company’s
      account.





In
      servicing a construction loan, the Manager may monitor the construction that
      is
      financed by the loan pursuant to a construction loan agreement and act for
      the
      Company in authorizing disbursements to borrowers from a construction
      disbursement account or otherwise. Disbursements to borrowers are made pursuant
      to approved construction draw schedules. The feasibility of the draw schedule
      and the construction budget will normally be approved by an outside consultant
      who will also monitor the progress of construction and approve construction
      draws by the borrower.





**D.**  **Sale
      of Loans.**  The
      Company makes mortgage loans for investment, and does not expect to engage
      in
      real estate operations in the ordinary course of business except as may be
      required if the Company forecloses on a property securing a mortgage loan.
      The
      Company does not presently intend to invest in mortgage loans primarily for
      the
      purpose of reselling such loans in the ordinary course of business; however,
      the
      Company may occasionally sell mortgage loans (or fractional interests therein)
      when the Manager determines that it appears to be advantageous for the Company
      to do so, based upon then current interest rates, the length of time that the
      loan has been held by the Company, and the overall investment objectives of
      the
      Company.





**E.**  **Company
      Borrowing.** The
      Company may borrow funds from a third party lender (which may be, but is not
      required to be, a bank or other financial institution) in order to: (i) fund
      additional mortgage loans; (ii) prevent default of loans senior to Company
      loans
      or discharge such loans entirely; or (iii) develop or operate any real property
      acquired by the Company as a result of a loan default. The Company may assign
      all or a portion of the Company’s loan portfolio to the lender as security for
      the loan(s). Such
      borrowings may result in increased yield to the Company if the interest earned
      by the Company on its leveraged loans exceeds the interest that must be paid
      by
      the Company on the funds borrowed from a third party lender. Using the Company’s
      loan portfolio to secure a loan for any purpose, however, entails risks to
      the
      Company that would not otherwise be present if the Company funded all of its
      loans from its own funds. Borrowing funds from third party lenders to make
      payments to senior lenders or to develop or operate any real property acquired
      by the Company as a result of a loan default entails additional risks. For
      example, should the Company’s net income be insufficient to pay these loans as
      they become due or should the Company otherwise default on such loans, the
      Company will be at risk of losing all assets (i.e., the Company loans) pledged
      as security. As of December 31, 2007, the Company has not engaged in any of
      the
      above-described borrowing.


12





**III.**
            **THE
                OFFERING OF MEMBERSHIP
                INTERESTS.**





**A.**  **Terms
      of the Offering.** We raise
      capital by selling Membership Interests in the Company. The Membership Interests
      are sold in Units. The Unit subscription price to each investor is one hundred
      dollars ($100) per Unit with an initial minimum subscription from each investor
      of two thousand dollars ($2,000), or 20 Units. Each Unit represents a membership
      interest in the Company.





The
      offering has not been registered under applicable federal securities laws.
      The
      Units are offered under the exemption from registration provided by Section
      3(a)(11) of the Securities Act of 1933, as amended, and SEC Rule 147 promulgated
      thereunder. The offering is limited to California residents only. The Company
      derives at
      least
      98% of its revenues from
      loans secured by real property located in California. The Company’s Operating
      Agreement and Subscription Agreement, both of which are executed by the
      investor, contain written disclosures regarding the limitations on resale
      prescribed by Rule 147.





With
      respect to California securities laws, the Units are offered and sold pursuant
      to a permit issued to the Company for this offering by the California Department
      of Corporations under Sections 25110 and 25113 of the California Corporations
      Code. Following the filing of an application by the Company, the permit was
      originally granted on February 24, 2003. The permit must be renewed annually,
      and the last renewal was granted on February
      29, 2008 .
      If the
      Company did not renew its permit, it would have a limited ability to continue
      to
      sell Units under one or more exemptions from qualification under California
      securities laws, but its ability to raise capital through the sale of Units
      would be greatly reduced.




**1.**  **Minimum-Maximum
      Offering; Formation of the Company.**  The
      Company was formed on December 4, 2002 upon the filing of the Articles of
      Organization with the Office of the California Secretary of State; however,
      the
      Company did not begin doing business (i.e., making or investing in mortgage
      loans) until September 26, 2003 when the minimum 5,000 Units was sold and the
      proceeds thereof were transferred to the Company’s funds available for
      investment in loans. The maximum capitalization of the Company pursuant to
      the
      current offering is $50,000,000 (500,000 Units). The maximum may be increased
      by
      the Manager from time to time.





**2.**  **Subscription
      Agreements and Subscription Account; Admission to the Company.** Subscription
      Agreements from prospective investors are accepted or rejected by the Manager
      promptly after receipt. The Manager reserves the right to reject any
      subscription submitted for any reason. Upon acceptance, an investor’s funds are
      placed in the Subscription Account. The investor’s funds are contributed to the
      capital of the Company with the purchase of Units only when, in the Manager’s
      discretion, the investor’s funds are required by the Company to fund a mortgage
      loan, or to create appropriate reserves or pay organizational expenses. Until
      then, subscription funds are held in the non-interest-bearing Subscription
      Account. Subscription Agreements are irrevocable and subscription funds are
      non-refundable, except with the consent of the Manager. Subscription Funds
      are
      kept in the Subscription Account for no longer than sixty (60) days from the
      date of receipt.


13





**3.**  **Election
      to Compound or Receive Monthly Cash Distributions.**  Upon
      subscribing for Units, an investor must elect whether to receive monthly cash
      distributions from the Company or to allow his or her earnings to compound
      (i.e., reinvest for additional Units). An investor may elect to switch from
      compounding to monthly distributions, or from monthly distributions to
      compounding, upon sixty (60) days prior notice to the Manager. Income allocable
      to investors who elect to compound their earnings will be retained by the
      Company for investing in further mortgage loans or other proper Company
      purposes. Investors who compound will be credited with a larger proportionate
      share of such earnings than investors who receive monthly distributions since
      the capital accounts of investors who compound will increase over time. Earnings
      which are compounded are first placed into the non-interest-bearing Subscription
      Account. The amounts are transferred to the capital of the Company at the
      discretion of the Manager, and at that time the Membership Interest of the
      investor is credited with the additional investment. The transfers occur at
      the
      discretion of the Manager, and the compounded funds have no priority of first
      use. As of December 31, 2007, 254 of the
      Company’s 386 Members have elected to compound their earnings.




**4.**  **Restrictions
      on Transfer.**  As
      a
      condition to this offering of Units, restrictions have been placed upon the
      ability of investors to resell or otherwise dispose of Units, including without
      limitation the following:





**(a)**  No
      Member
      may resell or otherwise transfer any Units without the prior written consent
      of
      the Manager, which may be withheld in its sole discretion;





**(b)**  Units
      may
      not be sold or transferred without the prior written consent of the California
      Commissioner of Corporations, except as permitted by the Commissioner’s Rules.
      (See “Commissioner’s Rule 260.141.11.”); and




**(c)**  During
      the period that Units are being offered and sold, and for a period of nine
      (9)
      months from the date of the last sale of Units, no Units may be sold or
      otherwise transferred to any person who is not a bona fide resident of the
      State
      of California.





Legends
      substantially in the forms set forth below are placed upon all instruments
      or
      certificates evidencing ownership of Units in the Company stating that the
      Units
      have not been registered under the Securities Act of 1933, as amended, and
      setting forth the foregoing limitations on resale, and notations regarding
      these
      limitations shall be made in the appropriate records of the Company with respect
      to all Units offered hereby.





THE
      MEMBERSHIP INTEREST UNITS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). SUCH
      INTERESTS MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR
      HYPOTHECATED TO ANY PERSON AT ANY TIME IN THE ABSENCE OF AN EFFECTIVE
      REGISTRATION STATEMENT COVERING SUCH UNITS UNDER THE ACT OR AN OPINION OF
      COUNSEL SATISFACTORY TO THE MANAGER OF THE FUND TO THE EFFECT THAT SUCH
      REGISTRATION IS NOT REQUIRED. IN ADDITION, IN NO EVENT MAY UNITS BE OFFERED
      FOR
      SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED TO ANY PERSON WHO IS NOT A
      RESIDENT OF CALIFORNIA, FOR A PERIOD OF NINE (9) MONTHS FROM THE DATE OF THE
      LAST SALE THEREOF BY THE FUND.





IT
      IS
      UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST
      THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
      CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
      AS PERMITTED BY THE COMMISSIONER’S RULES.





**B.**  **Investor
      Suitability Standards.** To
      purchase Units, an investor must meet certain eligibility and suitability
      standards, the primary ones of which are set forth below ,
      and
      must execute an Operating Agreement and a Subscription Agreement. By executing
      the Subscription Agreeme nt,
      an
      investor makes certain representations and warranties, upon which we rely in
      accepting subscriptions. Each investor must represent in writing that such
      investor is a bona fide resident of the State of California (i.e., the investor
      has his or her principal residence in California, or if the investor is a trust,
      corporation or other entity that the principal office of such trust, corporation
      or other entity is located in California). In addition:


14





**(a)**  Each
      Investor must have either: (i) a net worth (exclusive of home, furnishings
      and
      automobiles) of at least $250,000 and an annual gross income of at least
      $65,000; or (ii) a net worth (exclusive of home, furnishings and automobiles)
      of
      at least $500,000;





**(b)**  The
      amount of each Investor’s investment in Units offered hereby must not exceed ten
      percent (10%) of such Investor’s net worth (exclusive of home, furnishings and
      automobiles); and





**(c)**  If
      the
      investor is an ERISA Plan (such as a pension or profit sharing plan, Individual
      Retirement Account, or 401(k) plan), the foregoing requirements must be met
      by
      either the fiduciary account itself or by the plan participant who directly
      or
      indirectly supplies the funds for investment by the ERISA Plan.





**C.**  **Plan
      of Distribution.** The
      Units may be offered and sold directly by the Company, with no commissions
      or
      fees paid on such sales. The Units may also be offered and sold by securities
      broker/dealers retained by the Company, who receive selling commissions of
      up to
      6.5% of the gross sales proceeds from the sales of Units effected by such
      broker/dealers. Certain commission arrangements include a trailing payment
      of
      1.0% per annum of such proceeds as long as the Units sold remain outstanding.
      To
      the extent that a Member purchases Units through a broker/dealer and elects
      to
      compound his or her earnings in the Company, any annual commissions negotiated
      by the Company are calculated based upon the increased value of such Member’s
      capital account on the last day of the month of the anniversary of admission.
      Any such commissions directly reduce the proceeds received from this offering
      for investment in mortgage loans by the Company, and reduce the capital accounts
      of the Members. There is no firm commitment to purchase any Units, and there
      is
      no underwriter for the offering of Units.





As
      of
      December 31, 2007, the Company has retained the services of one broker/dealer,
      ePlanning Securities, to sell the Units. Under the Broker/Dealer Agreement
      between the Company and ePlanning, agents
      for ePlanning receive commissions based on the commission plan they select,
      receiving between 2% and 6% for the sale of Units, plus a 1.0% annual trailer.
      Additionally, ePlanning receives a 0.5% payment as a marketing fee.





**IV.**
            **RISK
                FACTORS**





An
      investment in Units involves a significant degree of risk and is suitable only
      for investors who have no need for liquidity in their investments. Prospective
      investors should carefully consider the following risks and other
      factors.


15





**A.**  **NO
      MARKET FOR UNITS AND RESTRICTIONS ON TRANSFER.** There is
      no public market for the Units and none is expected to develop in the future.
      Even if a potential buyer could be found, the transferability of Units is also
      restricted by the provisions of the Securities Act of 1933, as amended, and
      Rule
      147 thereunder, the California Corporate Securities Law of 1968, as amended,
      the
      regulations thereunder and by the provisions of the Operating Agreement. Any
      sale or transfer of Units also requires the prior written consent of the
      Manager, which may be withheld in its sole discretion, and may require the
      prior
      written consent of the California Commissioner of Corporations. Furthermore,
      Members will have only limited rights to redeem Units or withdraw from the
      Company or to otherwise obtain the return of their invested capital. (See,
“V.
      Summary of the Operating Agreement”).





**B.**  **TAX
      RISKS.**  The
      Company has elected to be treated as a partnership for federal income tax
      purposes. Any favorable federal tax treatment presently available with respect
      to the Company could be affected by any changes in tax laws that may result
      from
      future Congressional action, tax court or other judicial decisions, or
      interpretations of the Internal Revenue Service. Other tax risks include: (i)
      if
      the Company is deemed by the IRS not to be engaged in a trade or business,
      the
      Members’ share of expense deductions would be reduced; (ii) interest paid by
      investors who finance their purchase of Units may not be deductible; and (iii)
      an IRS audit of the Company’s tax return, books and records could result in an
      audit of investors’ tax returns. The Manager has not obtained an opinion of an
      independent tax counsel as to the taxation aspects of the operations of the
      Company. Investors should consult their own tax advisors concerning these
      matters.





**C.**  **LOAN
      DEFAULTS AND FORECLOSURES.** The
      Company is in the business of lending money and, as such, takes the risk of
      defaults by borrowers and other risks faced by lenders. Most Company loans
      will
      provide for monthly payments of interest only, and be entirely due and payable
      at the end of their term. Thus, the borrower will have to make a large “balloon”
payment of principal due at the end of the term. Many borrowers are unable
      to
      repay such loans out of their own funds and are compelled to refinance.
      Fluctuations in interest rates and the unavailability of mortgage funds could
      adversely affect the ability of borrowers to refinance their loans at maturity.





The
      Company is generally an “asset” rather than a “credit” lender. This means that
      we rely primarily on the value of the real property securing loans to protect
      our investment, with repayment ability also taken into consideration. There
      are
      a number of factors which could adversely affect the value of any real property
      securing Company loans, including, among other things, the following:





**1.**  **Changes
      in Market Value.** The
      Company will rely on a market value analysis, usually in the form of an
      independent appraisal, to determine the fair market value of real property
      used
      to secure loans made by the Company. No assurance can be given that such an
      analysis will be accurate. Moreover, since a market value analysis fixes the
      value of real property at a given point in time, subsequent events could
      adversely affect the value of real property used to secure a loan.




**2.**  **Risks
      of Construction Loan Valuation.** In
      making a construction loan based upon a market value analysis of a property
“as
      constructed,” the Company is subject to the risks that actual construction costs
      may exceed budget, construction delays could occur, labor or supply shortages
      may exist, or the market value of the project once completed could be less
      than
      anticipated. Also, if the Company must foreclose on the property before the
      project is completed, it is unlikely that the property will then have a value
      as
      high as its analyzed value “as constructed,” and therefore there is a greater
      likelihood that the Company will not be able to sell the property for the full
      amount owing to the Company. Furthermore, if the Company must foreclose before
      construction is completed, and if there are insufficient funds in any
      construction disbursement account to complete construction, the Manager will
      need to choose between selling the property with construction incomplete or
      incurring debt to finance completion of the project before it is sold.


16





**3.**  **Foreclosure
      and Resale.** If the
      borrower defaults, the Company may be forced to purchase the property at a
      foreclosure sale. If the Company cannot quickly sell such property, or the
      property does not produce any significant income, the Company’s profitability
      will be adversely affected.




**4.**  **Antideficiency
      Laws.** Due to
      certain provisions of California law applicable to all real estate loans, if
      the
      real property security proves insufficient to repay amounts owing to the
      Company, it is unlikely that the Company would have the right to recover the
      deficiency from the borrower. California has four principal statutory
      prohibitions which limit the remedies of a beneficiary under a deed of trust.
      Under one statute, a deficiency judgment is barred where the foreclosure was
      accomplished by means of a nonjudicial trustee’s sale. It is anticipated that
      all of the Fund’s loans will be enforced by means of a nonjudicial trustee’s
      sale, if foreclosure becomes necessary. Under a second statute, a deficiency
      judgment is barred in any event where the foreclosed deed of trust secured
      a
“purchase money” obligation, i.e., a promissory note evidencing a loan used to
      pay all or a part of the purchase price of a residential property occupied,
      at
      least in part, by the purchaser. This restriction will probably not apply to
      the
      Company’s commercial loans. A third statute, commonly known as the “one form of
      action” rule, requires the beneficiary to exhaust the security under the deed of
      trust by foreclosure before bringing a personal action against the trustor
      on
      the promissory note. The fourth statutory provision limits any deficiency
      judgment obtained by the beneficiary following a judicial sale to the excess
      of
      the outstanding debt over the fair market value of the property at the time
      of
      sale, thereby preventing a beneficiary from obtaining a large deficiency
      judgment against the debtor as a result of low bids at the judicial
      sale.




**5.**  **Junior
      Deeds of Trust.** A number
      of the Company’s loans will be secured by second or other junior deeds of trust.
      In the event of foreclosure on a Company loan that is so secured, the debt
      secured by the senior deeds of trust must be satisfied before any proceeds
      from
      the sale of the property can be applied toward the debt owed to the Company.
      Furthermore, to protect its junior security interest, the Company may be
      required to make substantial cash outlays for items such as loan payments to
      senior lienholders to prevent their foreclosure, property taxes, insurance,
      property maintenance or repair, etc.





**6.**  **Effect
      of Bankruptcy Laws.** The
      recovery of sums advanced by the Company in making or investing in loans and
      protecting its security may also be delayed or impaired by the operation of
      the
      federal bankruptcy laws or by irregularities in the manner in which the loan
      was
      made. Any borrower has the ability to delay a foreclosure sale by the Company
      for a period ranging from several months to several years simply by filing
      a
      petition in bankruptcy, which automatically stays any actions to enforce the
      terms of the loan.





**7.**  **Uninsured
      Losses.** The
      property securing Company loans could be adversely affected by earthquakes,
      floods, mud slides, similar events and acts of God that may not be insured
      against.





**D.**  **RELIANCE
      ON THE MANAGER.** The
      Manager makes all decisions with respect to the management of the Company,
      including the determination as to what loans to make or purchase, and the
      Company is dependent on the Manager’s continued services. In the event of the
      dissolution or other incapacity of the Manager or its principals, the business
      and operations of the Company may be adversely affected. Under the Operating
      Agreement, the Manager may withdraw on six months’ notice to the Members. There
      can be no assurances that an acceptable replacement Manager may be available
      on
      economically viable terms or at all.





**E.**  **COMPETITION.** The
      Company competes with institutional lenders and others engaged in the mortgage
      lending business, some of whom have greater financial resources and experience
      than the Company.


17







**F.**  **FLUCTUATIONS
      IN INTEREST RATES.** Mortgage
      interest rates are subject to abrupt and substantial fluctuations, but the
      purchase of Units is a relatively illiquid investment. If prevailing interest
      rates rise above the average interest rate being earned by the Company’s loan
      portfolio, investors may wish to liquidate their investment in order to take
      advantage of higher returns available from other investments, but will only
      have
      a limited ability to do so.





**G.**  **INVESTORS
      IN UNITS EXPERIENCE - INVESTMENT DELAYS.** There is
      generally a delay between the time the Units are subscribed for and the purchase
      price is placed in the Subscription Account, and the time the Units are actually
      purchased with the purchase price contributed to the Company’s capital. The
      decision to transfer an investor’s funds from the Subscription Account to the
      company’s capital is made at the discretion of the Manager, and will usually be
      delayed until the Company has a loan to fund. The Subscription Account is a
      non-interest-bearing account, and an investor’s funds may be held in the
      Subscription Account for no more than 60 days. During the period in which the
      funds are held in the Subscription Account, no interest is earned on the funds.




**H.**  **LACK
      OF REGULATION.** The
      management and investment practices of the Company are not supervised or
      regulated by any federal or state authority, except to the extent that the
      lending and brokerage activities of the Manager are subject to supervision
      or
      regulation by the California Departments of Real Estate and
      Corporations.





**I.**  **RISKS
      OF GOVERNMENT ACTION.** While
      the Manager will use its best efforts to comply with all local, state and
      federal lending regulations, there is the possibility of governmental action
      to
      enforce any alleged violations of such lending laws, which may result in legal
      fees, damage awards or fines and penalties, which may lead to losses for the
      Company.





**J.**  **ENVIRONMENTAL
      LIABILITIES** .
      Under
      current federal and state law, the owner of real property contaminated with
      toxic or hazardous substances (including a mortgage lender that has acquired
      title through foreclosure) may be liable for all costs associated with any
      remedial action necessary to bring the property into compliance with applicable
      environmental laws and regulations. This liability may arise regardless of
      who
      caused the contamination or when it was caused. If toxic or hazardous substances
      are present on real property that we have acquired through foreclosure, the
      Company may be responsible for the costs of cleaning up the property through
      removal or treatment of the substances. Even
      if
      the Company does not foreclose on a contaminated site, the mere existence of
      hazardous substances on the property may depress the market value of the
      property such that the loan is no longer adequately secured.





A
      lender’s best protection against environmental risks is to inspect and
      investigate the property thoroughly before making or investing in a loan;
      however, environmental inspections and investigations are very expensive, and
      often are not financially feasible in connection with loans of the size and
      type
      to be made by the Company. As a result, in the absence of factors indicating
      possible problems, environmental site assessments will generally not be required
      by the Company in connection with its loans. The Company will, however, take
      certain precautions to avoid environmental problems, such as attempting to
      avoid
      making or investing in loans secured by properties known or suspected to have
      (or to be likely to have) environmental problems.


**K.**  **RISKS
      OF COMPANY BORROWING.** The
      Company may borrow funds from private third party lenders in order to: (i)
      fund
      additional mortgage loans; (ii) prevent default of loans senior to Company
      loans
      or to discharge such loans in their entirety; or (iii) develop or operate any
      real property acquired by the Company as a result of a loan default. Such loans
      may be secured by the Company’s loan portfolio. If a lender elected to foreclose
      on this collateral as a result of a default by the Company, the Company could
      lose a significant portion of its assets, causing losses to Investors. The
      Company has made no such borrowing and does not contemplate doing so at this
      time.




18




**L.**  **RISKS
      OF LITIGATION** .
      The
      Manager acts in good faith and uses reasonable judgment in selecting borrowers
      and making and managing the loans. However, as a lender, the Manager and the
      Company are exposed to the risk of litigation by a borrower for allegations
      by
      the borrower (warranted or otherwise) regarding the terms of the loans or the
      actions or representations of the Manager in making, managing or foreclosing
      on
      the loans. If an allegation is brought and/or litigation is commenced against
      the Company or the Manager, the Company will incur legal fees and costs to
      respond to the allegations and to defend any resulting litigation.





**M.**  **LACK
      OF LOAN DIVERSITY AND GEOGRAPHIC CONCENTRATION OF LOANS. A** t
      least
      80% and as much as 100% of the Company’s loan portfolio is secured by properties
      within California. This concentration may increase the risk of delinquencies
      on
      the Company’s loans if and when California real estate or economic conditions
      are weaker than elsewhere.




**N.**  **CONCENTRATION
      OF LOANS.**  Six
      (6)
      loans totaling $ 3,631,930 were made to separate entities controlled by the
      same
      person. Each of the various borrowing entities is an independent entity
      organized for a specific project, and the various entities own real property
      in
      various places around California, mostly in the Central Valley. At December
      31,
      2007, these loans represented 19% of the Fund’s total loan portfolio. These
      loans were in default for non payment of interest ranging from 3-15
      months. Five
      (5)
      of the loans matured but remained outstanding at the end of the year. All 6
      loans are collateralized by the underlying real estate properties, and are
      personally guaranteed by the controlling person.





**O.**  **REAL
      ESTATE OWNED PROPERTIES (REOs).** Four
      (4)
      loans have been foreclosed during 2007 when the borrowers failed to pay off
      the
      loans at maturity. The REOs are valued at the lower of the estimated net
      realizable values and carrying costs of the REOs ($4,328,871). One (1) loan
      was
      a construction loan where the underlying collateral consisted of construction
      of
      two-single family homes in the City of Marina, California. The borrower
      defaulted and the Company took over the unfinished project and hired a general
      contractor to finish the construction project. This involved the infusion of
      additional funds by the Company to finish the project (approximately $177,000).
      The homes are substantially complete and are currently listed for sale with
      a
      real estate broker operating in the Marina area. Two (2) of the loans that
      went
      into foreclosure were secured by senior indebtedness; hence the Company assumed
      the two senior notes ($1,675,000) at the time of foreclosure. The remaining
      property is a commercial real estate that was operated as an auto repair shop
      by
      the borrower. The REOs are listed for sale with real estate brokers operating
      in
      their respective areas. The Company believes that these properties can be sold
      within 1 year without material loss to the Company. The only carrying costs
      that
      the Company anticipates in connection with holding the properties are real
      estate property taxes and liability insurance. The taxes and insurance premiums
      are expensed when incurred.




**V.**  **SUMMARY
      OF THE OPERATING AGREEMENT**





The
      following summary of the Operating Agreement for the Company, as amended, which
      is dated as of February 24, 2003, is qualified in its entirety by the terms
      of the Operating Agreement itself.





**Rights
      and Liabilities of Members** .
      The
      rights, duties and powers of Members are governed by the Operating Agreement
      and
      The Beverly-Killea Limited Liability Company Act of California (the “Act”), and
      the discussion herein of such rights, duties and powers is qualified in its
      entirety by reference to such Agreement and Act. Members in the Company are
      liable only to the extent of their agreed upon capital contributions, i.e.
      the
      price paid for the Membership Interest. Members may be liable for any return
      of
      capital, plus interest if necessary to discharge liabilities existing at the
      time of such return. Any cash distributed to Members may constitute, wholly
      or
      in part, return of capital.




19





Members
      have no control over the management of the Company, except that the approval
      of
      Members representing a majority of the outstanding Membership Interests is
      required for any of the following matters: (i) dissolution and termination
      of
      the Company; (ii) merger or consolidation of the Company with one or more other
      entities; (iii) amendment of the Operating Agreement; and (iv) removal of the
      Manager and election of a successor manager. In addition, upon the cessation
      of
      the Manager for any reason (such as the withdrawal or resignation of the
      Manager), a majority in interest of the Members may elect a replacement manager
      to continue the business of the Company. Members representing 10% of the
      Membership Interests may call a meeting of the Company.





**Capital
      Contributions** .
      Membership Interests in the Company are sold in Units of $100, with a minimum
      initial investment of 20 Units ($2,000). After the initial investment an
      investor may subscribe to purchase additional Units in amounts and on terms
      and
      conditions acceptable to the Manager.





**Rights,
      Powers and Duties of Manager** .
      Subject
      to the right of the Members to vote on the matters specified above, the Manager
      has the exclusive power to manage the business of the Company. The Manager
      is
      not required to devote full time to Company affairs but only such time as is
      required for the conduct of Company business. The Manager acting alone has
      the
      power and authority to act for and bind the Company. The Manager is granted
      the
      special power of attorney of each Member for the purpose of executing the
      documents which the Members have expressly agreed to execute and deliver or
      which are required to be executed, delivered and/or filed under applicable
      law.





**Profits
      and Losses** .
      Profits
      and losses of the Company accrued during any calendar month are allocated as
      of
      the last day of such calendar month to the Members in accordance with their
      respective percentage interests as of the first day of such month, or, if any
      Units are purchased following the first day of such month, then the profits
      and
      losses allocable to the Members for such month will be allocated in proportion
      to the number of days during such month that each Member held a capital account
      in the Company. Upon transfer of Units (as permitted under the Operating
      Agreement and applicable law), profit and loss will be allocated to the
      transferee beginning with the next succeeding calendar month.





**Cash
      Distributions** .
      Each
      Member elects whether to receive monthly cash distributions from the Company
      or
      to allow his or her earnings to be reinvested into the Company under its
      Distribution Reinvestment Program. A Member may change an election with sixty
      (60) days’ prior written notice. Members who reinvest will be credited with an
      increasingly larger Membership Interest as their capital accounts increase
      over
      time from the issuance of additional units to them. Cash available for
      distribution will be determined by computing the net income during the calendar
      month on the accrual basis and in accordance with generally accepted accounting
      principles.





Promptly
      after the end of each calendar month, the Company distributes to Members
      receiving monthly distributions an amount of cash equal to their proportionate
      share of the Company’s accrued net income during such month. Accrued net income
      means the excess of accrued income from operations and investment of, or the
      sale or refinancing or other disposition of, Company assets during such calendar
      month over the accrued operating expenses of the Company during such month,
      including any adjustments for bad debt reserves or deductions as the Manager
      may
      deem appropriate, all determined in accordance with generally accepted
      accounting principles. During the year 2007, the Company received no income
      from
      sale, refinancing or other disposition of Company assets. Cash available for
      distribution is distributed only to those Members who elect to receive such
      distributions in an amount equal to their respective allocable shares of Company
      profits during such month, and the balance of Company income is credited to
      the
      capital accounts of Members who have elected to reinvest
      earnings.


20


**Meetings** .
      The
      Manager, or Members representing ten percent (10%) of the outstanding Membership
      Interests, may call a meeting of the Members of the Company. Unless the notice
      otherwise specifies, all meetings will be held at the office of the Company.
      Members may vote in person or by proxy at the Company meeting. A majority of
      the
      Membership Interests constitutes a quorum at Company meetings.





**Accounting
      and Reports** .
      The
      Company furnishes to the Members an annual report of the Company’s operations,
      which is audited by an independent accounting firm. Within six months of the
      close of the year covered by the report, a copy or condensed version will be
      furnished to the Members. The Members will also be furnished such detailed
      information as is reasonably necessary to enable them to complete their own
      tax
      returns within 90 days after the end of the year. Any Members may inspect the
      books and records of the Company at all reasonable times and upon reasonable
      prior notice to the Manager.





**Amendment
      of the Agreement** .
      The
      Operating Agreement may be amended by the Manager alone (with respect to a
      limited number of designated matters), or upon the vote of Members holding
      a
      majority of the outstanding Membership Interests.





**Withdrawal
      from the Company** .
      A
      Member may not withdraw from the Company for at least twelve (12) months after
      the date such Units are purchased. After twelve (12) months, Members may
      withdraw all or part of their capital accounts from the Company by giving at
      least sixty (60) days prior written notice to the Manager. The amount that
      a
      withdrawing Member will receive from the Company is based on the withdrawing
      Member’s capital account. A Member’s capital account balance is calculated by
      adding the Member’s initial investment, plus any additional investments, plus
      any reinvested (compounded) earnings, plus any undistributed earnings, minus
      the
      Members’ proportionate share of the Company’s capitalized costs (which consist
      of expenses incurred in connection with the raising of capital). A capital
      account is an amount calculated for tax and accounting purposes, and may be
      greater than or less than the fair market value of such investor’s Membership
      Interest in the Company. The fair market value of a Member’s interest in the
      Company will generally be irrelevant in determining amounts to be paid upon
      withdrawal, except to the extent that the current fair market value of the
      Company’s loan portfolio is realized by sales of existing loans (which sales are
      not required to be made). The Company will not establish a reserve from which
      to
      fund withdrawals and, accordingly, the Company’s capacity to return a Member’s
      capital account is restricted to the availability of Company cash flow. Upon
      withdrawal, Members will receive an amount equal to their original investment
      with any difference between the Member’s capital account and Member’s original
      investment being paid by the Manager.





The
      Manager will not liquidate (and Members will not be entitled to withdraw),
      within any single calendar year, more than ten percent (10%) of the total
      Company capital accounts outstanding at the beginning of such calendar year.
      Distributions to a withdrawing Member of their capital account may be limited
      to
      $25,000 per calendar quarter. Unless otherwise waived by the Manager, any
      withdrawals requested by a Member and disbursed by the Company within the
      three-year period following the first year (i.e., four years after the date
      such
      Member’s Units are purchased) shall be reduced by the following amounts as a
      penalty for early withdrawal from the Company: (i) three percent (3%) of any
      amount disbursed in the year following the expiration of the first year; (ii)
      two percent (2%) of any amount disbursed in the second year following the
      expiration of the first year; and (iii) one percent (1%) of any amount disbursed
      in the third year following the expiration of the first year.





Upon
      dissolution and termination of the Company, a five-year winding-up period is
      provided for liquidating the Company’s loan portfolio and distributing cash to
      Members. The Company could suffer reduced earnings (or losses) if a substantial
      portion of its loan portfolio remains and must be liquidated quickly at the
      end
      of such winding-up period. Members who complete a withdrawal from the Company
      prior to any such liquidation will not be exposed to this risk.


21


**Limitations
      on Transferability** .
      The
      Operating Agreement places substantial limitations upon transferability of
      membership interests. Any transferee (including a donee) must be a person or
      entity which would have been qualified to purchase a Unit in this offering
      and a
      transferee may not become a substituted Member without the consent of the
      Manager. A transferee who does not become a substituted Member will own an
      economic interest which entitles him or her only to the share of income or
      return of capital to which the transferor would be entitled. Economic interest
      holders will have no voting or inspection rights.





In
      addition to the restrictions imposed by the Operating Agreement, additional
      restrictions are imposed by applicable securities laws. See 1V.A.





**Term
      of Company** .
      The
      Company will continue indefinitely until dissolved and terminated by vote of
      Members holding a majority of the outstanding membership interests with the
      concurrence of the Manager.





**Winding
      Up** .
      Upon
      dissolution of the Company, the Manager will wind up the Company’s affairs as
      follows: (i) no new loans will be made or purchased; and (ii) the Manager or
      its
      successor will liquidate the Company’s remaining assets as promptly as is
      consistent with obtaining the current fair value thereof, either by sale to
      third parties or by collecting loan payments under the terms of the loan. All
      funds received by the Company shall be applied and promptly distributed in
      accordance with the Act and the Operating Agreement.





In
      the
      event the Company dissolves at a time when there are outstanding unfulfilled
      withdrawal requests, such withdrawal requests will be of no further force or
      effect and all Members will thereafter be entitled to receive their pro rata
      portion of all remaining liquidating distributions of the Company in accordance
      with their respective outstanding capital account balances.





**Merger
      with Other Business Entities** .
      The
      Manager, with the prior written consent of a majority interest of the Members,
      has the right to merge the Company with one or more other business entities
      (of
      which the Manager may be a sponsor or co-sponsor).





**VI.**  **THE
      MANAGER**





The
      Manager of the Company is Lakeside Financial Group, Inc., a California
      corporation ,
      was
      incorporated in August of 2002 and began doing business on November 1, 2002,
      formed for the purpose of managing the Company. The Manager manages and directs
      the affairs of the Company. All loans made or invested in by the Company are
      arranged and serviced by the Manager. The Manager is licensed as a California
      real estate broker, and both the Company and the Manager are licensed California
      Finance Lenders. Certain principals and affiliates of the Manager currently
      engage in real estate related businesses, which include acquiring and developing
      real property, and financing the acquisition and
      development of real property. None of these businesses are similar to, or
      compete with, the Company. For a detailed description of the officers and
      directors of the Manager, see “Item 3-Directors, Officers and Significant
      Employees.”





**A.**  **Duties
      of the Manager.** The
      Manager is organized as a corporation. The Manager has four (4) directors (Paula
      M Lewis, Lee Kauftheil, Gary Armitage and Jeff Guidi); two (2) of such directors
      (Armitage & Guidi) are also shareholders of the Manager. See further
      description in “ Item
      3.
      Directors, Executive Officers and Significant Employees.” The Manager has three
      officers: President and Chief Executive Officer (“CEO”) Paula M Lewis, Vice
      President Richard Nelson, and Chief Financial Officer Placido H Canta.


22


The
      business purpose of the Manager is to manage the Company and it presently
      engages in no other business. Of the principal executive officers, only Ms.
      Lewis and Mr. Canta are full time employees of, and receive regular salaries
      from, the Manager, although, as described below, other individuals participate
      in the business of the Manager. Ms. Lewis is involved with practically all
      aspects of the business of managing the Company, such as underwriting loans,
      preparing loan documents and maintaining investor relations. Mr. Canta, as
      the
      chief financial officer of the Manager, is involved with all accounting aspects
      of managing the Company, such as preparing all accounting ledgers, worksheets
      and statements for the Company and the Manager, preparing and maintaining files
      for all investors in the Company, and preparing and distributing monthly
      statements to investors of the Company and the principals of the Manager. Mr.
      Nelson, who specializes in construction lending, serves in an advisory capacity
      to the Manager with respect to construction loans.





**1.**  **Marketing
      of Loans** .
      The
      Company obtains its loans through real estate mortgage brokers with whom
      individuals working for the Manager, primarily Ms. Lewis, Mr. Kauftheil and
      Mr.
      Nelson, have relationships. These brokers are constantly looking for commercial
      mortgage loans for their borrower clients, and recognize the Company as one
      possible source of financing. A secondary source for loans is through internet
      advertising. Currently the Company is listed under www.c-loans.com





**2.**  **Approval
      of Loans** .
      Ms.
      Lewis and Mr. James Koenig form the Loan Committee of the Manager. Mr. Koenig
      is
      an outside consultant who is appointed by the Manager to assist in analyzing,
      reviewing, evaluating and approving loan applications received by the Manager.
      Mr. Koenig was a director and shareholder of the Manager until he resigned
      on
      March 6, 2008. His shares of stock in the Manager have been transferred to
      an
      irrevocable trust (SunDial Trust of Redding, CA) on March 21, 2008. Mr. Koenig
      has extensive experience in the mortgage lending industry. The first step in
      analyzing a possible loan is for the prospective borrower to provide a completed
      loan application and the items on the loan approval checklist (both of which
      are
      supplied by the Manager). Ms. Lewis reviews and analyzes loan packages, and
      summarizes her review and conclusions in a Loan Review Summary. Ms. Lewis and
      Mr. Koenig then meet as the Loan Committee to discuss the loan and to decide
      whether to approve the loan. If Ms. Lewis and Mr. Koenig disagree on a
      particular loan, the loan is submitted to Mr. Kauftheil for final approval
      or
      disapproval. The deliberations of the Loan Committee with respect to each loan
      are summarized in minutes of the Loan Committee meeting. If a loan is approved
      by the Loan Committee, the borrower (or the broker of the borrower) is notified
      with a conditional loan approval letter, and the loan documents are prepared
      and
      executed and delivered at the closing.





**B.**  **Compensation
      to the Manager.** The
      following discussion summarizes the forms of compensation to which the Manager
      is entitled under the Operating Agreement. All of the amounts described below
      are payable regardless of the success or profitability of the Company, although
      any amounts may be partially or completely waived by the Manager from time
      to
      time, in the Manager’s sole discretion. (See below for a description of amounts
      which have been waived.) None of the following compensation was determined
      by
      arm’s-length negotiations. The Manager has the right to retain one or more other
      firms to perform the various services to be rendered by the Manager as described
      below.





**Form
                of Compensation**
            **Estimated
                Amount or Method of Compensation**Loan
                Brokerage Commissions, Renewal
              and
                Forbearance Fees
            Anticipated
                to average between 2% and 6% of the principal amount of each loan.
                Such
                fees will be paid to the Manager by the borrowers and will not be
                borne by
                the Company.Loan
                Processing and Documentation Fees.
            Prevailing
                industry rates for documentation fees and for loan processing fees.
                These
                fees may vary depending on market conditions and the size of the
                particular loan, and will be paid by the borrowers and not the
                Company.


23





Loan
                Servicing Fee
            Up
                to 0.25% of the principal amount of each Company loan on an annual
                basis,
                payable monthly (i.e., 0.0208% per month), but only as interest is
                received by the Company. [1]Asset
                Management Fee
            Up
                to 2.75% of Gross Assets Under Management on an annual basis, payable
                monthly (i.e., 0.229% per month). [2]Reimbursement
                of Expenses to Manager
            Reimbursement
                for all out-of-pocket organization and syndication expenses and all
                operating and administrative expenses of the Company.Broker/Dealer
                Commissions to Affiliate of
              Manager
            A
                broker/dealers selling Units on behalf of the Company are entitled
                to
                receive commissions of up to 6.50% of the sales price, and a trailing
                payment of up to 1.0% per year for amounts remaining invested. Certain
                broker/dealers selling Units on behalf of the Company may be affiliated
                with the Manager.





[1]  Loan
      servicing fees are determined by the Manager on a case by case basis, provided
      that they are not expected to exceed the amounts generally charged for
      comparable services to comparable borrowers in the geographical area where
      the
      security property for the loan is located.





[2]  “Gross
      Assets Under Management” means the total Company capital, including cash, notes
      (at book value), real estate owned (at book value), accounts receivable,
      advances made to protect loan security, unamortized organizational expenses
      and
      any other Company assets valued at fair market value. The Asset Management
      Fee
      will be paid on or about the first day of each calendar month with respect
      to
      Gross Assets Under Management as of the last day of the immediately preceding
      month. The
      Manager earned $49,976 and $90,821 during the years ended December 31, 2007
      and
      2006, respectively, representing management and servicing fees it was entitled
      to receive from the Fund. During 2007 and 2006, the Manager waived fees
      amounting to $596,336 and $352,866, respectively.





The
      Manager has, from time to time, waived some or all of the Asset Management
      Fee
      and the Loan Servicing Fee which the Company pays to the Manager. During the
      fiscal year ending on December 31, 2007, the Company has waived the following
      fees:





Month
            
            Asset M Fee
            
            Loan S Fee
            
            Total Fees
            
            Fees Paid
            
            Fees WaivedJan.
                2007
            
            $
            48,179
            
            $
            3,662
            
            $
            51,841
            
            $
            2,861
            
            $
            48,980Feb.
                2007
            
            $
            49,010
            
            $
            3,698
            
            $
            52,708
            
            $
            8,601
            
            $
            44,107Mar.
                2007
            
            $
            49,961
            
            $
            4,073
            
            $
            54,034
            
            $
            2,552
            
            $
            51,482Apr.
                2007
            
            $
            50,418
            
            $
            3,891
            
            $
            54,309
            
            $
            11,059
            
            $
            43,250May
                2007
            
            $
            51,164
            
            $
            3,504
            
            $
            54,668
            
            $
            1,054
            
            $
            53,614June
                2007
            
            $
            49,798
            
            $
            3,812
            
            $
            53,610
            
            $
            4,409
            
            $
            49,201July
                2007
            
            $
            50,279
            
            $
            3,824
            
            $
            54,103
            
            $
            1,674
            
            $
            52,429Aug.
                2007
            
            $
            50,735
            
            $
            3,889
            
            $
            54,624
            
            $
            0
            
            $
            54,624Sep.
                2007
            
            $
            50,653
            
            $
            3,834
            
            $
            54,487
            
            $
            0
            
            $
            54,487Oct.
                2007
            
            $
            49,935
            
            $
            3,799
            
            $
            53,734
            
            $
            0
            
            $
            53,734Nov.
                2007
            
            $
            50,056
            
            $
            3,818
            
            $
            53,874
            
            $
            17,767
            
            $
            36,107Dec.
                2007
            
            $
            50,406
            
            $
            3,914
            
            $
            54,320
            
            $
            0
            
            $
            54,320


24


**B.**  **Fiduciary
      Duties of the Manager** . Under
      California law, the fiduciary duties of a manager to a limited liability company
      and to its members are those of a partner to a partnership and to the partners
      of the partnership. Accordingly, a manager is accountable to a limited liability
      company as a fiduciary, which means that a manager has duties of good faith
      and
      loyalty with respect to company affairs. This fiduciary duty is in addition
      to
      those other duties and obligations of, and limitations on, the Manager which
      are
      set forth in the Operating Agreement.




**VII.**  **POTENTIAL
      CONFLICTS OF INTEREST**





The
      following is a list of the important areas in which the interests of the Manager
      may conflict with those of the Company. The Members must rely on the general
      fiduciary standards provided by applicable law and the Operating Agreement
      to
      prevent unfairness by the Manager in a transaction with the Company. (See,
“VI.
      The Manager”). The Company has not been represented by separate legal counsel in
      connection with its formation or its dealings with the Manager. Except as may
      arise in the normal course of the relationship, there are no transactions
      presently contemplated between the Company and its Manager (or its affiliates)
      other than those listed below.





**A.**  **Loan
      Brokerage Commissions, Renewal and Forbearance Fees.** None of
      the compensation set forth under “Compensation to the Manager,” above, was
      determined by arms’ length negotiations. It is anticipated that the loan
      brokerage commissions, renewal and forbearance fees charged to borrowers by
      the
      Manager for most loans will be approximately between 2% and 6% of the principal
      amount of each loan, but may be higher or lower depending upon market
      conditions. Generally, as these charges are increased, the interest rate which
      may be charged for the loan will be reduced, thus reducing the overall rate
      of
      return to the Members. This conflict of interest will exist in connection with
      every Company loan transaction, and Members must rely upon the fiduciary duties
      of the Manager, as provided by applicable law and the Operating Agreement,
      to
      protect their interest.





**B.**  **Use
      of Other Companies.** The
      Manager has the right to retain the services of other firms, in addition to
      or
      in lieu of the Manager, to perform brokerage services, loan servicing and other
      activities in connection with the Company’s loan portfolio. Such other firms may
      be affiliates of the Manager or the Manager’s management team.





**C.**  **Company
      Loans to Related Parties.** The
      Company may make or invest in loans to persons or entities that are affiliated
      with the Manager (i.e., loans to a borrower that is owned by one or more of
      the
      owners of the Manager). In cases of such related party loans, conflicts of
      interest will exist between the Manager and its affiliated persons, on the
      one
      hand, and the Company, on the other, in connection with setting the terms of
      the
      loan and in connection with any enforcement action or renegotiation that may
      occur in the future. The Manager will address these conflicts by applying the
      following standards and limitations to such related party loans:





**(1)**  The
      aggregate principal amount of all related party loans at any time shall not
      exceed 20% of total Company assets at such time;





**(2)**  The
      terms
      and conditions of any related party loans shall be consistent with the lending
      standards and policies set forth above and with loan terms typically offered
      by
      the Manager on similar loans to unaffiliated borrowers; and





**(3)**  The
      Manager shall purchase (or cause one of its affiliates to purchase) from the
      Company, without discount, any related party loan in which any material event
      of
      default has occurred and is continuing for at least thirty (30)
      days.


25


The
      Company currently has four (4) loans with affiliated entities, totaling $
      2,136,218, constituting 9.1% of the total of Company assets as of December
      31,
      2007. Additionally, an inter- company balance amounting to $36,043 was
      outstanding at the end of the year. These loans were made in the normal course
      of the Company’s business, were subjected to the Company’s normal underwriting
      process, were made on the Company’s standard terms for such investments, and do
      not appear to represent an unusual risk at the time the loans were made to
      the
      affiliates.





Of
      these
      four (4) loans, one ($224,390) is an undivided interest in a promissory note,
      the proceeds or which were distributed among five different limited liability
      companies of which James S. Koenig, Gary Armitage, and Jeffery Guidi
      (consultant/shareholders and directors of the Manager), directly or indirectly,
      are members. The promissory note is secured by a mortgage on one assisted living
      facility located in Virginia and pays an interest rate of 12% per annum. The
      note was paid off in January 2008. The second investment ($500,000) is an
      undivided interest in a promissory note made by an entity of which James S.
      Koenig, Gary Armitage, and Jeffery Guidi directly or indirectly, are members.
      The proceeds of that loan are being used for completion of a golf course owned
      by the maker of the note. The note matured in December 2006 and the borrower
      exercised a 24-month extension option. This note is currently in default for
      non
      payment of interest. The third promissory note is a second trust deed
      ($1,200,000) secured by a 2-story commercial office building in Redding,
      California. The note matures in March 2008 and bears interest at 11.90%. The
      fourth note consists of a second trust deed (loan commitment: $411,000) that
      is
      collateralized by a 140-acre undeveloped land in Alameda County. The note
      matures in May 2008 and bears interest at 15%. Both of these notes are current
      in terms of payment of interests.





**D.**  **Other
      Opportunities; Other Funds.** As a
      licensed real estate broker, the Manager may arrange and originate loans for
      other persons and companies, and at times these arrangements may be more
      lucrative for the Manager than arranging loans for the Company. As a result,
      there may exist a financial incentive for the Manager to arrange or originate
      loans for private investors outside the Company, and the Members must rely
      on
      the fiduciary duties of the Manager, as provided by applicable law and the
      Operating Agreement, to protect their interests under such circumstances. In
      the
      future, the Manager may also sponsor other funds formed to conduct business
      similar to that of the Company. If these other funds (if formed) have funds
      to
      invest at the same time as the Company, conflicts of interest may exist for
      the
      Manager as to whether to offer a particular loan opportunity to the Company
      or
      to these other funds. The Manager will decide which loans are appropriate for
      funding by the Company or by such other funds after consideration of all
      relevant factors, including the size of the loan, portfolio diversification,
      and
      amount of uninvested funds.




**E.**  **Sale
      of Defaulted Loans or Real Estate to Affiliates.** In the
      event a Company loan goes into default or the Company becomes the owner of
      any
      real property by reason of foreclosure on a Company loan, the Manager’s first
      priority will be to arrange the sale of the loan or property for a price that
      will permit the Company to recover the full amount of its invested capital
      plus
      accrued but unpaid interest and other charges, or so much thereof as can
      reasonably be obtained in light of current market conditions. In order to
      facilitate such a sale, the Manager may arrange a sale to persons or entities
      controlled by or affiliated with the Manager (e.g., to another entity formed
      by
      the Manager or its affiliates), for the express purpose of acquiring defaulted
      loans or foreclosure properties from lenders such as the Company. The Manager
      will be subject to conflicts of interest in arranging such sales since it will
      represent both parties to the transaction. For example, the Company and the
      potential buyer will have conflicting interests in determining the purchase
      price and other terms and conditions of sale. The Manager’s decision will not be
      subject to review by any outside parties. The Manager will undertake to resolve
      these conflicts by setting a purchase price for each defaulted loan or property
      which is not less than any of the following: (i) the independently appraised
      value of such loan or property, if any, at the time of sale; (ii) the amount
      of
      any third party offer already received, if any; or (iii) the total amount of
      the
      Company’s investment in the property.


26


**VIII.**  **REGULATION**





Our
      operations are conducted by the Manager. Additionally, the Manager earns fees
      by
      brokering loans to the Company. Both the Company and the Manager hold California
      Finance Lenders’ licenses. Additionally, the Manager holds a California real
      estate brokers’ license. Each of these licenses requires that certain reports be
      periodically filed with the California Department of Corporations and the
      California Department of Real Estate, and the operations of the Company and
      the
      Manager are subject to the regulatory supervision of the two California
      agencies.





We
      have
      not qualified as a real estate investment trust under the Internal Revenue
      Code,
      and therefore we are not subject to the restrictions on activities that are
      imposed on real estate investment trusts.





The
      Company has not registered as an “investment company” under the Investment
      Company Act of 1940 pursuant to an exemption provided by Section 3©(5)(C). That
      section provides that companies that are primarily engaged in purchasing or
      otherwise acquiring mortgages and other liens and interests in real estate
      are
      not investment companies. The Company conducts its business in such a way as
      to
      conform to the various requirements of the exemption.





We
      and
      the Manager are subject to the Equal Credit Opportunity Act of 1974, which
      prohibits creditors from discriminating against loan applicants on the basis
      of
      race, color, sex, age or marital status, and the Fair Credit Reporting Act
      of
      1970, which requires lenders to supply applicants with the name and address
      of
      the reporting agency if the applicant is denied credit. We are also subject
      to
      the Employee Retirement Income Security Act of 1974, as well as to various
      federal and state securities laws regulating the issuance and sale of
      securities. (See, “III. The Offering of Membership Interests”).





Should
      the Manager or the Company fail to adhere to these regulations, we could face
      potential disciplinary or other civil action that could have a material adverse
      effect on our business. The Manager believes that these regulations are being
      complied with. The provision of the Company’s Operating Agreement which provides
      for indemnification of the Manager does not provide for such indemnification
      in
      the case of the Manager’s fraud, bad faith or willful misconduct. (See, “Part
      II, Item 5. “Indemnification of Directors and Officers”).





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**




The
      Company’s principal executive offices are located at 1738 Yuba Street, Redding,
      California, 96001, and its telephone number is (530) 226-5850. The facility
      is
      utilized for the administrative and professional offices of the Manager. The
      facility consists of approximately 2,750 square
      feet of office space, leased for $2,558 per month. The lease expires on November
      1, 2009. The Company believes that its existing facilities are adequate for
      its
      current use.





Four
      (4)
      loans have been foreclosed during 2007 when the Borrowers failed to pay off
      the
      loans at maturity. The REOs are valued at the lower of the estimated net
      realizable values and carrying costs of the REOs ($4,328,871). One (1) loan
      was
      a construction loan where the underlying collateral consisted of construction
      of
      two-single family homes in the City of Marina, California. The borrower
      defaulted and the Company took over the unfinished project and hired a general
      contractor to finish the construction project. This involved the infusion of
      additional funds by the Company to finish the project (approximately $177,000).
      The homes are substantially complete and are currently listed for sale with
      a
      real estate broker operating in the Marina area. Two (2) of the loans that
      went
      into foreclosure were secured by senior indebtedness; hence the Company assumed
      the two senior notes ($1,675,000) at the time of foreclosure. The remaining
      property is a commercial real estate that was operated as an auto repair shop
      by
      the borrower. The REOs are listed for sale with real estate brokers operating
      in
      their respective areas. The Company believes that these properties can be sold
      within 1 year without material loss to the Company. The only carrying costs
      that
      the Company anticipates in connection with holding the properties are real
      estate property taxes and liability insurance. The taxes and insurance premiums
      are expensed when incurred.


27


**ITEM
      3.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES**




**Directors
      and Executive Officers**





The
      Company is a California limited liability company. As such, it has no officers
      and directors. All management powers are vested in the Manager, Lakeside
      Financial Group, Inc. The following table sets forth certain information with
      respect to the executive officers and directors of the Manager:





Name
            
            Age
            
            PositionPaula
                M Lewis
            
            41
            
            President,
                CEO and DirectorPlacido
                Canta
            
            55
            
            Chief
                Financial OfficerRichard
                Nelson
            
            68
            
            Vice
                PresidentLee
                Kauftheil
            
            75
            
            DirectorGary
                Armitage
            
            57
            
            DirectorJeffery
                Guidi
            
            51
            
            Director





Directors
      are elected to serve until the next annual meeting of stockholders and until
      their successors are elected and qualified. Directors serve without cash
      compensation and without other fixed remuneration. Officers are elected by
      the
      Board of Directors and serve until their successors are appointed by the Board
      of Directors. Biographical resumes of each officer and director are set forth
      below.




**Paula
      M Lewis** .
      Paula M
      Lewis was appointed President, Chief Executive Officer and Director of the
      Manager on November 16, 2007. Ms. Lewis was employed by Asset Real Estate &
Investment Company (“AREI”) as a project manager from 1999 to 2001 and was
      appointed President in March 2001, an office she held until she resigned in
      2005. AREI is in the business of owning and developing real estate properties,
      and arranging financing for real estate property ownership and development,
      including the raising of capital through private offerings of debt and equity
      securities. Ms. Lewis’ prior experience has been in mortgage lending, both
      retail and wholesale, escrow and real estate with such companies as Norwest
      Mortgage, Bank of America, Ashland Mortgage Company, Coldwell Banker and Placer
      Title Company. Ms.
      Lewis
      succeeded Mr. William Webster as President of Lakeside Financial Group, Inc.
      who
      resigned from the Manager in October, 2007.





**Placido
      H. Canta.** Placido
      H. Canta is the chief financial officer of the Manager. As such, he is
      responsible for internal and administrative controls, and overseeing the
      accounting and finance functions of the company. Mr. Canta holds a BS Degree
      in
      Business Administration from the University of the East and is a CPA. Since
      working for one of the “big four” accounting firms (Deloitte & Touche), he
      has worked for companies in various industries such as banking, real estate
      and
      construction, advertising and health care.


28


**Richard
      A. Nelson.** Richard
      Nelson is a Vice President of the Manager. In this capacity, Mr. Nelson assists
      Lakeside in its lending activity. Since 1995, Mr. Nelson has been the owner
      of
      Western Construction Lending Company, which specializes in wholesale home
      construction loans. In the past three years Mr. Nelson’s company has loaned over
      $21,000,000, with average loan size of $276,000. Mr. Nelson is a licensed real
      estate broker, and is also an officer and broker of AREI. Prior to forming
      Western Construction Lending Company, Mr. Nelson served as Chief Financial
      Officer and broker of Speiro Corporation, d/b/a/ Sterling Mortgage Co., which
      specialized in conversion of mobile home parks to private
      ownership.





**Gary
      Armitage** .
      Gary
      Armitage is a director and shareholder of the Manager. Mr. Armitage is currently
      a principal of AGA Financial, which is a financial planning company and
      securities broker. Mr. Armitage has held this position since 1996. AGA Financial
      is an agent of ePlanning Securities, a registered broker-dealer. AGA Financial,
      as well as ePlanning’s other agents, are among those brokers facilitating the
      sale of Units for the Company. In facilitating the sale of units, brokers such
      as Mr. Armitage and other salespersons acting as agents of ePlanning introduce
      and describe the Company and the Units to prospective investors, furnish the
      prospective investors with the necessary disclosure documents prepared by the
      Company including the Offering Circular, and assist prospective investors in
      completing and returning Subscription Agreements prepared by the Company.
      Pursuant to the Broker/Dealer Agreement currently in place between the Company
      and ePlanning Securities, agents for ePlanning (such as Mr. Armitage) receive
      commissions based on the commission plan they select, receiving up to 6% for
      the
      sale of Units, plus a 1.0% annual trailer. Additionally, ePlanning receives
      a
      0.5% payment as a marketing fee. Prior to his involvement with AGA Financial,
      Mr. Armitage worked as an insurance agent for Equitable Life Insurance
      Company.





**Jeffery
      Guidi** .
      Jeffery
      Guidi is a director and shareholder of the Manager. Mr. Guidi is currently
      a
      principal of AGA Financial, which is a financial planning company and securities
      broker. Mr. Guidi has held this position since 1996. AGA Financial is an agent
      of ePlanning Securities, a registered broker-dealer. AGA Financial, as well
      as
      ePlanning’s other agents, are among those brokers facilitating the sale of Units
      for the Company. In facilitating the sale of units, brokers such as Mr. Guidi
      and other salespersons acting as agents of ePlanning introduce and describe
      the
      Company and the Units to prospective investors, furnish the prospective
      investors with the necessary disclosure documents prepared by the Company
      including the Offering Circular, and assist prospective investors in completing
      and returning Subscription Agreements prepared by the Company. Pursuant to
      the
      Broker/Dealer Agreement currently in place between the Company and ePlanning
      Securities, agents for ePlanning (such as Mr. Guidi) receive commissions based
      on the commission plan they select, receiving up to 6% for the sale of Units,
      plus a 1.0% annual trailer. Additionally, ePlanning receives a 0.5% payment
      as a
      marketing fee. Prior to his involvement with AGA Financial, Mr. Guidi worked
      as
      a financial planner for EQ Financial Consultants, Inc. Prior to that, Mr. Guidi
      worked in the mortgage lending division of First Nationwide Bank.





**Lee
      Kauftheil**  **** Lee
      Kauftheil was appointed Director of Lakeside Financial Group, Inc. effective
      March, 2008. Mr. Kauftheil is the President, Legal Counsel and Broker of Record
      of Financial Advantage, where he is responsible for the management, structuring
      of joint venture programs and arranging construction loans and other types
      of
      financing. Prior to his current position, he was a partner and counsel to the
      largest privately owned mortgage banking firm in the United States, where he
      was
      engaged in all phases of real estate services including mortgage banking, loans
      servicing, real estate development and property management. Mr. Kauftheil served
      as an officer in the US Marine Corp and he received his business administration
      degree from Pennsylvania State University and his Doctor of Jurisprudence from
      Golden Gate University. He succeeded Mr. James Koenig as Director of the Manager
      after Mr. Koenig resigned from the Board on March 6, 2008. Mr.
      Koenig was a director and shareholder of the Manager until his resignation.
      His
      financial interest in the Manager has been transferred to an irrevocable trust
      (SunDial Trust of Redding, CA) on March 21, 2008 – see Item 5 (a)
      below.


29


**ITEM
      4.**  **REMUNERATION
      OF DIRECTORS AND OFFICERS**





(a)
            The
                Company, as a limited liability company, has no officers and directors.
                All management powers are vested in the Manager, which is a California
                corporation. The following table sets forth the aggregate annual
                remuneration of each of the two highest paid persons who are officers
                or
                directors of the Manager:





Name of
            
            Capacities in which
            
            AnnualIndividual or Group
            
            Remuneration was received
            
            RemunerationPaula
                M Lewis
            
            
            Officer
                and Director
            
            $
            175,000Placido
                H Canta
            
            
            Officer
            
            $
            150,000





In
      addition to the above amount, Mr. Canta was also entitled to receive a bonus
      in
      the amount of 2.0% of the net income of the Manager for the year 2007, but
      received $0.00 because the Manager had a net loss for the year.





**ITEM
      5.**  **SECURITY
      OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS**





(a)  The
      Company, as a limited liability company, has no officers or directors, with
      all
      of the management powers being vested in the Manager. No person owns 10% or
      more
      of the Company’s outstanding securities.





All
      of
      the outstanding voting securities of the Manager are held by the persons set
      forth below, all of whom are directors and/or officers of the Manager. Holdings
      as of December 31, 2007 are as follows:





**Name and Address**
            
            
            
            **Number of**
            
            **Percentage of****of Owner**
            
            **Title of Class**
            
            **Shares Owned**
            
            **Class**James
                S. Koenig
            
            
            Common Stock
            
            
            102,940
            
            
            46.00
            %(shares
                were subsequently transferredto
                Sundial Trust on March 21, 2008)Gary
                Armitage
            
            
            Common Stock
            
            
            51,470
            
            
            23.00
            %4030
                Old Barn RoadHealdsburg,
                CAJeffery
                Guidi
            
            
            Common Stock
            
            
            51,470
            
            
            23.00
            %264
                Boas DriveSanta
                Rosa, CAWilliam
                F. Webster
            
            
            Common Stock
            
            
            17,903
            
            
            8.00
            %1905
                Juarez LaneRedding,
                CA 96003All
                Officers and Directors
            
            
            Common Stock
            
            
            223,783
            
            
            100.0
            %As
                a Group (4 persons)


30


(b)  No
      other
      persons holds or shares the power to vote the securities described in subsection
      (a). No person holds or shares power to vote 10% or more of the Company’s voting
      securities. No person holds or shares power to vote 10% or more of the Manager’s
      securities other than those described in subsection (a).





(c)  Neither
      the Company nor the Manager currently has any non-voting securities
      outstanding.





(d)  Neither
      the Company nor the Manager currently has any options, warrants or rights
      outstanding.





(e)  Neither
      the Company nor the Manager has parents.





**ITEM
      6.**  **INTEREST
      OF MANAGEMENT AND CERTAIN OTHER TRANSACTIONS**





Pursuant
      to the terms of the Company’s Operating Agreement, and the terms of the offering
      of Membership Interests by the Company, the Company may make or invest in loans
      to affiliates of the Manager, provided that:





(a)  the
      aggregate principal amount of all related party loans at any time shall not
      exceed 20% of total Company assets at any time;





(b)  the
      terms
      and conditions of any related party loan shall be consistent with the lending
      standards and policies of the Company for a similar loan to an unaffiliated
      borrower; and





(c)  the
      Manager shall purchase (or cause to be purchased) from the Company, without
      discount, any related party loan in which any material event of default has
      occurred and is continuing for at least thirty (30) days.




The
      Company currently has made four (4) loans to affiliated entities, totaling
      $
      2,136,218, constituting 9.1% of the total of Company assets as of December
      31,
      2007. Additionally, an inter- company balance amounting to $36,043 was
      outstanding at the end of the year. These loans and inter-company receivables
      were made in the normal course of the Company’s business, were subjected to the
      Company’s normal underwriting process, were made on the Company’s standard terms
      for such investments, and do not appear to represent an unusual risk at the
      time
      the loans were made to the affiliates.





Of
      these
      loans, one (1) note ($224,390) is an undivided interest in a promissory note, the
      proceeds or which were distributed among five limited liability
      companies of which
      James S. Koenig (consultant of Manager), Gary Armitage, and Jeffery Guidi
      (shareholders and directors of the Manager), directly or indirectly, are
      members. The promissory note is secured by a mortgage on one assisted living
      facility located in Virginia and pays an interest rate of 12% per annum. The
      note
      was paid off in January 2008. The second investment ($500,000) is an undivided interest in a promissory note made by
      an
      entity of which James S. Koenig, Gary Armitage, and Jeffery Guidi directly
      or
      indirectly, are members. The proceeds of that loan are being used for completion
      of a golf course owned by the maker of the note. The
      note
      matured in December 2006 and the borrower exercised a 24-month extension option.
      This note is currently in default for non payment of interest. The
      Manager, through its Board of Directors, is presently developing plans to cure
      the default and consequently, bring these past due interest
      current.


31


**PART
      II**





**ITEM
      1.**  **MARKET
      PRICE AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHER SHAREHOLDER
      MATTERS**





(a)  Market
      Information .
      There
      is no established trading market for the Company’s Membership Interests, and it
      is not anticipated that any such trading market will develop. There are no
      outstanding options, warrants or convertible securities.





(b)  Holders .
      The
      Company has 386 Members
      as of December 31, 2007.





(c)  Dividends .
      The
      Company pays cash distributions to Members on a monthly basis. Members elect
      whether to receive monthly cash distributions from the Company, or to allow
      their earnings to be reinvested into the Company.





Promptly
      after the end of each calendar month, the Company distributes to Members
      receiving monthly distributions an amount of cash determined by their Percentage
      Interest. The aggregate amount available for distribution is the excess of
      accrued income from operations and investment of, or the sale or refinancing
      or
      other disposition of, Company assets during such calendar month over the accrued
      operating expenses of the Company during such month, including any adjustments
      for bad debt reserves or deductions as the Manager may deem appropriate, all
      determined in accordance with generally accepted accounting principles. Cash
      available for distribution is distributed only to those Members who elect to
      receive such distributions in an amount equal to their respective allocable
      shares of Company profits during such month, and the balance of Company income
      is credited to the capital accounts of Members who elected to reinvest
      earnings.





**ITEM
      2.**  **DESCRIPTION
      OF EXHIBITS.**





Please
      see Part III, Item 1, “Index to Exhibits.”





**ITEM
      3.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS**





On
      May 2,
      2006, the Company engaged Armanino McKenna LLP of San Ramon, California, to
      be
      its principal accountant, and it continues to be the Company’s principal
      accountant. There have been no disagreements between the Company’s management
      and the principal accountant.





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





The
      Company submitted no matters to its Members for approval during the fiscal
      year
      covered by this report.





**ITEM
      5.**  **COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE ACT**





The
      Company was furnished with no late reports on Forms 3, 4 or 5 during the period
      covered by this report.


32


**PART
      F/S**







33


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Balance
      Sheet**


**December
      31, 2007**





**ASSETS**Cash
                and cash items
            
            $
            224,016Loan
                interest reserve (restricted)
            
            
            176,805Accrued
                interest receivable
            
            
            117,690Accounts
                and notes receivable - related parties
            
            
            2,172,261Notes
                receivable - non related parties, net of allowance for losses:
                $187,512
            
            
            16,463,118Other
                assets-real estate owned properties, net of allowance of
                $100,000
            
            
            4,228,871**TOTAL
                ASSETS**
            
            **$**
            **23,382,761****LIABILITIES
                AND MEMBERS' EQUITY**Accounts
                payable and other liabilities
            
            $
            37,676Notes
                payable
            
            
            1,675,000Deferred
                interest on notes receivable
            
            
            292,442Total
                liabilities
            
            
            2,005,118Uninvested
                subscriptions
            
            
            38,360Members'
                equityMembers'
                contributions, net
            
            
            21,434,879Retained
                earnings
            
            
            (95,596
            )Total
                Members' equity
            
            
            21,339,283**TOTAL
                LIABILITIES AND MEMBERS' EQUITY**
            
            **$**
            **23,382,761**





See
      accompanying Notes


34





**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Statements
      of Income**


**For
      the Years Ended December 31,**





**2007**
            
            **2006****Revenues**Interest
                Income
            
            $
            1,851,840
            
            $
            1,527,549Total
                revenues
            
            $
            1,851,840
            
            
            1,527,549**Expenses**Management
                fees
            
            
            49,976
            
            
            90,821Provision
                for losses on loans and real estate owned properties
            
            
            260,489
            
            
            78,613Professional
                fees - accounting and taxes
            
            
            32,800
            
            
            47,800Trailer
                commissions
            
            
            59,000
            
            
            59,000Advertising
            
            
            9,000
            
            
            21,500Legal
                fees
            
            
            16,250
            
            
            13,550Printing
            
            
            8,850
            
            
            20,600Conferences
                and seminars
            
            
            14,500
            
            
            12,000Permits,
                fees and licenses
            
            
            3,000
            
            
            3,000Taxes
            
            
            48,143
            
            
            1,800Other
                operating expenses
            
            
            25,019
            
            
            9,200Total
                expenses
            
            
            527,027
            
            
            357,884**Net
                income**
            
            **$**
            **1,324,813**
            
            **$**
            **1,169,665**





See
      accompanying Notes


35




**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Statements
      of Members’ Equity**


**For
      the Years Ended December 31, 2007 and 2006**





**Members'**
            
            **Retained****Contributions**
            
            **Earnings**
            
            **TOTAL****Members'
                equity, January 1, 2006**
            
            **$**
            **10,102,408**
            
            **$**
            **56,549**
            
            **$**
            **10,158,957**Contributions
            
            
            5,612,162
            
            
            
            
            
            5,612,162Costs
                incurred in raising capital
            
            
            (232,870
            )
            
            
            
            
            (232,870
            )Reinvestment
                of members' share of net income
            
            
            722,445
            
            
            
            
            
            722,445Investors'
                withdrawals
            
            
            (377,028
            )
            
            
            
            
            (377,028
            )Net
                income
            
            
            
            
            
            1,169,666
            
            
            1,169,666Cash
                distribution
            
            
            
            
            
            (1,124,873
            )
            
            (1,124,873
            )**Members'
                equity, December 31, 2006**
            
            
            **15,827,117**
            
            
            **101,342**
            
            
            **15,928,459**Contributions
            
            
            6,711,787
            
            
            
            
            
            6,711,787Costs
                incurred in raising capital
            
            
            (226,279
            )
            
            
            
            
            (226,279
            )Reinvestment
                of members' share of net income
            
            
            922,913
            
            
            
            
            
            922,913Investors'
                withdrawals
            
            
            (1,800,659
            )
            
            
            
            
            (1,800,659
            )Net
                income
            
            
            
            
            
            1,324,813
            
            
            1,324,813Cash
                distribution
            
            
            
            
            
            (1,521,751
            )
            
            (1,521,751
            )**Members'
                equity, December 31, 2007**
            
            **$**
            **21,434,879**
            
            **$**
            **(95,596**
            **)**
            **$**
            **21,339,283**





See
      accompanying Notes


36





**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Statements
      of Cash Flows**


**For
      the Years Ended December 31,**




**2007**
              
              **2006****Cash
                  Flows from Operating Activities:**Net
                  income
              
              $
              1,324,813
              
              $
              1,169,665Provision
                  for loan losses
              
              
              260,489
              
              
              51,000Loan
                  interest reserve (restricted)
              
              
              250,403
              
              
              (143,967
              )Accrued
                  interest receivable
              
              
              (5,737
              )
              
              (139,961
              )Accounts
                  payable and other liabilities
              
              
              (43,612
              )
              
              50,449Deferred
                  interest on notes receivable
              
              
              (134,765
              )
              
              143,967Sub
                  total
              
              
              1,651,591
              
              
              1,131,153**Cash
                  Flows from Investing Activities:**Related
                  party notes receivable
              
              
              (1,447,985
              )
              
              177,000Notes
                  receivable and real estate propertiesFunding
              
              
              (10,072,378
              )
              
              (8,810,651
              )Pay
                  off
              
              
              4,156,044
              
              
              2,442,010Sub
                  total
              
              
              (7,364,319
              )
              
              (6,191,641
              )**Cash
                  Flows from Financing Activities:**Increase
                  in notes payable
              
              
              1,675,000
              
              
              0Investors'
                  subscriptions
              
              
              (3,517,862
              )
              
              2,815,276Members'
                  contributions and re-investments
              
              
              7,634,700
              
              
              6,334,607Costs
                  incurred in raising capital and commissions
              
              
              (226,279
              )
              
              (232,870
              )Investors'
                  withdrawals
              
              
              (1,800,659
              )
              
              (377,029
              )Cash
                  distributions to members
              
              
              (1,521,751
              )
              
              (1,124,873
              )Sub
                  total
              
              
              2,243,149
              
              
              7,415,111**Net
                  Change in Cash during the Year**
              
              
              **(3,469,579**
              **)**
              
              **2,354,623****Cash
                  in Bank, Beginning of Year**
              
              
              **3,693,595**
              
              
              **1,338,972****Cash
                  in Bank, End of Year**
              
              **$**
              **224,016**
              
              **$**
              **3,693,595**




See
      accompanying Notes


37


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**




**Note
      1 -**  **Organization
      and Description of Business**





Lakeside
      Mortgage Fund, LLC (the “Company” or the “Fund”), a California limited liability
      company was formed on December 4, 2002 under the California Beverly-Killea
      Limited Liability Company Act (the “Act”) to conduct any lawful business for
      which a limited liability company may be organized under the Act, including
      investment of the Fund’s cash and making or investing in notes, mortgages and
      loans to members of the general public secured by deeds of trust on real estate
      properties located primarily in the State of California.





**Terms**


The
      Fund’s operating plan is to continue to seek investors and use those proceeds to
      fund suitable loans consistent with the Fund’s lending criteria. Management
      believes qualified investors will continue to invest in the Fund so that the
      Fund will continue to raise capital from such investors, and invest such capital
      in commercial mortgage loans.





The
      Manager of the Fund is Lakeside Financial Group, Inc. (the “Manager” or
“Lakeside”), a California corporation formed for the purpose of managing the
      Fund. Lakeside was incorporated in August 2002 and began doing business in
      November 2002. Lakeside is not a member of the Fund, and is owned by
      shareholders who are not members of the Fund.





The
      Fund
      will continue to operate indefinitely until dissolved and terminated by vote
      of
      members holding a majority of the outstanding membership interests, with the
      concurrence of the Fund Manager.





**Profits
      and losses**


The
      profit or loss of the Fund is allocated to the members in proportion to their
      respective percentage interest. The Manager is required to allocate to the
      members all profits and losses realized by the Fund during the month as of
      the
      close of business on the last day of each calendar month, in accordance with
      their respective percentage interests and in proportion to the number of days
      during the calendar month that they owned the interests.





**Distributions**


Cash
      available for distribution is the net income during the calendar month using
      the
      accrual method of accounting and in accordance with United States generally
      accepted accounting principles (“US GAAP”). Monthly, the Fund provides
      statements of account to members and distributes or reinvests amounts equal
      to
      the members’ proportionate share of the Fund’s net income during such month. The
      Manager is required to distribute funds only to the extent that funds are
      available.





**Withdrawals**


Fund
      members are allowed to withdraw from the Fund and receive a return of the amount
      in their capital accounts only after 12 months from the date of admission into
      the Fund (“Holding Period”). Members must give a 60-day written notice prior to
      withdrawing and payments to any withdrawing member are limited to $25,000 per
      quarter. After the Holding Period, members may withdraw and receive a return
      of
      their capital accounts subject to the availability of cash in the Fund, and
      subject to the following penalties for early withdrawal pursuant to the terms
      of
      the operating agreement: (i) 3% of withdrawal amount within the first year
      following the Holding Period; (ii) 2% of withdrawal amount within the second
      year following the Holding Period; and (iii) 1% of withdrawal amount within
      the
      third year following the Holding Period. Aggregate withdrawals among all members
      may not exceed 10% of the Fund’s total capital for any calendar year. The Fund
      does not maintain a reserve for withdrawing members. The Fund’s capacity to
      return a withdrawing member’s capital account is limited by the availability of
      cash on hand after payment of expenses and provision for maintaining adequate
      reserves, in the discretion of the Manager.


38


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





**Related
      parties**


The
      Manager is entitled to receive certain fees, compensation and expense
      reimbursements from the Fund. The Manager is entitled to receive from the Fund
      an asset management fee, payable monthly, in a maximum amount of 2.75% of the
      gross assets under management per year (0.229% per month). The Manager is also
      entitled to receive a loan servicing fee, payable monthly, in a maximum amount
      of 0.25% of the total unpaid principal balances of loans serviced (0.02% per
      month). The Manager may waive these fees in order to improve the return to
      investor members. The Manager is also entitled to receive reimbursement from
      the
      Fund for organizational, syndication and other operating expenses incurred
      on
      behalf of the Fund, including out-of-pocket general and administrative expenses
      of the Fund related to the offering of membership interests, accounting and
      audit fees, legal fees and expenses, postage and other expenses related to
      the
      preparation of reports to members.





The
      Manager receives other fees from third parties such as compensation to the
      Manager for acting as broker in arranging loans from the Fund. These fees (which
      are not paid by the Fund, but rather by third party borrowers) are determined
      on
      a case-by-case basis, are generally between 2% to 6% of the loan amount, and
      generally consist of brokerage, origination, renewal and/or processing
      fees.





The
      Fund
      receives certain operating and administrative services from the Manager, some
      of
      which may not be reimbursed to the Manager. The Fund’s financial position and
      results of operations would likely be different without this relationship with
      the Manager.





**Note
      2 -**  **Summary
      of Significant Accounting Policies**





(a)
            Basis
                of Accounting


The
      financial statements of the organization have been prepared on the accrual
      basis
      of accounting and reflect all significant receivables, payables and other
      liabilities.





(b)
            Management
                Estimates


The
      preparation of financial statements in conformity with US GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Such estimates relate principally to
      the
      determination of the allowance for loan losses, including the valuation of
      impaired loans and the valuation of real estate owned properties. Actual results
      could differ from those estimates.


39


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





(c)
            Revenue
                Recognition


Interest
      is recognized as revenue when earned according to the contractual terms of
      the
      loan.





(d)
            Income
                Taxes


The
      Fund
      is treated as a partnership for federal and California income tax purposes.
      Consequently, all tax effects of the Fund’s income or loss are passed through to
      the members individually, and no federal or California income taxes are provided
      for in the financial statements of the Fund. The Fund pays an annual California
      tax of $800 and an annual California LLC fee based upon its annual gross
      receipts.





(e)
                Cash
                    and Cash Equivalents


For
      purposes of the statements of cash flows, cash and cash equivalents include
      interest-bearing and non interest-bearing bank deposits, money market accounts
      and commercial paper with original maturities of three months or less. At
      December 31, 2007, the Fund had approximately $60,246 of cash that exceeded
      this
      limit and thus was not covered by federal depository insurance. Periodically,
      the Fund’s cash balances exceed federally insured limits.





(f)
            Loans
                Secured by Trust Deeds


Loans
      secured by trust deeds are recorded at cost. To date, no loans had been
      purchased from outside third party issuers of loans. The Fund loans will have
      varying terms at the discretion of the Manager. Construction loans will
      generally have a term of between one and two years and will provide for monthly
      payments of interest only with a “balloon payment” at the end of the term. Other
      Fund loans may have a longer amortization schedule and may be fully amortizing
      (i.e., original principal amount of the loan will be repaid in equal monthly
      installments of principal and interest over the term). The Fund will not
      recognize interest income on loans once they are determined to be impaired
      until
      the interest is collected in cash after principal is collected. A loan is
      impaired when, based on current information and events, it is probable that
      the
      Fund will be unable to collect all amounts due according to the contractual
      terms of the loan agreement. Cash receipts will be allocated to interest income,
      except when such payments are specifically designated as principal reduction
      or
      when management does not believe the Fund’s investment in the loan is fully
      recoverable. Impairment is measured on a loan by loan basis by either the
      present value of expected future cash flows discounted at the loan’s effective
      interest rate, the loan’s obtainable market price or the fair value of the
      underlying collateral.


40


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





(g)
            Allowance
                for Loan Losses


The
      allowance for loan losses will be established as losses are estimated to have
      occurred through a provision for loan losses that will be charged to earnings.
      Loan losses will be charged against the allowance when management believes
      the
      uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
      any,
      will be credited to income. The allowance for loan losses will be evaluated
      on a
      regular basis by management and is based upon management’s periodic review of
      the collectibility of the loans in light of historical experience, the types
      and
      dollar amounts of loans in the portfolio, adverse situations that may affect
      the
      borrower’s ability to repay, estimated value of any underlying collateral and
      prevailing economic conditions. This evaluation is inherently subjective as
      it
      requires estimates that are susceptible to significant revision as more
      information becomes available.





The
      following shows the activities in the allowance for loan losses during the
      year
      ended December 31, 2007:





Balance,
                December 31, 2006
            
            $
            110,000Additions
            
            
            160,489Write-off
                of accrued interest and loss on sale of REO
            
            
            (
                82,977
            )Balance,
                December 31, 2007
            
            $
            187,512





(h)
            Real
                Estate Held for Sale


Real
                estate held for sale includes real estate acquired through foreclosure
                and
                is stated at the lower of the recorded investment in the loan, plus
                any
                senior indebtedness, or at the property’s estimated fair value, less
                estimated costs to sell.





(i)
            Loan
                Interest Reserve


The
      Fund
      often requires borrowers to set up interest reserve accounts from which monthly
      payments of interest are made. The interest reserve is deposited into a separate
      bank account in the name of the Fund, designated specifically as interest
      reserve on loans issued by the Fund. At the end of the month, the Fund draws
      the
      calculated monthly interest on outstanding loans from the interest reserve
      account and transfers such amount into the general operating account of the
      Fund
      as part of the distributable fund available for monthly disbursement to the
      members. The equivalent unearned amount is recorded as deferred interest in
      the
      liabilities section of the balance sheet. As of December 31, 2007, the loan
      interest reserve cash balance and deferred interest had a balance of $176,805
      and $292,442, respectively. The difference of $115,637 was not funded at the
      end
      of the year.





(j)
            Contra-Equity
                Accounts: Offering Costs and Commissions Incurred in Connection with
                Raising of Capital


Syndication
                costs incurred in connection with the raising of capital by offering
                units
                of membership interest in the Fund are being treated as a reduction
                of
                paid in capital. Initial marketing fees and broker’s commissions paid to
                an outside brokerage firm are treated as contra-equity accounts.
                The fees
                paid by the Fund currently range up to 6.5%. The brokers are also
                entitled
                to receive “trailer commissions” equivalent to 1.0% of the average daily
                invested capital at the 1 year anniversary of the invested funds.
                The
                initial marketing/broker’s fees are capitalized in accordance with US
                GAAP, pursuant to the AICPA’s Technical Practice Aid TIS 7200.07
                (Accounting for Syndication Costs of Limited Partnerships). Subsequent
                payments of trailer commissions however are treated as period costs and
                charged to current earnings of the Fund. As such, the initial
                marketing/broker’s fees are included in the balance sheet under the
                caption heading “Members’ contributions, net” while the trailer
                commissions are shown in the statements of income, when incurred.The
                Fund has capitalized $226,279 of brokers’ fees during the year ended
                December 31, 2007.




41


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





(k)
            Subscription
                Account


Upon
      receipt of the funds from prospective investors subscribing to purchase
      membership interests, those funds are deposited into a subscription account.
      The
      funds are held, in the Manager’s discretion up to a maximum of 60 days, until
      needed by the Fund. The funds are then contributed to the capital of the Fund
      in
      exchange for a membership interest. The Manager may hold funds in the
      subscription account for longer than 60 days only upon the written consent
      of
      the subscriber.





As
      of
      December 31, 2007, the uninvested funds in the subscription account was
      $38,360.




(l)
            Fair
                Value of Financial Instruments





The
      following methods and assumptions were used to estimate the fair value of
      financial instruments:





(a)
            Cash
                and cash equivalents - The carrying amount equals fair value.  All
                amounts, including interest bearing, are subject to immediate
                withdrawal.





(b)
            Secured
                loans had a carrying value of $ 18,599,336 at December 31, 2007,
                which is
                substantially equivalent to fair
                value.





(m)
            Recent
                accounting pronouncements





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140” (SFAS 156), which permits, but
      does not require, an entity to account for one or more classes of servicing
      rights (i.e. mortgage servicing rights) at fair value, with the changes in
      fair
      value recorded in the statement of income. SFAS 156 is effective in the first
      quarter of 2007. The adoption of SFAS 156 did not have a material impact on
      the
      Fund’s financial condition and results of operations.


42


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





On
      September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS 154). SFAS 157 defines fair value, establishes a framework for measuring
      fair value under GAAP and enhances disclosures about fair value measurements.
      SFAS 157 defines fair value as the exchange price that would be received for
      an
      asset or paid to transfer a liability (an exit price) in the principal or most
      advantageous market for the asset or liability in an orderly transaction between
      market participants on the measurement date. SFAS 157 is effective for the
      Fund’s financial statements issued for the year beginning on January 1, 2008,
      with earlier adoption permitted. Management is currently evaluating the impact
      and timing of the adoption of SFAS 157 on the Fund’s financial condition and
      results of operations.





On
      February 15, 2007, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value
      Option for Financial Liabilities (SFAS 159), “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS 159), which allows the entity
      the irrevocable option to elect fair value for the initial and subsequent
      measurement for certain financial assets and liabilities on a
      contract-by-contract basis. Subsequent changes in fair value of these financial
      assets and liabilities would be recognized in earnings when they occur. SFAS
      159
      further establishes certain additional disclosure requirements. SFAS 159 is
      effective for the Fund’s financial statements for the year beginning on January
      1, 2008, with earlier adoption permitted. Management is currently evaluating
      the
      impact and timing of the adoption of SFAS 159 on the Fund’s financial condition
      and results of operations.





On
      July
      13, 2006, the FASB released FASB interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 106” (FIN
      48). FIN 48 clarifies the accounting and reporting for income taxes where
      interpretation of the tax laws may be uncertain. FIN 48 prescribes a
      comprehensive model for the financial statement recognition, measurement,
      presentation and disclosure of income tax uncertainties with respect to
      positions taken or expected to be taken in income tax returns. The Fund will
      adopt FIN 48 in the first quarter of 2007. The adoption of FIN 48 did not have
      a
      material impact on the Fund’s financial condition and results of
      operations.





On
      September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 108 “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements (SAB 108). SAB 108 expresses the SEC Staff’s views regarding the
      process of quantifying financial statement misstatements. SAB 108 states that
      in
      evaluating the materiality of financial statement misstatements, an entity
      must
      quantify the impact of correcting misstatements, including both the carryover
      and reversing effects of prior year misstatements, on the current year financial
      statements. SAB 108 is effective for the year ended December 31, 2006. The
      application of SAB 108 did not have an impact on the Fund’s financial condition
      and results of operations.


43


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





Note
      3 -  Loans
      Secured by Trust Deeds





At
      December 31, 2007, the Fund held the following types of mortgages:





2007Commercial
            
            $
            5,489,218Construction
            
            
            5,291,147Unimproved
                land
            
            
            8,006,483Total
            
            $
            18,786,848First
                mortgages
            
            $
            13,766,833Second
                mortgages
            
            
            5,020,015Total
            
            $
            18,786,848





Scheduled
      maturities of loans secured by trust deeds as of December 31, 2007 and the
      interest sensitivity of such loans are as follows:





FixedInterestYear
                Ending December 31:2007
                (including 2006)
            
            $
            3,473,2702008
            
            
            14,630,5782009
            
            
            683,000Total
            
            $
            18,786,848





The
      scheduled maturities above include six (6) loans ($3,473,270) that are past
      maturity at December 31, 2007 but remained outstanding at the end of the year.
      One (1) loan that matured was subsequently paid off in January 2008. Interest
      receivable on these matured loans amounted to $45,189 at December 31, 2007.
      It
      is the Fund’s experience that loans can be refinanced or repaid before or after
      the maturity date. Therefore, the above tabulation for scheduled maturities
      is
      not a forecast of future cash receipts.





In
      addition to the above mentioned matured loans, six (6) loans ($2,579,064) were
      in default at the end of 2007 for non payment of interest. Non accrual interest
      ranged  between
      3-15 months; one (1) loan with past due interest was subsequently re-instated
      by
      the borrower under a 3-month payment plan for past due interests, including
      penalties and default interests. Occasionally, the Fund allows borrowers to
      continue to make the payments on loans past maturity for periods of time. The
      Manager has pursued the collection or re-structuring of these loans and related
      interest receivables, either through extension or partial pay downs. When such
      default interest is collected, it is applied first to any outstanding accrued
      interest receivables and the balance is recognized into income during the period
      it was collected. The
      loans
      are believed to be covered by the fair market values of the underlying real
      properties, and the Fund does not anticipate that it will incur significant
      losses in the cases of these loans .


44


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





The
      Fund
      has no variable interest rate loans at December 31, 2007. The interest rates
      on
      these loans ranged from 9.00% to 15.00%.





At
      December 31, 2007, 99% of the
      Fund’s loans receivable was collateralized by properties located in
      California.





As
      of
      December 31, 2007, the Fund’s loan portfolio consisted of twenty four (24) real
      estate loans to unrelated parties totaling $16,650,630 (87%), and four (4)
      loans
      receivable from related parties amounting to $2,136,218. These debt securities
      are all secured by deeds of trust.





Six
      (6)
      loans totaling $3,631,930 were made to separate entities controlled by the
      same
      person. Each of the various borrowing entities is an independent entity
      organized for a specific project, and the various entities own real properties
      in various places around California, mostly in the central valley of California. These
      loans represent 19% of the total loan portfolio. Five (5)
      of these loans are on default due to non payment at maturity. One of the loans
      matured in September 2006 and the other four loans matured at various dates
      in
      2007. The remaining one (1) loan will mature in 2008. Additionally, these loans
      were classified on non accrual status for non payment of interest for over
      60
      days. No interest has been accrued for the note that matured in September 2006
      while the remaining notes had been on non accrual status for between 3 - 9
      months. The Manager however is actively pursuing collections of these loans,
      including the unaccrued interest receivables .
      All six
      (6 )
      loans
      are collateralized by the underlying real estate properties, and are each
      personally guaranteed by the controlling person.





Note
      4 – Related Party Transactions





Loans
      Secured by Trust Deeds


The
      Fund
      may invest up to 20% of its total assets in loans to affiliated entities. The
      Company currently has four (4) investments with affiliated entities, totaling
      $
      2,136,218, constituting 9.1% of the total of Company assets as of December
      31,
      2007. Additionally, an-inter- company balance amounting to $36,043 was
      outstanding at the end of 2007. These loans were made in the normal course
      of
      the Company’s business, were subjected to the Company’s normal underwriting
      process, were made on the Company’s standard terms for such investments, and do
      not appear to represent an unusual risk at the time the loans were made to
      the
      affiliates.


45





**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





Of
      these
      loans, one (1) note ($224,390) is an undivided interest in a promissory note,
      the proceeds or which were distributed among five different limited liability
      companies of which James S. Koenig (consultant of Manager), Gary Armitage,
      and
      Jeffery Guidi (shareholders and directors of the Manager), directly or
      indirectly, are members. The promissory note is secured by a mortgage on one
      assisted living facility located in Virginia and pays an interest rate of 12%
      per annum. The note was paid off in January 2008. The second loan ($500,000)
      is
      an undivided interest in a promissory note made by an entity of which James
      S.
      Koenig, Gary Armitage, and Jeffery Guidi directly or indirectly, are members.
      The proceeds of that loan are being used for completion of a golf course owned
      by the maker of the note. The note matured in December 2006 and the borrower
      exercised a 24-month extension option. This note is currently in default for
      non
      payment of interest. The third promissory note was a second trust deed
      ($1,200,000) secured by a 2-story commercial office building in Redding, CA.
      The
      note matures in March 2008 and bears interest at 11.90%. The fourth note
      consists of a second trust deed (loan commitment: $411,000) that was
      collateralized by a 140-acre undeveloped land in Alameda County. The note
      matures in May 2008 and bears interest at 15%. Both notes are current in terms
      of interest payments.




As
      noted,
      the Fund is limited in its investments with affiliated entities to a maximum
      of
      20% of its total assets, as defined. As of December 31, 2007, the Fund is in
      compliance with this restriction.





Contra
      Equity Costs


Additional
      costs incurred in connection with the offering of units of membership interest
      in the Fund are treated as reduction of paid in capital, or contra equity costs.
      These expenditures consisted primarily of the initial accounting and filing
      costs relating to the registration and as such being treated as syndication
      costs as contemplated in the AICPA’s Technical Practice Aid TIS 7200.07
      (Accounting for Syndication Costs of Limited Partnerships). During the years
      ended December 31, 2007 and 2006 the Fund incurred no additional offering costs.





The
      Fund
      paid commissions to securities brokers in connection with the sale of membership
      interests by the Fund. The commission rate ranged between 3.5% and up to 6.5%
      of
      the gross sales proceeds from the sale of units of the Fund. The total amount
      of
      net brokers’ commissions paid during the years ended December 31, 2007 and 2006
      were $226,279 and $232,870, respectively. These costs are recorded as “Costs
      incurred in raising capital” and included in the balance sheet under the heading
“Members’ contributions, net”.





Borrower’s
      Costs


The
      Manager acts as loan broker in the initial placement of the Fund loans and
      performs loan servicing functions as well. The Manager is compensated by the
      Fund for such loan servicing activities and is compensated by the borrower
      for
      the initial placement of the loans. The Fund does not incur “Incremental Direct
      Costs” as defined in SFAS No. 91, “ *Accounting
      for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
      and Initial Direct Costs of Leases* .”
These
      are costs to originate loans that result directly from, and are essential to,
      the lending transaction and would not have been incurred by the Fund had the
      lending transaction not occurred. The Manager of the Fund incurs these types
      of
      costs; consequently the Manager is entitled to receive certain fees for its
      services such as loan brokerage commissions, loan processing and documentation
      fees, loan servicing and asset management fees and reimbursement of other
      expenses of the Manager. None of these fees are paid by the borrower to the
      Fund
      directly and therefore are not included in the income and expenses of the Fund.
      The Fund’s borrowers paid $ 601,748 and
      $509,787 representing loan origination and extension fees to the Manager during
      the years 2007 and 2006 respectively.


46


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





Broker’s
      Commissions on Invested Funds


The
      Fund
      has retained the services of securities broker/dealers to sell units of
      membership interest in the Fund. One such broker/dealer is ePlanning Securities,
      Inc., which is affiliated with the Manager. Certain shareholders of the Manager
      (who are not members of the Fund) are also shareholders and/or directors of
      ePlanning. ePlanning sold membership units of the Fund to its client-investors
      during the years ended December 31, 2007 and 2006 amounting to $6,711,787 and
      $5,612,162 of which it realized commissions totaling $226,279 and $232,870,
      respectively. The brokers do not earn a commission until funds are transferred
      from the subscription account to members’ equity, at which time the funds become
      contributed capital of the Fund.





Management
      and servicing fees


The
      Manager earned $49,976 and $90,821 during the years ended December 31, 2007
      and
      2006, respectively, representing management and servicing fees it was entitled
      to receive from the Fund. During 2007 and 2006, the Manager waived fees
      amounting to $596,336 and $352,866, respectively.





Note
      5 – Real Estate Held for Sale


The
      following schedule reflects the activities in real estate held for sale at
      December 31, 2007:





Balance,
                December 31, 2006
            
            $
            380,000Additions
                during the year
            
            
            4,328,871Disposition
                during the year
            
            
            (
                380,000
            )Balance,
                December 31, 2007
            
            $
            4,328,871





Four
      (4)
      loans were foreclosed during 2007 when the borrowers failed to pay off the
      loans
      at maturity. The real estate owned properties (“REOs”) are valued at the lower
      of the estimated net realizable values and carrying costs of the REOs
      ($4,328,871). One (1) loan was a construction loan where the underlying
      collateral consisted of construction of two-single family homes in the City
      of
      Marina, California. The borrower defaulted and the Company took over the
      unfinished project and hired a general contractor to finish the construction
      project. This involved the infusion of additional funds to finish the project
      (approximately $177,000). The homes are substantially complete and are currently
      listed for sale with a real estate broker operating in the Marina area. Two
      (2)
      of the loans that went into foreclosure were secured by senior indebtedness;
      hence the Company assumed the two senior notes ($1,675,000) at the time of
      foreclosure. Both senior notes bear interest at 12% per year. The monthly
      payments on these notes are $5,500 and $11,250. One of the notes matures in
      April, 2008 while the other has already matured in February, 2008. The Manager
      is working to re-structure the notes and at the same time has listed the
      properties for sale to pay off the senior lienholders. The remaining property
      is
      a commercial real estate that was operated as an auto repair shop by the
      borrower. The REOs are listed for sale with real estate brokers operating in
      their respective areas. The Company believes that these properties can be sold
      within 1 year without material loss to the Company. The only carrying costs
      that
      the Company anticipates in connection with holding the properties are real
      estate property taxes and liability insurance . The
      taxes
      and insurance premiums are expensed when incurred.


47


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





On
      January 24, 2008, the Company foreclosed another loan ($978,000). The Company
      therefore took over the real property (10-acre parcel in Galt, California)
      securing the loan. This loan is one of six (6) loans issued to different
      entities controlled and guaranteed by the same principal, as discussed in Note
      6
      below. The Company is having on-going discussion with the principal to remedy
      the default, and the same time seeking other interested parties to buy-out
      the
      principal’s obligations to the Fund.





Note
      6 -  Concentrations





Notes
      receivable – non related parties


Six
      (6)
      loans totaling $3,631,930 were made to separate entities controlled by the
      same
      person. Each of the various borrowing entities is an independent entity
      organized for a specific project, and the various entities own real properties
      in various places around California, mostly in the central valley of California. These
      loans represent 19% of the total loan portfolio. Five (5)
      of these loans are in default due to non payment at maturity. One of the loans
      matured in September 2006 and the other four loans matured at various dates
      in
      2007. The remaining loan will mature in 2008. Additionally, these loans were
      classified on non accrual status for non payment of interest for over 60 days.
      No interest has been accrued for the note that matured in September 2006 while
      the remaining notes had been on non accrual status for between 3 – 9
      months. The Manager however is actively pursuing collections of these loans,
      including the unaccrued interest receivables .
      All six
      (6) loans
      are collateralized by the underlying real estate properties, and are each
      personally guaranteed by the controlling person.





Commitments
      and contingencies


The
      Fund
      has outstanding loan commitments on four (4) construction loans totaling
      $1,650,093 which was undisbursed at December 31, 2007.


48


**Lakeside
      Mortgage Fund, LLC**


**(A
      California Limited Liability Company)**


**Notes
      to Financial Statements**


**December
      31, 2007**





Workout
      agreements


The
      Fund
      periodically negotiates various workout agreements with borrowers whose loans
      are past maturity or who are delinquent in making payments. As of December
      31,
      2007, there were eleven (11) loans totaling $ 6,052,334 in the process of
      workout agreements.





Legal
      proceedings


The
      Fund
      is involved in various legal actions arising in the normal course of business.
      In the opinion of management, such matters will not have a material effect
      on
      the financial position of the Fund.





Note
      7 – Regulatory Requirements





Employee
      Retirement Income Security Act of 1974 (“ERISA”)


Some
      of
      the investors purchasing membership interests are employee benefit plans,
      including Individual Retirement Accounts, which are subject to ERISA. Persons
      making the investment decisions for such ERISA investors are deemed to be
“fiduciaries” of such investors and must discharge their duties with the care,
      skill and prudence which a prudent person would exercise under the
      circumstances.





Normally
      an investment in an equity interest of an entity, such as a membership interest
      in the Fund, will be deemed a “plan asset” of the ERISA investor, but the
      underlying assets of the entity will not be deemed plan assets. However, if
      (i)
      the equity interests are not publicly-offered securities, (ii) the entity is
      not
      one of several types of “operating companies” defined in ERISA regulations, and
      (iii) investment by ERISA investors exceeds 25% of the value of the class of
      equity interests, then the underlying assets of the entity may be deemed “plan
      assets,” with the entity deemed a “fiduciary” with respect to the ERISA
      investors.




Securities
      Laws


In
      offering the units of membership interest, the Fund is subject to applicable
      federal and state securities laws. On the federal level, the Fund is offering
      the membership interests pursuant to the exemption from registration for
      intrastate offerings provided by Section 3(a) (11) of the Securities Act of
      1933, as amended, and Rule 147 promulgated thereunder. In accordance with this
      exemption, the membership interests are offered only in California, the Fund
      restricts the amount of its assets which are located outside of California
      and
      members are prohibited from transferring any part of their membership interests
      to out-of-state transferees for a period of nine (9) months.





On
      the
      state level, the Fund is offering the units of membership interest pursuant
      to a
      permit issued by the California Department of Corporations. The permit requires
      annual renewal. The original permit was issued on February 24, 2003. The permit
      was most recently renewed on February
      29, 2008.





As
      of
      December 31, 2007, the Fund was in compliance with all applicable federal and
      state securities laws.


49





**PART
      III**





**ITEM
      1. INDEX TO EXHIBITS**





Exhibit
                No.
            
            Description2.1.*
            
            Articles
                of Organization3.1.*
            
            Operating
                Agreement of Lakeside Mortgage Fund, LLC3.2.**
            
            Amendment
                No. 1 to Operating Agreement6.1.*
            
            Broker/Dealer
                Agreement6.2.*
            
            Amendment
                No. 1 to Broker Dealer Agreement31.1.
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-
                Oxley
                Act of 2002.31.2.
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
                Oxley
                Act of 2002.32.1.
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-
                Oxley
                Act of 2002.32.2.
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-
                Oxley
                Act of 2002.





*
      Incorporated by reference to the Company’s Registration Statement on Form 10-SB,
      as amended, originally filed with the Commission under the Exchange Act on
      August 6, 2004.





**
      Incorporated by reference to the Company’s Annual Report on Form 10-KSB,
      originally filed with the Commission under the Exchange Act on March 30,
      2005.




**ITEM
      2.**  **DESCRIPTION
      OF EXHIBITS.**





Please
      see Part III, Item 1, “Index to Exhibits.”


50


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.





LAKESIDE
              MORTGAGE FUND, LLC,A
              California Limited Liability CompanyBy:
            Lakeside
                Financial Group, Inc.,Manager





Date:
                April 4, 2008
            By:
            /S/
                Paula M LewisPaula
                M Lewis, President & CEO




51