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

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
                             SECURITIES ACT OF 1934

                     FOR THE PERIOD ENDED DECEMBER 31, 2005

                        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. Employer
             Incorporation or organization)      Identification No.)


            443 Redcliff Drive, Suite 240
            Redding, California                         96002
            (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. [ ]

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 [ ]

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 [ ] No [X]

<PAGE>

State issuer's revenues for its most recent fiscal year: $ 849,149.00.

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 ($100.00 per unit), was approximately $ 11,732,556.00 on February 28,
2006.

Transitional Small Business Disclosure Format (Check one): Yes |X|; No |_|



                                       2
<PAGE>

                                TABLE OF CONTENTS


PART I  (Alternative 2)

Item 1   Description of Business
Item 2   Description of Property
Item 3   Directors, Executive Officers and Significant Employees
Item 4   Remuneration of Directors and Officers
Item 5   Security Ownership of Management and Certain Securityholders
Item 6   Interest of Management and Others in Certain Transactions

PART II

Item 1   Market Price of and Dividends on the Registrant's Common Equity and
         Other Shareholder Matters
Item 2   Description of Exhibits
Item 3   Changes in and Disagreements with Accountants
Item 4   Submission of Matters to a Vote of Security Holders
Item 5   Compliance with Section 16(a) of the Exchange Act

PART F/S

PART III

Item 1   Index to Exhibits
Item 2   Description of Exhibits

SIGNATURES





                                       3
<PAGE>

                    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 as the "Company," "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.

      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 250,000 Units, at a price of $100.00 per Unit, with a
minimum investment per investor of 20 Units ($2,000.00), for a total offering
amount of $25,000,000.00. The Company began offering the Units on February 24,
2003, and, as of December 31, 2005, has raised $ 10,634,577.00.

      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. Under applicable state 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 1, 2006. (See, "III. The
Offering of Membership Interests")

      Purchasers of Units become Members of 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 interest 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 the Members.
(See, "V. Summary of Operating Agreement" for a complete description of the
Operating Agreement and the rights and the duties of the Members.)

                                       4
<PAGE>

      Investors' funds are placed initially in a non-interest-bearing
Subscription Account. Within 60 days of being placed in the Subscription
Agreement, 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 Agreement. Upon becoming a Member, the investor begins receiving
monthly distributions from the Company. 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
management fee from the Company (equal to 2.75% of gross assets under management
per year) and a loan servicing fee (equal to .25% per loan 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 complete description of the duties of the Manager, and how the
Manager performs its functions, see, "IV. The Manager."

      B. RESULTS OF OPERATIONS. The Company was issued its permit to offer
securities, by the California Department of Corporations, on February 24, 2003.
That permit, as well as the annual permit renewals, provides for a maximum
offering amount of $25,000,000.00, and a minimum offering amount of $500,000.00.
We reached the minimum amount, and contributed the investor funds to the capital
of the Company, on September 26, 2003. On December 31, 2005, the Company had
Member capital contributions of $10,634,577.00, and 21 loans totaling
$9,631,815.00, with the rest of the capital in the form of cash. One loan had
gone into default (which has since been brought current), and all other
borrowers were current on their interest payments.

      As of December 31, 2005, the Company had invested in the following
outstanding loans:

Loan No.              Principal            Interest      Location of Collateral
--------             ----------            --------      ----------------------
200301            $   484,000.00            10.9%            Anderson, CA
AREI2003          $   224,390.00            12.0%            VA, NC, and SC
200405            $   177,000.00            10.9%            Byron, CA
200408            $   206,000.00            10.9%            West Sacramento, CA
200409            $   450,000.00            10.9%            Yuba City, CA
200410            $   890,000.00            12.0%            Galt, CA
200411            $   807,824.00            10.9%            Marina, CA
200412            $   500,000.00            10.0%            Mountain House, CA
200501            $   160,000.00            10.9%            Modesto, CA
200502            $   470,737.00            10.9%            Madera, CA
200503            $   708,050.00            10.9%            Martinez, CA
200504            $   750,000.00            12.0%            Stockton, CA
200505            $   153,000.00            10.9%            Hayward, CA
200506            $   126,000.00            10.9%            Hayward, CA
200507            $   230,000.00            12.0%            Los Banos, CA
200508            $   490,000.00            12.0%            Madera, CA
200509            $   380,000.00            10.9%            Los Gatos, CA
200510            $   400,000.00            12.0%            Los Banos, CA
200511            $1,071,564.00             12.0%            Homeland, CA
200512            $   850,000.00            12.0%            Oroville, CA
200513            $   103,250.00            12.0%            Arnold, CA

                                       5
<PAGE>

      All of the Company's loans were newly originated except loans AREI2003 and
200412. These investments are undivided interests in promissory notes which were
originated through private placements. See, "VII. Potential Conflicts of
Interest -- C. Company Loans to Related Parties." As of December 31, 2005 the
average term of all outstanding loans was 17.2 months, and the average interest
rate was 11.37%. All loans have interest-only payment terms, and all loans are
current with respect to principal and interest.

      The Company began making distributions to Members in November of 2003.
During the fiscal year ending December 31, 2005, the Company has made the
following distributions to its Members, most of which have chosen to reinvest
their distributions back into the Company (i.e., to compound their investment):

<TABLE>
<CAPTION>
                           Members           Total Amt.         Amount          Amount of      Annualized
Month                      Rec. Dist.       Distributed       Compounded        Cash Dist.       Return
-----                      ----------       -----------       ----------        ----------       ------
<S>                        <C>              <C>               <C>               <C>              <C>
January '05                179              $38,227.00        $27,647.00        $10,580.00       7.80%
February '05               190              $38,581.00        $28,040.00        $10,541.00       8.00%
March '05                  195              $44,920.00        $32,910.00        $12,010.00       8.00%
April '05                  209              $43,831.00        $32,063.00        $11,768.00       7.75%
May '05                    233              $51,276.00        $37,026.00        $14,250.00       8.00%
June '05                   248              $53,962.00        $38,194.00        $15,768.00       8.00%
July '05                   258              $58,105.00        $41,014.00        $17,091.00       8.00%
August '05                 258              $59,655.00        $41,715.00        $17,940.00       8.00%
September '05              267              $60,586.00        $42,861.00        $17,725.00       8.05%
October '05                281              $65,898.00        $46,109.00        $19,789.00       8.00%
November '05               282              $67,520.00        $45,819.00        $21,701.00       8.10%
December '05               286              $73,315.00        $50,048.00        $23,267.00       8.25%
</TABLE>

      Note: The Manager is entitled to certain management fees from the Company,
which the Manager has waived, in whole or in part, in the past (See, "VI. The
Manager - A. Compensation to Manager," for a detailed explanation). If the
Manager had not waived these fees during the above-mentioned periods, the
returns to investors would have been 4.30%, 5.87%, 4.92%, 5.41%, 5.41%, 5.75%,
5.95%, 5.62%, 5.30%, 5.64%, 5.94% and 5.83% for the respective periods from
January 2005 through December 2005.

      C. TWELVE MONTH PLAN OF OPERATION. As of December 31, 2005, we have sold a
total of 106,346 Units, at $100.00 per Unit, for a total of $10,634,577.00.
After deducting for broker commissions and offering expenses, the net proceeds
to the Company from these sales have been $10,102,409.00. The Company has
$9,631,815.00 invested in commercial mortgage loans, with the remainder in the
form of cash and/or other temporary investments such as short term commercial
paper. As of December 31, 2005, the Company has 286 Members.

      During the next twelve months, the Manager will continue to underwrite and
select loans for the Company to invest in, as well as short term investments for
cash between loans. The Company will continue to raise capital with its
intrastate offering under a permit from the California Department of
Corporations. It is anticipated that, at some point in the future, we will offer
the Units of Membership Interest in additional states through a registered
public offering, but this is not anticipated to occur within the next twelve
months. 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 2005. (See, "IV. A. Compensation to the Manager").

                                       6
<PAGE>

      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.

      In general, mortgage interest rates rose slightly or remained stable
during 2005. The economy has shown signs of improvement. During 2005, the
Federal Reserve Board increased the discount rate several times. It is not known
whether further increases will occur in the near future. There are a number of
continuing signs, however, that the economy in general may be improving, which
normally generates increased transactions in the real estate marketplace,
including demand for loans.


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. We make loans secured by first or second
mortgages on real property. 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.

                  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%.

                                       7
<PAGE>

            2. LOAN TO VALUE RATIOS.

                                                       Maximum Loan
      Type of Property                                 to Value Ratio
      ----------------                                 --------------
      Commercial Property                              80%
      Construction Loan - Commercial                   70%
      Construction Loan - Residential                  70%
      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 something other than a full appraisal, we feel
that this added risk is offset by the fact 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 longer terms. So far the Company has required the
update of appraisals only in connection with term extensions.

            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 property, 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, 2005 the Company has
outstanding 11 loans secured by first deeds of trust, and 10 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, 2005, no loan proceeds 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.

                                       8
<PAGE>

            4. GEOGRAPHIC AREA OF LENDING ACTIVITY. The Company limits lending
activities primarily to deeds of trust on properties located in California,
however the Company may make loans 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 60 days and 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:

                  (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 intend to
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 insurance shall name 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 shall receive assignments of all beneficial
interest in any documents related to each Loan so purchased. Company investments
in Loans will not be 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 is to a party affiliated with the Manager, and the Company is
depending on the Manager to assert its rights with respect to a default on the
loan, there is a potential conflict of interest. The duty of the Manager to
purchase the loan is an unsecured obligation of the Manager. If this duty were
to arise, the Manager would most likely seek financing to purchase the loan and
then institute and prosecute foreclosure proceedings on its own to recover the
loan amount. As of December 31, 2005 the Company has made three loans to
affiliated entities. (See, VII. "Potential Conflicts of Interest - C. Company
Loans to Related Parties.")

                                       9
<PAGE>

            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.

            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, would be 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 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.

      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 make monthly interest payments which will involve mailing their
checks or money orders to the Manager for deposit in the Company's account.

      Servicing a construction loan may also include monitoring the construction
financed by the loan pursuant to a construction loan agreement and acting 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 on
which it has invested in a mortgage loan and takes over ownership and management
of the property). 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.

                                       10
<PAGE>

      E. LEVERAGING THE PORTFOLIO. 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). Leveraging the Company's
loan portfolio 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. Leveraging
a loan for any purpose, however, entails certain 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 also 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 assets (i.e., the Company loans) pledged as security. As of December
31, 2005, the Company has not engaged in any of the above-described leveraging
activities.


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 Rule
147 promulgated thereunder. The offering is limited to California residents
only. The Company derives at least 80% 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 applicable state securities laws, the Units are
offered pursuant to a permit issued to the Company for this offering by the
California Department of Corporations pursuant to Sections 25110 and 25113 of
the California Corporations Code. The permit was originally granted on February
24, 2003. The permit must be renewed annually, and the last renewal was granted
on February 1, 2006. 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. The maximum
capitalization of the Company pursuant to the current offering is $25,000,000
(250,000 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.

                                       11
<PAGE>

            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, 2005, 228 of the Company's 286 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.

                                       12
<PAGE>

      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 Agreement, 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:

            (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 independent securities broker/dealers retained by the
Company, who receive selling commissions of up to 4.5% of the gross sales
proceeds from the sales of Units effected by such broker/dealers. Certain
commission arrangements include a trailing payment of 0.5% 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, 2005 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 a 4%
commission for the sale of Units, plus a 0.5% annual trailer based on amounts
remaining invested with the Company. 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.

      A. NO MARKET FOR UNITS. 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. Under Rule 147 to
Units may be resold until 9 months after the last issuance of Units under this
offering. There are further restrictions pursuant to the California Corporate
Securities Law of 1968, as amended, the regulations thereunder, and 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").

                                       13
<PAGE>

      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.

      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 such 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.

            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.

                                       14
<PAGE>

            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 will make 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 to a substantial degree
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 will compete with institutional lenders and
others engaged in the mortgage lending business, some of whom have greater
financial resources and experience than the Company.

      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. 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.

                                       15
<PAGE>

      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 or 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 LEVERAGE. 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.

      L. RISKS OF LITIGATION. The Manager will act in good faith and use
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 any 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.
Especially in the early stages of our operations, the number of loans is likely
to be small. During this phase the effect on the Company of a default on one or
a small number of loans will be significantly greater than if the Company had
made a large number of loans. In addition, at least 80% and as much as 100% of
the Company's loan portfolio will be secured by properties within California.
This concentration may increase the risk of delinquencies on the Company's loans
when California real estate or economic conditions are weaker than elsewhere.

                                       16
<PAGE>

      N. CONCENTRATION OF LOANS. Six (6) loans totaling $ 3,831,564 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. These loans represent 40% of the Fund's total loan
portfolio. The loans are all current, are adequately collateralized by the
underlying real estate properties, and are each personally guarantied by the
controlling person.


V.    SUMMARY OF THE OPERATING AGREEMENT

      The following is a summary of the Operating Agreement for the Company, as
amended, which is dated as of February 24, 2003, and 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 Chapter 3, Title 2.5 of the
California Corporations Code (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.

      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 $100.00, with a minimum initial investment of 20 Units ($2,000.00).
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 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.

                                       17
<PAGE>

      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. 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. 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. 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.

      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 may (but currently is not required to)
be 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 certain 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.

                                       18
<PAGE>

      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.
Conversely, if prevailing interest rates have declined at a time when the loan
portfolio must be liquidated, unanticipated profits could be realized by those
Members who remain in the Company until its termination.

      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. Under the
Securities Act of 1933, as amended, the exemption from registration relied on by
the Company is the intrastate exemption provided by Section 3(a)(11). Rule 147
promulgated under that section requires that no resales may be made to residents
outside of California until nine months after the last sale of Units by the
Company. Additionally such resales may require the prior written consent of the
California Commissioner of Corporations.

      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, upon the prior written
consent of a majority interest of the Members, will have the right to merge the
Company with one or more other business entities (of which the Manager may be a
sponsor or co-sponsor).

                                       19
<PAGE>

VI.   THE MANAGER

      The Manager of the Company is Lakeside Financial Group, Inc., a California
corporation which 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 directors, which are also its four shareholders (William
Webster, James Koenig, Gary Armitage and Jeff Guidi), each of whom is described
in "Item 3. Directors, Executive Officers and Significant Employees." The
Manager has three officers: President and CEO William Webster, Vice President
Richard Nelson, and Chief Financial Officer Placido Canta.

      The sole business of the Manager is to manage the Company. The Manager
engages in no other business. Of the individuals mentioned above, only Webster
and 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. Webster is involved with practically all aspects of the
business of managing the Company, such as underwriting loans, preparing loan
documents, performing other legal work on behalf of the Manager and the Company,
and maintaining investor relations. 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. 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 gets its loans through real
estate mortgage brokers with whom individuals working for the Manager--primarily
Webster, Koenig and 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 a listed lender on two
websites: www.c-loans.com and the real estate websites maintained by
www.zipsearch.com.

            2. APPROVAL OF LOANS. Webster and Koenig form the Loan Committee of
the Manager. 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). Webster reviews
and analyzes loan packages, and summarizes his review and conclusions in a Loan
Review Summary. Webster and Koenig then meet as the Loan Committee to discuss
the loan and to decide whether to approve the loan. If Webster and Koenig
disagree on a particular loan, the loan is submitted to the entire board of
directors to approve or disapprove. 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 (by Webster) and executed and delivered at the closing.

      B. COMPENSATION TO THE MANAGER. The following discussion summarizes the
forms of compensation received by the Manager. All of the amounts described
below are received 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 retains the right to seek
to retain one or more other firms to perform the various services to be rendered
by the Manager as described below.

                                       20
<PAGE>

FORM OF COMPENSATION                            ESTIMATED AMOUNT OR METHOD OF
Loan Brokerage Commissions, Renewal             COMPENSATION Anticipated to
and Forbearance Fees                            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.

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 Affiliates of      Broker/dealers selling Units on
Manager                                         behalf of the Company are
                                                entitled to receive commissions
                                                of up to 4.5% of the sales
                                                price, and certain commission
                                                arrangements may include a
                                                trailing payment of up to 0.5%
                                                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 debtors 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 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, 2005, the Company has waived the
following fees:

  Month       Asset M Fee  Loan S Fee  Total Fees   Fees Paid  Fees Waived
  -----       -----------  ----------  ----------   ---------  -----------

Jan. 2005     $14,253.00   $1,086.00   $15,339.00   $    0.00   $15,339.00
Feb. 2005     $14,839.00   $1,215.00   $16,054.00   $5,925.00   $10,129.00
Mar. 2005     $16,016.00   $1,301.00   $17,317.00   $3,051.00   $14,266.00
Apr. 2005     $17,034.00   $1,316.00   $18,350.00   $6,482.00   $11,868.00
May. 2005     $18,862.00   $1,550.00   $20,412.00   $3,834.00   $16,578.00
Jun. 2005     $19,310.00   $1,633.00   $20,943.00   $7,033.00   $13,910.00
Jul. 2005     $20,315.00   $1,719.00   $22,034.00   $4,958.00   $17,076.00
Aug. 2005     $22,068.00   $1,694.00   $23,762.00   $5,305.00   $18.457.00
Sep. 2005     $22,708.00   $1,759.00   $24,467.00   $7,471.00   $16,996.00
Oct. 2005     $23,395.00   $1,989.00   $25,384.00   $5,912.00   $19,472.00
Nov. 2005     $24,124.00   $1,996.00   $26,120.00   $9,797.00   $16,323.00
Dec. 2005     $25,849.00   $2,007.00   $27,856.00   $6,336.00   $21,520.00

                                       21
<PAGE>


      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 3% to 4% 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

                                       22
<PAGE>

            (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.

      The Company currently has three (3) investments with affiliated entities,
in the amounts of $224,390.00, $177,000.00, and $500,000.00, constituting 8.04%
of the total of Company assets as of December 31, 2005. These three investments
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. All three
investments are current as to principal and interest as of December 31, 2005,
and as of the date of this filing.

      Of these investments, one investment ($224,390.00) is an undivided
interest in a promissory note, the proceeds or which are distributed among five
different limited liability companies of which James S. Koenig, Gary Armitage,
and Jeffery Guidi (all of whom are shareholders and directors of the Manager),
directly or indirectly, are members. The promissory note is secured by mortgages
on five different assisted living facilities located in North Carolina, South
Carolina and Virginia, has a term of 36 months, and pays an interest rate of 12%
per annum. The second investment ($177.00.00) is a loan to an affiliated entity,
Koco, LLC (in which Armitage and Guidi are each 50% general partners in a
partnership that has a 50% interest in an entity that has a 75% interest in
Koco, and in which Koenig is a limited partner with a 99% limited partnership
interest in an entity which has a 50% interest in an entity that has a 75%
interest in Koco), the proceeds of which were used for the purchase of real
property, which is secured by a second deed of trust on real property owned by
the borrower, which has a term of 12 months, and which pays an interest rate of
10.9%. The third investment ($500,000.00) is an undivided interest in a
promissory note made by an entity of which James S. Koenig, Gary Armitage, and
Jeffery Guidi (all of whom are shareholders and directors of the Manager),
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 has a
term of 36 moths, and pays interest to the Company at a rate of 10%.

      D. OTHER OPPORTUNITIES; OTHER FUNDS. As a licensed real estate broker, the
Manager may arrange and originate loans for companies other than ours, 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.

                                       23
<PAGE>


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 filed with the California Department of Corporations and the
California Department of Real Estate.

      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 (the "Act"). Although the Company's activities
could make it an "investment company" as that term is defined under Sections
3(a)(1)(A) and 3(a)(1)(C) of the Act, the Company is excluded from the
definition of "investment company" by Section 3(c)(5)(C) of the Act. That
section provides an exemption for companies that are primarily engaged in
purchasing or otherwise acquiring mortgages and other liens and interests in
real estate. 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 443 Redcliff
Drive, Suite 240, Redding, California, 96002, 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 1,800 square feet
of office space, leased for $1,157.00 per month. The lease expires on April 2,
2008. The Company believes that its existing facilities are adequate for its
current use.


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., which is a California corporation. The following
table sets forth certain information with respect to the executive officers and
directors of the Manager:

                                       24
<PAGE>

Name                      Age               Position
-----------------------------------------------------------------------------
William F. Webster        46                President, Secretary and Director
Placido Canta             52                Chief Financial Officer
Richard Nelson            65                Vice President
James S. Koenig           52                Director
Gary Armitage             55                Director
Jeffery Guidi             49                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.

      WILLIAM F. WEBSTER. William Webster is the President and Secretary, and a
director and shareholder, of the Manager. Prior to joining Lakeside, Mr. Webster
was an attorney in solo practice in Sacramento, California, where he represented
privately held businesses and publicly held corporations in the areas of
securities and corporate finance, mergers and acquisitions, and entity formation
and reorganization. Mr. Webster has represented AREI (described below) and
related entities for the past six years, serving as general corporate counsel
and securities counsel, and representing AREI in all of its various real estate
financing activities. Prior to becoming a solo practitioner in 1996, Mr. Webster
worked as an associate at the Sacramento law firm of Weintraub Genshlea Chediak
& Sproul.

      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.

      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.

      JAMES S. KOENIG. James S. Koenig is a director and shareholder of the
Manager. Mr. Koenig is also the sole shareholder and director of Asset Real
Estate & Investment Company ("AREI"). AREI is in the business of owning and
developing real property, and arranging for financing for real property
ownership and development. In the above capacities, Mr. Koenig directs and
oversees the operations of AREI, which include the raising of capital for real
estate ownership and development through private offerings of debt and equity
securities. Prior to his involvement with AREI, Jim served as president of AMC,
a division of Discovery Mortgage Company, a mortgage banking company, and as
president of Ashland Mortgage Company, another wholesale mortgage banking
company. Mr. Koenig's experience prior to this has been in mortgage lending and
mortgage-backed securities with companies such as Danville Financial Group,
Echelon Mortgage Acceptance Company, and Commonwealth Mortgage Corporation.

                                       25
<PAGE>

      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 a 4% commission for the sale of Units,
plus a 0.5% annual trailer based on amounts remaining invested with the Company.
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. Mr. 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 a 4% commission for the sale of Units, plus a 0.5% annual
trailer based on amounts remaining invested with the Company. 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.


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 three highest paid persons who are officers or
directors of the Manager for the past fiscal year which ended on December 31,
2005.

Name of                    Capacities in which                      Aggregate
Individual or Group        Remuneration was received                Remuneration
--------------------------------------------------------------------------------

William F. Webster(1)               Officer and Director            $219,942.00
Placido Canta(2)                    Officer                         $126,050.00

      1. In addition to the above amount, Mr. Webster was also entitled to
receive: (i) a bonus in the amount of 5.0% of the net income of the Manager, but
received nothing because the Manager had a net loss for the year ended December
31, 2005; and (ii) shares of common stock in the Manager equal to 2% of the
outstanding shares of the Manager, pursuant to which Mr. Webster was issued
4,378 shares of common stock in early 2005.

      2. 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, but received
nothing because the Manager had a net loss for the year ended December 31, 2005.

                                       26
<PAGE>

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
persons 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, 2005 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          48.0%
8538 Upland Court
Redding, CA 96001

Gary Armitage                     Common Stock         51,470          24.0%
4030 Old Barn Road
Healdsburg, CA

Jeffery Guidi                     Common Stock         51,470          24.0%
264 Boas Drive
Santa Rosa, CA

William F. Webster                Common Stock          8,580           4.0%
1905 Juarez Lane
Redding, CA 96003

All Officers and Directors        Common Stock        214,460         100.0%
As a Group(4 persons)

      (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 OTHERS IN CERTAIN 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:

                                       27
<PAGE>

      (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 a for 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 three (3) investments with affiliated entities,
in the amounts of $224,390.00, $177,000.00, and $500,000.00, constituting 8.04%
of the total of Company assets as of December 31, 2005. These three investments
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. All three
investments are current as to principal and interest as of December 31, 2005,
and as of the date of this filing.

      Of these investments, one investment ($224,390.00) is an undivided
interest in a promissory note, the proceeds or which are distributed among five
different limited liability companies of which James S. Koenig, Gary Armitage,
and Jeffery Guidi (all of whom are shareholders and directors of the Manager),
directly or indirectly, are members. The promissory note is secured by mortgages
on five different assisted living facilities located in North Carolina, South
Carolina and Virginia, has a term of 36 months, and pays an interest rate of 12%
per annum. The second investment ($177.00.00) is a loan to an affiliated entity,
Koco, LLC (in which Armitage and Guidi are each 50% general partners in a
partnership that has a 50% interest in an entity that has a 75% interest in
Koco, and in which Koenig is a limited partner with a 99% limited partnership
interest in an entity which has a 50% interest in an entity that has a 75%
interest in Koco), the proceeds of which were used for the purchase of real
property, which is secured by a second deed of trust on real property owned by
the borrower, which has a term of 12 months, and which pays an interest rate of
10.9%. The third investment ($500,000.00) is an undivided interest in a
promissory note made by an entity of which James S. Koenig, Gary Armitage, and
Jeffery Guidi (all of whom are shareholders and directors of the Manager),
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 has a
term of 36 moths, and pays interest to the Company at a rate of 10%.




                                       28
<PAGE>

                                     PART II


ITEM 1. MARKET PRICE OF 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 286 Members as of December 31, 2005.

      (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

      The Company's principal accountant is Nicholson & Olson, LLP of Roseville,
California. There have been no disagreements between the Company's management
and the Company's 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.



                                       29
<PAGE>

                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM


To the Manager and
Members of Lakeside Mortgage Fund, LLC


We have audited the accompanying balance sheets of Lakeside Mortgage Fund, LLC
(a California limited liability company) as of December 31, 2005 and 2004 and
the related statements of operations, members' equity and cash flows for the
years ended December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lakeside Mortgage Fund, LLC (a
California limited liability company) as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for the years ended December 31,
2005 and 2004, in conformity with U.S. generally accepted accounting principles.


Nicholson & Olson
Roseville, California
March 1, 2006

<PAGE>

[LOGO] LAKESIDE FINANCIAL GROUP, INC.
443 REDCLIFF DRIVE,
SUITE 100
REDDING, CA 96002
PH. (530) 226--5850
FAX (530) 226--5853



                              FINANCIAL STATEMENTS



                           LAKESIDE MORTGAGE FUND, LLC



                            DECEMBER 31, 2005 & 2004



<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                                 BALANCE SHEETS
                                  DECEMBER 31,

<TABLE>
<CAPTION>
                                                                                       2005             2004

                               ASSETS

<S>                                                                              <C>                  <C>
        Cash and cash items (Note 5)                                              $ 1,338,972      $   514,164
        Loan interest reserve (restricted)                                            283,240          235,621
        Accrued interest receivable                                                    19,069           14,180
        Notes receivable - related parties (Notes 3 and 4)                            901,390          982,000
        Notes receivable - non related parties, net of allowance for bad
           debts: $59,000 and $7,100 in 2005 and 2004, respectively (Note 3)        8,671,424        4,027,389
                                                                                  -----------      -----------

TOTAL ASSETS                                                                      $11,214,095      $ 5,773,354
                                                                                  ===========      ===========


                   LIABILITIES AND MEMBERS' EQUITY


        Accounts payable & other current liabilities                              $    30,953      $    15,522
        Uninvested subscriptions                                                      740,944          234,741
        Deferred interest on notes receivable                                         283,240          235,621
                                                                                  -----------      -----------

Total liabilities                                                                   1,055,137          485,884
                                                                                  -----------      -----------

Members' equity (Note 4)
        Members' contributions, net                                                10,102,409        5,267,710
        Retained earnings                                                              56,549           19,760
                                                                                  -----------      -----------

        Total Members' equity                                                      10,158,958        5,287,470
                                                                                  -----------      -----------

TOTAL LIABILITIES AND MEMBERS' EQUITY                                             $11,214,095      $ 5,773,354
                                                                                  ===========      ===========
</TABLE>


SEE ACCOMPANYING NOTES

<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                            Statements of Operations
                       For the Periods Ended December 31,

                                                    2005          2004

Revenues
      Interest Income                             $849,149      $270,925
                                                  --------      --------

      Total revenues                               849,149       270,925
                                                  --------      --------


EXPENSES
      Management fees (Note 4)                      66,123        22,139
      Provision for loan losses                     52,600         7,100
      Professional fees - accounting & taxes        26,933        18,171
      Trailer commissions                           19,337         5,598
      Advertising                                    3,250           750
      Legal fees                                     3,872           700
      Printing                                       3,759            --
      Conferences & seminars                         2,500            --
      Permits, fees & licenses                       5,498            --
      Taxes                                          3,200            --
      Other operating expenses                       7,925           495
                                                  --------      --------

      Total expenses                               194,997        54,953
                                                  --------      --------

NET INCOME                                        $654,152      $215,972
                                                  ========      ========


SEE ACCOMPANYING NOTES

<PAGE>


                           LAKESIDE MORTGAGE FUND, LLC
                    (A California Limited Liability Company)

                          STATEMENTS OF MEMBERS' EQUITY

                For the Periods Ended December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                       Members'          Retained
                                                                    CONTRIBUTIONS         EARNINGS             TOTAL

<S>                                                                         <C>                  <C>                <C>
MEMBERS' EQUITY, SEPTEMBER 26, 2003 (INCEPTION DATE)                   $        -              $    -          $        -
       Contributions                                                        941,035                                 941,035
       Costs incurred in raising capital                                   (107,936)                               (107,936)
       Reinvestment of members' share of net income                           2,981                                   2,981
       Net income                                                                                10,264              10,264
       Cash distribution                                                                         (4,906)             (4,906)
                                                                  ----------------------------------------------------------

MEMBERS' EQUITY, DECEMBER 31, 2003                                          836,080               5,358             841,438

       Contributions                                                      4,521,367                               4,521,367
       Costs incurred in raising capital                                   (234,093)                               (234,093)
       Reinvestment of members' share of net income                         144,356                                 144,356
       Net income                                                                               215,973             215,973
       Cash distribution                                                                       (201,571)           (201,571)
                                                                  ----------------------------------------------------------


MEMBERS' EQUITY, DECEMBER 31, 2004                                        5,267,710              19,760           5,287,470

       Contributions                                                      5,075,826                               5,075,826
       Costs incurred in raising capital                                   (190,139)                               (190,139)
       Reinvestment of members' share of net income                         438,532                                 438,532
       Investors' withdrawals                                              (489,520)                               (489,520)
       Net income                                                                               654,152             654,152
       Cash distribution                                                                       (617,363)           (617,363)
                                                                  ----------------------------------------------------------


MEMBERS' EQUITY, DECEMBER 31, 2005                                     $ 10,102,409            $ 56,549        $ 10,158,958
                                                                  ==========================================================
</TABLE>


SEE ACCOMPANYING NOTES

<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                            STATEMENTS OF CASH FLOWS
                       FOR THE PERIODS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                2005               2004


CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                        <C>               <C>
      Net income from operations                           $   654,152       $   215,973
      Provision for bad debts                                   51,900             7,100
      Loan interest reserves (restricted)                      (47,618)         (228,718)
      Loan interest reserve & other assets                      (4,889)          (12,342)
      Accounts payable and other liabilities                    15,430            14,923
      Deferred interest on notes receivable                     47,618           228,718
                                                           -----------       -----------

      Sub total                                                716,593           225,654
                                                           -----------       -----------


CASH FLOWS FROM INVESTING ACTIVITIES:

      Investment in related party notes receivable              80,610          (807,000)
      Notes receivable secured by real estate               (4,695,935)       (3,654,489)
                                                           -----------       -----------

      Sub total                                             (4,615,325)       (4,461,489)
                                                           -----------       -----------


CASH FLOWS FROM FINANCING ACTIVITIES:

      Investors' subscriptions                                 506,204            63,386
      Members' contributions & re investments                5,534,358         4,665,723
      Costs incurred in raising capital & commissions         (190,139)         (259,093)
      Investors' withdrawals                                  (509,520)               --
      Cash distributions to members                           (617,363)         (201,571)
                                                           -----------       -----------

      Sub total                                              4,723,540         4,268,445
                                                           -----------       -----------


NET CHANGE IN CASH DURING THE PERIOD                           824,808            32,610

CASH IN BANK, BEGINNING OF PERIOD                              514,164           481,554
                                                           -----------       -----------


CASH IN BANK, END OF PERIOD                                $ 1,338,972       $   514,164
                                                           ===========       ===========
</TABLE>


SEE ACCOMPANYING NOTES

<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005



1

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Lakeside Mortgage Fund, LLC (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.

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.

The Fund began operations on September 26, 2003. Fiscal year 2003 was the first
year during which the Fund is considered an operating company. Prior to
September 26, 2003, the Company had been in the development stage. The fiscal
year of the Fund ends on December 31.

The Fund's operation 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. ("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 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.

                                       1
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

Cash available for distribution will be the equivalent of net income during the
calendar month using the accrual method of accounting and in accordance with US
generally accepted accounting principles. Monthly, the Fund will provide
statements of account to Members and distribute or reinvest amounts equal to the
Members' proportionate share of the Fund's accrued net income during such month.
Accrued net income means the excess of accrued income from operations and
investment of, or sale or refinancing or other disposition of, Fund assets
during such calendar month over the accrued operating expenses of the Fund
during such month, including any adjustments for bad debt reserves, accrued
Fund's operating expenses or other reserves for expenses and losses as the
Manager may deem appropriate or for which the Manager believes it to be in the
best interests of the Fund, all determined in accordance with generally accepted
accounting principles. The Manager is required to allocate funds only to the
extent that funds are available. Cash available for distributions in an amount
equal to their respective allocable shares of Fund net profits during such
month, and the balance of Fund net income will be credited to the capital
accounts of Members who elected to compound earnings.

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.

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 Note 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.

                                       2
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

The Manager receives other fees from third parties 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 3% to 5% of the loan amount, and generally
consist of brokerage, origination, renewal and/or processing fees.

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 accordingly reflect all
      significant receivables, payables and other liabilities.

(B)   ESTIMATES AND ASSUMPTIONS The preparation of financial statements in
      conformity with accounting principles generally accepted in the United
      States of America requires management to make estimates and assumptions
      that affect the reported amounts of assets and liabilities and disclosure
      of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.

(C)   REVENUE RECOGNITION Interest is recognized as revenue when earned
      according to the contractual terms of the loan and in accordance with
      generally accepted accounting principles.

(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.

                                       3
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

(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; all loans have been originated by the Fund. Interest is
      recognized as revenue when earned according to the contractual terms of
      the loan. The Fund loans will have varying terms at the discretion of the
      Manager. Construction loans will generally have a term of between one and
      five 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. In such cases, the Fund will
      recognize income using the effective interest method of accounting in
      accordance with generally accepted accounting principles. The Fund will
      not recognize interest income on loans once they are determined to be
      impaired until the interest is collected in cash. 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 or when the payment of principal or interest is 90 days
      past due, and a specific reserve is recorded. 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.

      As of December 31, 2005, one (1) loan amounting to $ 206,000 was past due
      (matured on December 22, 2005) and remained unpaid at the end of the year.
      The delinquency was however subsequently cured and the note is now on
      current status.

(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 allowance. 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. 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.

                                       4
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

      As of December 31, 2005 and 2004, the balance of the reserve for loan
      losses amounted to $ 59,000.00 and $ 7,100.00, respectively.

(H)   INTEREST RESERVE ACCOUNT 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
      loan/s 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
      a Deferred Interest Reserve Account in the liabilities section of the
      balance sheet. As of December 31, 2005 and 2004, the interest reserve and
      deferred interest reserve accounts carried balance amounting to $
      283,240.00 and $ 235,621.00, respectively.

(I)   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 range
      between 3.5% - 4.5%, depending on the commission plan selected by
      individual brokers. The brokers are also entitled to receive "trailer
      commissions" equivalent to 1/2 of 1% of the average daily invested capital
      at the anniversary of the invested funds. The initial marketing/broker's
      fees are capitalized in accordance with 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 Statement of Operations, when
      incurred. The Fund has capitalized $ 190,139 and $ 234,093 of syndication
      costs and brokers' fees during 2005 and 2004, respectively.

(J)   ORGANIZATION COSTS All costs including registration and legal fees
      incurred in connection with the setting up and incorporating of the Fund
      have been expensed and have been borne by the Manager.

                                       5
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

(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 for a loan
      or other purpose. 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, 2005 and 2004, the uninvested funds in the Subscription
      Account amounted to $ 740,944.00 and $ 234,741.00, respectively.

(L)   NEW ACCOUNTING PRONOUNCEMENTS

      SFAS 149

      In April 2003, the FASB issued Statement No. 149, "amendment of Statement
      133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
      SFAS No. 133 to provide clarification on the financial accounting and
      reporting of derivative instruments and hedging activities and requires
      that contracts with similar characteristics be accounted for on a
      comparable basis. The standard is effective for contracts entered into or
      modified after June 30, 2003. The adoption of SFAS No. 149 did not have
      any impact on our financial position or results of operations.

      SFAS 150

      In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
      Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
      specifies that instruments within its scope embody obligations of the
      issuer and that, therefore, the issuer must classify them as liabilities.
      SFAS 150 did not have a material impact on our financial position or
      results of operations.

      Interpretation No. 46

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
      Variable Interest Entities" ("Interpretation 46") which was then revised
      in December 2003. Interpretation 46 clarifies the application of
      Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
      to certain entities in which equity investors do not have the
      characteristics of a controlling financial interest or do not have
      sufficient equity at risk for the entity to finance its activities without
      additional subordinated financial support from other parties. The
      recognition and measurement provisions of Interpretation 46 are effective
      for newly created variable interest entities formed after January 31,
      2003, and for existing variable interest entities, on the first interim or
      annual reporting period beginning after March 31, 2004. The adoption of
      FIN 46 did not impact our financial position or results of operations.

                                       6
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

      SOP 03-3

      In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
      Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with
      the evidence of deterioration of credit quality since origination acquired
      by completion of a transfer for which it is probable at acquisition, that
      the Partnership will be unable to collect all contractually required
      payments receivable. SOP 03-3 is effective for loans acquired in fiscal
      years beginning after December 31, 2004. We do not expect SOP 03-3 to have
      a material impact on our financial position or results of operations.

      EITF 00-21

      Emerging Issue Task Force 00-21 ("EITF 00-21"), Accounting for Revenue
      Arrangements with Multiple Deliverables, issued during the fourth quarter
      of 2003, provides guidance on revenue recognition for revenues derived
      from a single contract that contains multiple products or services. EITF
      00-21 also provides additional requirements to determine when these
      revenues may be recorded separately for accounting purposes. EITF 00-21
      did not impact our financial statements.

      SAB 104

      In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB
      104"), Revenue Recognition, which supercedes SAB 101, Revenue Recognition
      in Financial Statements. SAB 104's primary purpose is to rescind the
      accounting guidance contained in SAB 101 related to multiple element
      revenue arrangements, superceded as a result of the issuance of EITF
      00-21. SAB 104 did not impact our financial statements.


NOTE 3 - LOANS SECURED BY TRUST DEEDS

At December 31, 2005 and 2004, the Fund held the following types of mortgages:

                                       7
<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

                                                2005                    2004

         Commercial                         $ 1,957,390            $ 2,564,185
         Construction                       $ 2,261,637            $   668,304
         Unimproved Land                    $ 5,412,787            $ 1,784,000
         Residential                        $     0                $     0
                                            ------------------------------------


         Total                              $ 9,631,814            $ 5,016,489
                                            ------------------------------------


         First Mortgages                    $ 4,930,374            $ 2,425,489
         Second Mortgages                   $ 4,701,440            $ 2,591,000
         Third Mortgages                    $         0            $     0
                                            ------------------------------------


         Total                              $ 9,631,814            $ 5,016,489
                                            ------------------------------------

     Scheduled maturities of loans secured by trust deeds as of December 31,
     2005 and the interest sensitivity of such loans are as follows:

                                            Fixed          Variable
                                            Interest       Interest
                                            Rate           Rate          Total
                                            -----------------------------------


         Year Ending December 31:
         2005                               $ 1,013,823      0     $ 1,013,823
         2006                               $ 8,147,254      0     $ 8,147,254
         2007                               $   470,737      0     $   470,737
         2008                                      0         0           0
         2009                                      0         0           0
                                            ------------------------------------



         Total                              $ 9,631,814      0     $ 9,631,814
                                            ------------------------------------

     The Fund has no variable interest rate loans at December 31, 2005.

     At December 31, 2005, 98% of the Fund's Loans Receivable was collateralized
     by properties located in California.

                                       8
<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

     As of December 31, 2005, the Fund's loan portfolio consisted of eighteen
     (18) real estate loans to unrelated parties totaling $ 8,730,424 and three
     (3) loans receivable from related parties amounting to $ 901,390. These
     debt securities are all secured by deeds of trust.

      1.    Loan 200301 amounting to $ 484,000, due in monthly installments of $
            4,396 interest only at 10.90% maturing on May 1, 2006. This loan is
            secured by a first trust deed on the underlying property.
      2.    Loan 200408 amounting to $ 206,000, due in monthly installments of $
            1,871 interest only at 10.90% maturing on December 22, 2005. This
            loan is secured by a second trust deed on the underlying property.
            This loan was past due at the end of the year. The note was
            subsequently renewed to mature on June 22, 2006.
      3.    Loan 200410 amounting to $ 890,000, due in monthly installments of $
            8,900 interest only at 12.00% maturing on March 15, 2006. This loan
            is secured by a second trust deed on the underlying property.
      4.    Loan 200409 amounting to $ 450,000, due in monthly installments of $
            4,088 interest only at 10.90% maturing on April 12, 2006. This loan
            is secured by a first trust deed on the underlying property.
      5.    Loan 200411 amounting to $ 807,823, due in monthly installments of $
            7,338 interest only at 10.90% maturing on June 6, 2006. This loan is
            secured by a first trust deed on the underlying property.
      6.    Loan 200501 amounting to $ 160,000, due in monthly installments of $
            1,453 interest only at 10.90% maturing on January 11, 2006. This
            loan is secured by a first trust deed on the underlying property.
      7.    Loan 200502 amounting to $ 470,737, due in monthly installments of $
            4,276 interest only at 10.90% maturing on January 18, 2007. This
            loan is secured by a first trust deed on the underlying property.
      8.    Loan 200503 amounting to $ 708,050, due in monthly installments of $
            6,431 interest only at 10.90% maturing on February 1, 2006. This
            loan is secured by a second trust deed on the underlying property.
      9.    Loan 200504 amounting to $ 750,000 due in monthly installments of $
            7,500 interest only at 12.00% maturing on March 8, 2006. This loan
            is secured by a second trust deed on the underlying property.
      10.   Loan 200505 amounting to $ 153,000 due in monthly installments of $
            1,390 interest only at 10.90% maturing on March 11, 2006. This loan
            is secured by a first trust deed on the underlying property.
      11.   Loan 200506 amounting to $ 126,000 due in monthly installments of $
            1,272 interest only at 10.90% maturing on March 11, 2006. This loan
            is secured by a second trust deed on the underlying property.

                                       9
<PAGE>

                          LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

      12.   Loan 200507 amounting to $ 230,000 due in monthly installments of $
            2,300 interest only at 12.00% maturing on March 25, 2006. This loan
            is secured by a second trust deed on the underlying property.
      13.   Loan 200508 amounting to $ 490,000 due in monthly installments of $
            4,900 interest only at 12.00% maturing on April 11, 2006. This loan
            is secured by a second trust deed on the underlying property.
      14.   Loan 200509 amounting to $ 380,000 due in monthly installments of
            $3,452 interest only at 10.90% maturing on May 19, 2006. This loan
            is secured by a first trust deed on the underlying property.
      15.   Loan 200510 amounting to $ 400,000 due in monthly installments of $
            4,000 interest only at 12.00% maturing on May 8, 2006. This loan is
            secured by a second trust deed on the underlying property.
      16.   Loan 200511 amounting to $ 1,071,564 due in monthly installments of
            $ 10,716 interest only at 12.00% maturing on March 15, 2006. This
            loan is secured by a first trust deed on the underlying property.
      17.   Loan 200512 amounting to $ 850,000 due in monthly installments of $
            8,500 interest only at 12.00% maturing on October 14, 2006. This
            loan is secured by a first trust deed on the underlying property.
      18.   Loan 200513 amounting to $ 103,250 due in monthly installments of $
            1,033 interest only at 12.00% maturing on December 12, 2006. This
            loan is secured by a first trust deed on the underlying property.
      19.   Loan 200405 to a related party amounting to $ 177,000, due in
            monthly installments of $ 1,608 interest only at 10.90% maturing on
            June 11, 2006. This loan is secured by a second trust deed on the
            underlying property.
      20.   Investment in 2003 Combined Note Participation amounting to $305,000
            and maturing at various dates from September 2006 through December
            2006. This amount was partially paid off by $ 80,610 on December 23,
            2005. Interest is payable monthly at 12% per annum.
      21.   Investment in participation notes issued by Mountain House Golf
            Course, LLC amounting to $ 500,000 and maturing in December 2006.
            Interest is payable monthly at an effective rate of approximately
            11.00% per annum.

     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. On December 31, 2005, the Fund had an interest in two (2)
     participating notes issued by affiliated entities. One note is a
     participation interest in five separate promissory notes. The loan is
     carried at cost. This loan anticipates earning a 12% interest rate and will
     be repaid between various dates ranging from September 21, 2006 to December
     21, 2006, at which time the amount of the loan will be returned to the
     Fund. The life of the loan may be extended up to two years pursuant to an

                                       10
<PAGE>
                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

     extension option in the notes. The loan does have an option for early
     withdrawal. A portion of the combined notes was partially paid off ($
     80,610) on December 23, 2005. The second participation note matures in
     December 2006 and bears an effective interest of approximately 11% per
     annum. Additionally, the Fund has a loan receivable from another related
     party amounting to $ 177,000 secured by a second trust deed on the
     underlying property. This loan accrues monthly interest of $ 1,608 (10.90%
     per year) and the principal amount is due in full on June 11, 2006. For the
     years ended December 31, 2005 and 2004, the Fund recognized interest income
     on notes and loan receivable to related parties amounting to $ 111,027 and
     $ 46,941, respectively.

     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,
     2005, the Fund is in compliance with this restriction.

     CONTRA EQUITY COSTS
     The Fund incurred $ 0.00 and $ 36,778 during the years ended December 31,
     2005 and 2004, respectively as additional costs in connection with the
     offering of units of membership interest in the Fund. 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). Accordingly, these costs
     are treated as reduction of Paid in Capital.

     The Fund paid commissions to securities brokers in connection with the sale
     of membership interests by the Fund. The commission rates ranged between
     3.50% and 4.50% 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, 2005 and 2004 were $ 190,139 and $ 234,093,
     respectively. These costs are recorded as "Costs incurred in raising
     capital" and included in the Balance Sheet under the heading "Members'
     contributions, net".

     The Manager received $ 66,123 and $ 22,139 during the years ended December
     31, 2005 and 2004, respectively representing management and servicing fees
     it was entitled to receive from the Fund.

                                       11
<PAGE>
                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

     BORROWER'S COSTS
     The Manager acts as loan broker in the initial placement of the Fund loans
     and performs loan servicing function 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 FASB's SFAS # 91. 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.
     .
     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,
     2005 and 2004 amounting to $ 5,075,826 and $ 4,521,367 of which it realized
     commissions totaling $ 190,139 and $ 234,093, respectively. The brokers do
     not earn a commission until funds are transferred from the Subscription
     Account to the "Invested Funds" account, at which time the funds become
     contributed capital of the Fund.

     NOTE 5 -     CONCENTRATIONS

     CASH AND CASH ITEMS
     Cash and cash items are maintained with several financial institutions.
     Deposits held with banks may exceed the amount of insurance provided on
     such deposits. At December 31, 2005, the Fund had approximately $ 1,038,972
     of cash that exceeded this limit and thus was not covered by federal
     depository insurance. These deposits may be redeemed upon demand and
     therefore bear minimal risk. The Fund has not experienced any losses in
     such accounts

     NOTES RECEIVABLE - NON RELATED PARTIES
     Six (6) loans totaling $ 3,831,564 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. These loans represent 40% of the Fund's total loan
     portfolio. The loans are all current, are adequately collateralized by the
     underlying real estate properties, and are each personally guarantied by
     the controlling person.

                                       12
<PAGE>

                           LAKESIDE MORTGAGE FUND, LLC
                    (A CALIFORNIA LIMITED LIABILITY COMPANY)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

     NOTE 6 - 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 man 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 renewed on March 2, 2005

     As of December 31, 2005, the Fund was in compliance with all applicable
     federal and state securities laws.

                                       13
<PAGE>

                                    PART III


ITEM 1.  INDEX TO EXHIBITS

Exhibit No.  Description

2.1.*       Articles of Organization
3.1.*       Operating Agreement of Lakeside Mortgage Fund, LLC
3.2.**      Amendment No. 1 to Operating Agreement
6.1.*       Broker/Dealer Agreement
6.2.*       Amendment No. 1 to Broker Dealer Agreement
12.1.*      Offering Circular dated March 1, 2004
31.1.       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."






                                       31
<PAGE>

                                   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 Company

                                      By:  Lakeside Financial Group, Inc.,
                                           Manager



Date:  March 29, 2006                      By:   /S/ William F. Webster
                                                 ----------------------
                                                   William F. Webster, President


                                       32