**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)


x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                EXCHANGE ACT OF 1934**




**For
      the Quarterly Period Ended September 30, 2008**





**OR**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                EXCHANGE ACT OF 1934**




**For
      the transition period from ______________ to
      ______________**





**Commission
      File Number:  000-50893**





**Lakeside
      Mortgage Fund, LLC**


(Exact
      name of registrant as specified in its charter)





**California**
            
            **52-2387294**(State or other jurisdiction of incorporation
            
            (I.R.S. Employeror organization)
            
            Identification No.)





**1738 Yuba Street, Redding, CA**
            **96001**(Address of principal executive offices)
            (Zip Code)





**(530)
                226-5850**


(Registrant’s
      telephone number, including area code)





**NOT
                APPLICABLE**


(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes
            x
            
            No
             ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      Accelerated Filer  ̈ Accelerated
      Filer  ̈ Non-Accelerated
      Filer  ̈


Smaller
      reporting company 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













**LAKESIDE
      MORTGAGE FUND, LLC**


**(A
      California Limited Liability Company)**


**Index**





**PAGE NO.****PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                StatementsBalance
                Sheets as of September 30, 2008 (unaudited) and
              December
                31, 2007
            3Statements
                of Operation for the three and nine months ended
              September
                30, 2008 and 2007 (unaudited)
            4Statement
                of Member’s Equity for the nine months ended
              September
                30, 2008 (unaudited)
            5Statements
                of Cash Flows for the nine months ended
              September
                30, 2008 and 2007 (unaudited)
            6Notes
                to Consolidated Financial Statements (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            18Item
                4T.
            Controls
                and Procedures
            24**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3.
            Defaults
                Upon Senior Securities
            26Item
                6.
            Exhibits
            26SIGNATURE
            
            27


-2-


**Part
      1**   **FINANCIAL
      INFORMATION**





**Item
      1**   **FINANCIAL
      STATEMENTS**





**LAKESIDE
      MORTGAGE FUND, LLC**


**(A
      California Limited Liability Company)**


**BALANCE
      SHEETS**


**SEPTEMBER
      30, 2008 (unaudited) AND DECEMBER 31, 2007**





**September 30,**
              **2008**
            
            **December 31,**
              **2007****ASSETS**Cash
                and cash equivalents
            
            $
            358,472
            
            $
            224,016Cash
                restricted for loan interest reserve
            
            
            19,017
            
            
            176,805Interest
                receivable
            
            
            122,331
            
            
            117,690Accounts
                receivable - related parties
            
            
            105,874
            
            
            36,043Notes
                receivable - related parties, net of allowance for loan losses: $363,330
                and $0
            
            
            1,747,670
            
            
            2,136,218Notes
                receivable - non related parties, net of allowance forloan
                losses: $614,122 and $187,512
            
            
            10,756,066
            
            
            16,463,118Real
                estate owned (REO) property, net of allowance for losses: $517,471
                and
                $100,000
            
            
            8,206,945
            
            
            4,228,871**TOTAL
                ASSETS**
            
            **$**
            **21,316,375**
            
            **$**
            **23,382,761****LIABILITIES
                AND MEMBERS' EQUITY**Accounts
                payable and other current liabilities
            
            $
            361,839
            
            $
            37,676Accounts
                payable – related parties
            
            
            78,712
            
            
            -0-Deferred
                interest on notes receivable
            
            
            19,017
            
            
            292,442Notes
                payable
            
            
            1,925,000
            
            
            1,675,000Total
                liabilities
            
            
            2,384,568
            
            
            2,005,118Un-invested
                subscriptions
            
            
            24,688
            
            
            38,360Members'
                equity:Members'
                contributions, net
            
            
            20,987,229
            
            
            21,434,879Distributions
                in excess of earnings
            
            
            (2,080,110
            )
            
            (95,596
            )Total
                members' equity
            
            
            18,907,119
            
            
            21,339,283**TOTAL
                LIABILITIES AND MEMBERS' EQUITY**
            
            **$**
            **21,316,375**
            
            **$**
            **23,382,761**





The
      accompanying notes are an integral part of these financial statements


-3-





**LAKESIDE
      MORTGAGE FUND, LLC**


**(A
      California Limited Liability Company)**


**STATEMENTS
      OF OPERATION**


**FOR
      THE THREE & NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
      (unaudited)**





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenues**Interest
                income
            
            $
            139,270
            
            $
            476,142
            
            $
            796,240
            
            $
            1,429,193Total
                revenues
            
            
            139,270
            
            
            476,142
            
            
            796,240
            
            
            1,429,193**Expenses**Professional
                fees
            
            
            19,971
            
            
            16,200
            
            
            136,122
            
            
            51,850Management
                fees
            
            
            120,483
            
            
            1,674
            
            
            120,483
            
            
            32,209Provision
                for loan and REO losses
            
            
            473,462
            
            
            65,489
            
            
            1,564,429
            
            
            151,489Interest
                expense
            
            
            55,749
            
            
            -0-
            
            
            159,915
            
            
            -0-Other
                expenses
            
            
            3,345
            
            
            48,009
            
            
            167,746
            
            
            131,202Total
                expenses
            
            
            673,010
            
            
            131,372
            
            
            2,148,695
            
            
            366,750**Net
                income/(loss)**
            
            **$**
            **(533,740**
            **)**
            **$**
            **344,770**
            
            **$**
            **(1,352,455**
            **)**
            **$**
            **1,062,443**





The
      accompanying notes are an integral part of these financial
      statements


-4-





**LAKESIDE
      MORTGAGE FUND, LLC**


**(A
      California Limited Liability Company)**


**STATEMENT
      OF MEMBERS’ EQUITY**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (unaudited)**





**Members'**
            
            **Distributions in****Contributions**
            
            **excess of earnings**
            
            **TOTAL****Balance,
                January 1, 2008**
            
            **$**
            **21,434,879**
            
            **$**
            **(95,596**
            **)**
            **$**
            **21,339,283**Contributions
            
            
            322,365
            
            
            -0-
            
            
            322,365Costs
                incurred in raising capital
            
            
            (4,710
            )
            
            
            
            
            (4,710
            )Reinvestment
                of members' share of net income
            
            
            260,998
            
            
            
            
            
            260,998Members’
                withdrawal
            
            
            (1,026,303
            )
            
            
            
            
            (1,026,303
            )Net
                loss
            
            
            
            
            
            (1,352,455
            )
            
            (1,352,455
            )Distributions
            
            
            
            
            
            (632,059
            )
            
            (632,059
            )**Balance,
                September 30, 2008**
            
            **$**
            **20,987,229**
            
            **$**
            **(2,080,110**
            **)**
            **$**
            **18,907,119**





The
      accompanying notes are an integral part of these financial
      statements


-5-





**LAKESIDE
      MORTGAGE FUND, LLC**


**(A
      California Limited Liability Company)**


**STATEMENTS
      OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
      (unaudited)**





**2008**
            
            **2007****Cash
                Flows from Operating Activities:**Net
                income /(loss)
            
            $
            (1,352,455
            )
            $
            1,062,443Provision
                for loan losses & REO
            
            
            1,564,429
            
            
            187,389Change
                in:Interest
                receivable
            
            
            (196,448
            )
            
            (98,723
            )Accounts
                receivable-related parties
            
            
            (69,831
            )
            
            -Cash
                restricted for loan interest reserves
            
            
            157,788
            
            
            3,834Accounts
                payable and other liabilities
            
            
            324,163
            
            
            (8,452
            )Accounts
                payable-related parties
            
            
            78,712Deferred
                interest on notes
            
            
            (273,425
            )
            
            (3,834
            )Net
                cash provided by operating activities
            
            
            232,933
            
            
            1,142,657**Cash
                Flows from Investing Activities:**Non
                related party notes receivable secured by real estate and real estate
                owned properties:Funding
            
            
            (629,963
            )
            
            (7,354,685
            )Payoff
            
            
            1,561,289
            
            
            3,871,944Related
                party notes receivable secured by real estate:Funding
            
            
            (199,172
            )
            
            (1,200,000
            )Payoff
            
            
            224,390
            
            
            -Net
                cash provided by (used in) investing activities
            
            
            956,544
            
            
            (4,805,623
            )**Cash
                Flows from Financing Activities:**Members'
                contributions, subscriptions and re investments
            
            
            608,051
            
            
            3,502,841Members'
                withdrawals
            
            
            (1,026,303
            )
            
            (1,224,324
            )Costs
                incurred in raising capital and commissions
            
            
            (4,710
            )
            
            (263,268
            )Distributions
                to members
            
            
            (632,059
            )
            
            (1,144,447
            )Net
                cash provided by (used in) financing activities
            
            
            (1,055,021
            )
            
            870,802**Net
                increase (decrease) in cash during the period**
            
            
            **134,456**
            
            
            **(2,792,164**
            **)****Cash
                in bank, beginning of period**
            
            
            **224,016**
            
            
            **3,693,595****Cash
                in bank, end of period**
            
            $
            358,472
            
            **$**
            **901,431**Non
                cash investing and financing transactions:Conversion
                of notes receivable to real estate owned
            
            $
            4,379,240
            
            
            -Assumption
                of note payable on real estate owned
            
            $
            800,000
            
            
            -Write-off
                of note payable related to REO disposition
            
            $
            550,000





The
      accompanying notes are an integral part of these financial
      statements.


-6-


**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
      accompanying unaudited financial statements of the Fund have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America ("U.S. GAAP") for interim financial information and pursuant to the
      instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
      and
      Exchange Commission ("SEC"). Accordingly, these statements do not include all
      of
      the information and footnotes required by U.S. GAAP for complete financial
      statements. In the opinion of the Fund’s Manager, these unaudited condensed
      financial statements reflect all adjustments (consisting of normal recurring
      adjustments) necessary to present fairly the financial position of the Fund
      at
      September 30, 2008, the results of operations for the three and nine months
      ended September 30, 2008 and 2007 and cash flows for the nine months ended
      September 30, 2008 and 2007. Results of operations for the three and nine months
      ended September 30, 2008 are not necessarily indicative of results of operations
      expected for the full fiscal year ending December 31, 2008. Please refer to
      the
      Fund’s 2007 Annual Report on Form 10-KSB for the complete financial statements
      for the period ended December 31, 2007.





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





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





**Profits
      and losses**


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





**Distributions**


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





**Withdrawals**


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


7





As
      of
      September 30, 2008 the Fund has received requests for withdrawal from members
      representing $9,595,728 of membership interest which have not yet been paid,
      due
      to the limitations of the membership agreement that does not allow for total
      annual fund withdrawals of more than 10% of the total capital account at the
      beginning of the year, $2,244,000.





**Related
      parties**


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





The
      Manager receives other fees from third parties as compensation to the Manager
      for acting as the 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.





The
      Fund
      treats the affiliated companies of the Manager as related parties due to the
      significant influence of the Manager and its Board with respect to the
      management and operations of the Fund.





**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 in accordance with US GAAP.





**(b)**
            **Management
                Estimates**


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





**(c)**
            **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.
      Periodically, the Fund’s cash balances exceed federally insured limits.





**(d)**
            **Loans
                Secured by Trust Deeds**


Loans
      secured by trust deeds are recorded at cost. The Fund loans have varying terms
      at the discretion of the Manager. Construction loans 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. The Fund does not recognize interest
      income on loans once they are determined to be impaired until the interest
      is
      collected in cash after principal is collected. A loan is impaired when, based
      on current information and events, it is probable that the Fund will be unable
      to collect all amounts due according to the contractual terms of the loan
      agreement. Cash receipts are allocated to interest income, except when such
      payments are specifically designated as principal reduction or when management
      does not believe the Fund’s investment in the loan is fully recoverable.
      Impairment is measured on a loan by loan basis by either the present value
      of
      expected future cash flows discounted at the loan’s effective interest rate, the
      loan’s obtainable market price or the fair value of the underlying
      collateral.


8





**(e)**
            **Allowance
                for Loan Losses**


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





The
      following shows the activity in the allowance for loan losses during the nine
      month period ended September 30, 2008:





*Non-
                Related Party Notes Receivable*Balance,
                December 31, 2007
            
            $
            187,512Additions
            
            
            426,610Write
                offs
            
            
            -Balance,
                September 30, 2008
            
            $
            614,122*Related
                Party Notes Receivable (Note 4)*Balance,
                December 31, 2007
            
            $
            -Additions
            
            
            363,330Write
                offs
            
            
            -Balance,
                September 30, 2008
            
            $
            363,330





**(f)**
            **Real
                Estate Held for Sale (REO)**


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





The
      allowance for losses on REO is reviewed quarterly. As part of the review all
      REO
      property is evaluated for recoverability based on data available in the local
      real estate markets where the REO is located. Data on the national and local
      economies is also considered along with any recent property appraisals.





The
      following summarizes the activity in the allowance for losses on REO during
      the
      nine months ended September 30, 2008:




Balance,
                December 31, 2007
            
            $
            100,000Additions
            
            
            763,463Write
                offs
            
            
            (345,992
            )Balance,
                September 30, 2008
            
            $
            517,471





**(g)**
            **Cash
                Restricted for Loan Interest Reserve**


The
      Fund
      often requires borrowers to set up interest reserve accounts from which monthly
      payments of interest are made. The interest reserve is deposited into a separate
      bank account in the name of the Fund, designated specifically as interest
      reserve on loans issued by the Fund. At the end of the month, the Fund draws
      the
      calculated monthly interest on outstanding loans from the interest reserve
      account and transfers such amount into the general operating account of the
      Fund
      as part of the distributable fund available for monthly disbursement to the
      members. The equivalent unearned amount is recorded as deferred interest in
      the
      liabilities section of the balance sheet.




9





**(h)**
            **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
                members’ contributions. Initial marketing fees and broker’s commissions
                paid to an outside brokerage firm are treated as contra-equity accounts.
                The fees paid by the Fund are currently up to 6.5%. The brokers are
                also
                entitled to receive “trailer commissions” equivalent to 1.0% of the
                average daily invested capital at the 1 year anniversary of the invested
                funds. Subsequent payments of trailer commissions however are treated
                as
                period costs and charged to current earnings of the Fund.





**(i)**
            **Subscription
                Account**


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





**(j)**
            **Revenue
                Recognition**


Interest
      is recognized as revenue when earned according to the contractual terms of
      the
      loan and when collection is reasonably expected.





**(k)**
            **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 and an annual California LLC fee based upon its annual gross
      receipts.





**(l)**
            **Fair
                Value of Financial
                Instruments**


Effective
      January 1, 2008, the Fund adopted the provisions of Statement of Financial
      Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, for its
      financial assets and liabilities. The adoption of this portion of SFAS No.
      157
      did not have any effect on the financial position or results of operations
      and,
      as a disclosure standard, the adoption of the provisions of SFAS No. 157 will
      not have an effect on our financial position or results of
      operations.





Various
      inputs are used in determining the fair value of the financial assets and
      liabilities and are summarized into three broad categories:


·
            Level
                1 - Valuation is based upon quoted prices for identical instruments
                traded
                in active markets.


·
            Level
                2 – Valuation is based upon quoted prices for similar instruments in
                active markets, quoted prices for identical or similar instruments
                in
                markets that are not active, and model-based valuation techniques
                for
                which all significant assumptions are observable in the market.


·
            Level
                3 – Valuation is generated from model-based techniques that use
                significant assumptions not observable in the market. These unobservable
                assumptions reflect estimates of assumptions that market participants
                would use in pricing the asset or liability. Valuation techniques
                include
                use of option pricing models, discounted cash flow models and similar
                techniques.





The
      inputs or methodology used for valuing notes receivable and REOs are not
      necessarily an indication of the risk associated with investing in those notes
      receivable.


10




Following
      are the disclosures related to our assets and liabilities pursuant to SFAS
      No.
      157 (in thousands):





September 30, 2008Fair Value
            
            Input LevelNotes
                and Accounts Receivable-related party
            
            $
            1,748
            
            
            Level
                2Notes
                receivable
            
            $
            10,756
            
            
            Level
                2Real
                estate owned
            
            $
            8,207
            
            
            Level
                2





Valuation
      of notes receivable


Notes
      receivable are held at the lower of cost or fair value. Potential impairments
      are measured based on projected cash flows. The fair value of certain notes
      receivable are estimated based on the fair value of the underlying collateral
      using level two inputs.





Valuation
      of Real Estate owned


We
      estimate the fair value of real estate owned based upon market comparables
      less
      cost of disposal and estimated carrying costs.





**(m)**
                **Recent
                    accounting
                    pronouncements**





On
      October 10, 2008, the FASB issued Staff Position No. 157-3, which
      clarifies the application of FAS 157, *Fair
      Value Measurements* ,
      in an
      inactive market and illustrates how an entity would determine fair value when
      the market for a financial asset is not active. The FSP states that an entity
      should not automatically conclude that a particular transaction price is
      determinative of fair value. In a dislocated market, judgment is required to
      evaluate whether individual transactions are forced liquidations or distressed
      sales. When relevant observable market information is not available, a valuation
      approach that incorporates management’s judgments about the assumptions that
      market participants would use in pricing the asset in a current sale transaction
      would be acceptable. The FSP also indicates that quotes from brokers or pricing
      services may be relevant inputs when measuring fair value, but are not
      necessarily determinative in the absence of an active market for the asset.
      In
      weighing a broker quote as an input to a fair value measurement, an entity
      should place less reliance on quotes that do not reflect the result of market
      transactions. Further, the nature of the quote (for example, whether the quote
      is an indicative price or a binding offer) should be considered when weighing
      the available evidence. The FSP is effective immediately and applies to prior
      periods for which financial statements have not been issued, including interim
      or annual periods ending on or before September 30, 2008. Accordingly, the
      Fund adopted the FSP prospectively, beginning July 1, 2008. The adoption of
      the FSP did not have a material impact on the financial results or fair value
      determinations.





On
      February 15, 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No. 159, “The Fair Value Option for Financial Liabilities (SFAS 159), which
      allows an entity the irrevocable option to elect fair value for the initial
      and
      subsequent measurement for certain financial assets and liabilities on a
      contract-by-contract basis. Subsequent changes in fair value of these financial
      assets and liabilities would be recognized in earnings when they occur. SFAS
      159
      further establishes certain additional disclosure requirements. SFAS 159 is
      effective for the Fund’s financial statements for the year beginning on January
      1, 2008, with earlier adoption permitted. The adoption of SFAS 159 did not
      have
      a material impact on the Fund’s financial condition and results of operations
      since the Fund has not elected the fair value option for any of its financial
      instruments.


11




**Note
      3 -**  **Notes
      Receivable**





At
      September 30, 2008, the Fund held the following types of mortgages
      (gross):





Commercial
            
            $
            4,244,754Construction
            
            
            4,946,744Unimproved
                Land
            
            
            4,289,690Total
            
            $
            13,481,188First
                Mortgages
            
            $
            9,854,971Second
                Mortgages
            
            
            3,626,217Total
            
            $
            13,481,188


Scheduled
      maturities of loans secured by trust deeds as of September 30, 2008 and the
      interest sensitivity of such loans are as follows:





Year
                Ending December 31:
            
            Fixed
                Interest Rate2008
            
            $
            12,526,9852009
            
            
            954,203Total
            
            $
            13,481,188





The
      scheduled maturities for the year ending 2008 include ten loans (totaling
      $9,350,690) that are past maturity at September 30, 2008. It is the Fund’s
      experience that loans can be refinanced or repaid before or after the maturity
      date. Therefore, the above tabulation for scheduled maturities is not a forecast
      of future cash receipts.





Accrued
      interest receivable on the ten loans mentioned above amounted to $109,530 as
      of
      September 30, 2008; loans are classified under non-accrual status at the time
      the Manager determines that collection of interest is doubtful, therefore,
      interest has not been accrued on a majority of these loans for periods ranging
      from 1-24 months. Additionally, one loan amounting to $473,504 that has not
      yet
      matured was delinquent in interest payments for twelve months. Occasionally,
      the
      Fund allows borrowers to continue to make the payments on loans past maturity
      for periods of time. The
      loans
      are collateralized by the underlying real estate properties.





The
      Fund
      has no variable interest rate loans at September 30, 2008. Also, at September
      30, 2008, 100% of the Fund’s loans receivable was collateralized by properties
      located in California.





At
      September 30, 2008, the Fund’s gross loan portfolio consisted of sixteen real
      estate loans to unrelated parties of $11,370,188 and three loans receivable
      from
      related parties of $2,111,000.





1.
            Loan
                200412, an investment in participation notes issued by a related
                party
                amounting to $500,000 and maturing in December 2008. Interest is
                payable
                monthly at an effective rate of approximately 9.00% per annum. See
                Note
                4.


2.
            Loan
                200504 amounting to $802,800 due in monthly installments of $8,028
                interest only at 12.00%. This loan matured on September 8, 2006 and
                is
                secured by a second trust deed on the underlying property. See Note
                6.


3.
            Loan
                200507 amounting to $257,375 due in monthly installments of $2,574
                interest only at 12.00%. This loan matured on June 25, 2007 and is
                secured
                by a second trust deed on the underlying property. See Note
                6.


4.
            Loan
                200510 amounting to $455,042 due in monthly installments of $4,550
                interest only at 12.00%. This loan matured on August 8, 2007 and
                is
                secured by a second trust deed on the underlying property. See Note
                6.


5.
            Loan
                200602 amounting to $589,473 due in monthly installments of $5,895
                interest only at 12%. This loan matured on January 30, 2007 and is
                secured
                by a first trust deed on the underlying property. See Note
                6.






12




6.
            Loan
                200603 amounting to $2,780,000 due in monthly installments of $27,800
                interest only at 12%. This loan matured on May 2, 2008 and a notice
                of
                default has been filed. This loan is secured by a first trust deed
                on the
                underlying property.


7.
            Loan
                200608 amounting to $525,000 due in monthly installments of $4,769
                interest only at 10.90%. This loan matured on June 7, 2008 and was
                subsequently extended until December 7, 2008. This loan is secured
                by a
                first trust deed on the underlying
                property.


8.
            Loan
                200609.1 amounting to $345,000 due in monthly installments of $3,134
                interest only at 10.90%. This loan matured on June 27, 2008 and was
                subsequently extended until December 27, 2008. This loan is secured
                by a
                first trust deed on the underlying
                property.


9.
            Loan
                200612 amounting to $570,000 due in monthly installments of $5,653
                interest only at 11.90%. This loan matured on August 30, 2008 and
                is
                secured by a first trust deed on the underlying property. A notice
                of
                default has been filed on this
                loan.


10.
            Loan
                200615 amounting to $1,100,000 due in monthly installments of $10,542
                interest only at 11.50% maturing on October 20, 2008. This loan is
                secured
                by a first trust deed on the underlying
                property.


11.
            Loan
                200702 amounting to $706,295 at September 30, 2008. Total construction
                loan commitment equals $767,000 with interest added monthly at 11.90%.
                This loan matured on September 2, 2008 and is in negotiations for
                extension. This loan is secured by a first trust deed on the underlying
                property.


12.
            Loan
                200703 amounting to $1,200,000 due in monthly installments of $11,900
                interest only at 11.90%. This loan matured on March 8, 2008. This
                loan is
                secured by a second trust deed on the underlying property. See Note
                4.


13.
            Loan
                200704 amounting to $473,504 due in monthly installments of $4,696
                interest only at 11.90% maturing on June 4, 2009. This loan is secured
                by
                a first trust deed on the underlying
                property.


14.
            Loan
                200705 amounting to $126,964 at September 30, 2008. Total construction
                loan commitment equals $1,265,000 with interest added monthly at
                11.90%.
                This construction loan matured on July 13, 2008 and was subsequently
                extended until July 13, 2009. This loan is secured by a first trust
                deed
                on the underlying property.


15.
            Loan
                200706 amounting to $1,085,000 due in monthly installments of $10,760
                interest only at 11.90%. This loan matured on August 17, 2008 and
                is
                secured by a first trust deed on the underlying property. A notice
                of
                default has been filed on this
                loan.


16.
            Loan
                200707 amounting to $1,200,000 due in monthly installments of $11,500
                interest only at 11.50%. This loan matured on September 6, 2008 and
                is
                secured by a first trust deed on the underlying property. The fund
                is
                working with the borrower to extend the terms of the
                loan.


17.
            Loan
                200708 amounting to $220,250 due in monthly installments of $2,184
                interest only at 11.90%. This loan matured on September 21, 2008
                and was
                subsequently extended until March 31, 2009. This loan is secured
                by a
                first trust deed on the underlying
                property.


18.
            Loan
                200709 amounting to $411,000 due in monthly installments of $5,138
                interest only at 15.00%. This loan matured on May 27, 2008. This
                loan is
                secured by a second trust deed on the underlying property. See Note
                4.


19.
            Construction
                Loan 200800 amounting to $133,484 at September 30, 2008. Total
                construction loan commitment equals $668,000 with interest added
                monthly
                at 12.90%. This loan matures in September 2009.




13




**Note
      4 – Related Party Transactions**





**Notes
      Receivable**


The
      Fund
      may invest up to 20% of its total assets in loans to affiliated entities. On
      September 30, 2008, the Fund had an interest in three loans issued to affiliated
      entities of the Manager. One loan is a commercial loan for $411,000, all of
      which was funded through September 30, 2008. The note bears interest at 15.00%
      and was due on May 27, 2008. The loan was still outstanding as of September
      30,
      2008, and had interest receivable recorded of $7,200. The second participation
      loan amounting to $500,000 matures in December 2008 and bears interest at 9%
      per
      annum. Interest payments have been delinquent since April 2007 and total $67,500
      as of September 30, 2008. The third loan, a commercial loan, amounts to
      $1,200,000 that matured on March 8, 2008 and bears interest at 11.90%.
      Delinquent interest since maturity amounts to $70,523. The Manager has not
      made
      any of the delinquent interest payments to the Fund and interest income is
      no
      longer being recognized on these loans due to the uncertainty related to the
      Manager being able to make such interest payments.





Pursuant
      to a provision of the Operating Agreement, the Manager is obligated to purchase
      from the Fund any related-party loan with respect to which any material event
      of
      default by the borrower has occurred and is continuing for thirty days. All
      of
      the affiliated loans are currently in this position. As the Manager has not
      had
      the funds to purchase these loans they have been evaluated for possible loss.
      At
      September 30, 2008 the loan loss reserve related to affiliated loans was
      determined to be $363,330. The Manager is aware of the default on these loans
      and is in active discussion with the affiliated borrowers with the objective
      of
      curing all defaults.





For
      the
      three months ended September 30, 2008 and 2007, the Fund recognized interest
      income on loans to related parties amounting to $7,200 and $54,578. For the
      nine
      months ended September 30, 2008 and 2007, the Fund recognized interest income
      of
      $103,218 and $135,036, respectively on loans to related parties.





As
      noted,
      the Fund is limited in its investments with affiliated entities to a maximum
      of
      20% of its total assets, as defined in the operating agreement. As of September
      30, 2008 the Fund is in compliance with this restriction.





**Borrower’s
      Costs**


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





**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 three months ended September 30, 2008 and 2007 amounting to $0 and
      $414,897 of which it realized commissions totaling $0 and $15,252, respectively.
      The brokers do not earn a commission until funds are transferred from the
      subscription account to members’ equity, at which time the funds become
      contributed capital of the Fund.




14





**Management
      and servicing fees**


The
      Fund
      expensed management fees of $120,483, including an accrued amount of $78,712
      at
      September 30, 2008. The Fund expensed fees of $1,674 during the three months
      ended September 30, 2007. The Manager waived a total of $ 45,113
      and $161,541 in fees
      during the three months ended September 30, 2008 and 2007. During the nine
      months ended September 30, 2008 and 2007, the Fund expensed $120,483 and
      $32,209, and the Manager waived a total of $ 394,952
      and $452,175 in fees.





**Note
      5 - Real Estate Owned (REOs) and Notes Payable**





The
      following schedule reflects the activities in REOs at September 30,
      2008:


Gross
                  balance, January 1, 2008
              
              $
              4,328,871Additions
              
              
              5,291,537Dispositions
              
              
              (895,992
              )Reserve
              
              
              (517,471
              )Net
                  balance, September 30, 2008
              
              $
              8,206,945




At
      September 30, 2008 the Fund had eight REO properties. The REOs are valued at
      the
      lower of the estimated net realizable values and carrying costs of the REOs.
      A
      description of each REO follows (gross):





·
            The
                first REO was taken over in April 2007 (loan amount: $850,000) consisting
                of a commercial property (vacant building and 1.39 acre parcel in
                Oroville, CA). This property has been listed for sale.


·
            The
                second REO was taken over in May 2007 (construction loan amount:
                $928,200)
                consisting of two newly-constructed single family homes in Marina
                City,
                CA. When the borrower defaulted, the Company took possession of the
                unfinished project and hired a general contractor to finish the
                construction project. This involved the infusion of additional funds
                to
                finish the project amounting to approximately $262,000 at September
                30,
                2008. Both homes were listed in August 2008 and neither has been
                sold as
                of September 30, 2008.


·
            The
                third REO consists of a 24.02 vacant parcel in Los Gatos Hills, Santa
                Clara County, CA. This property was taken over in August 2007 (loan
                amount: $260,000) and was subject to a senior first trust deed loan
                amounting to $1,125,000. The first trust deed bears a 12% interest
                rate,
                with a monthly interest payment of $11,250, which matured in April
                2008.


·
            The
                fourth REO consists of 10 acres of undeveloped land in Galt, CA (loan
                amount: $890,000). This property was taken over in January 2008 and
                was
                subject to a senior first trust deed loan amounting to $800,000,
                which was
                assumed by the Fund. The senior lien bears an 11% interest rate,
                with a
                monthly interest only payment of $7,333.


·
            The
                fifth REO was taken over in May 2008 (loan amount: $552,000) and
                consists
                of 14.78 acres of undeveloped land in Madera County, CA.


·
            The
                sixth REO was taken over in June 2008 (loan amount: $400,000) and
                consists
                of 19 acres of agricultural land in Le Grand, CA.


·
            The
                seventh REO was taken over in July 2008 (loan amount: $1,900,000)
                and
                consists of 194 acres of undeveloped land in Oroville, CA.


·
            The
                eighth REO was taken over in September 2008 (construction loan amount:
                $549,240) and is a single family home in Homeland, CA. This property
                was
                listed for sale in November 2008.





The
      total
      notes payable related to REO due at September 30, 2008 totaled
      $1,925,000.




15




The
      Manager is working to list those properties not currently listed with real
      estate brokers in the communities where the properties are located. The only
      other significant carrying costs that the Company anticipates in connection
      with
      holding the properties are real estate property taxes and liability insurance.
      The taxes and insurance premiums are expensed when incurred.





In
      July
      2008 one of the REO properties held by the fund, a 1.5 acre parcel in Tustin
      Hills, CA, was foreclosed on by the senior first trust deed holder and the
      Fund
      did not receive any proceeds from the sale of the underlying collateral. The
      loss associated with this property was $345,992. As the fund had recorded the
      amount of the first trust deed loan of $550,000 in REO and as a note payable,
      these accounts were also adjusted to reflect the loss of this property.





**Note
      6 -**  **Concentrations,
      commitments and contingencies and workout agreements**





**Notes
      receivable - non related parties**


Four
      loans totaling $2,104,690 were made to separate entities controlled by the
      same
      person. The various borrowing entities were organized for different purposes,
      and own real properties in various places in California, mostly in the Central
      Valley. These loans represent 16% of the total loan portfolio. All four loans
      are past their maturity date and remain outstanding at September 30, 2008.
      Interests on these loans have not been accrued for periods ranging from 12-25
      months. The loans are collateralized by the underlying real estate properties,
      and are personally guaranteed by the controlling person. A fifth loan made
      to an
      entity controlled by this same person was foreclosed on in July 2008 and is
      included in REO property.





**Commitments
      and contingencies**


The
      Fund
      has outstanding loan commitments on three construction loans totaling $1,733,256
      which was undisbursed at September 30, 2008.





**Workout
      agreements**


The
      Fund
      periodically negotiates various workout agreements with borrowers whose loans
      are past maturity or who are delinquent in making payments. As of September
      30,
      2008, there were three loans totaling $2,379,799 under negotiation or in the
      process of workout agreements.





**Legal
      proceedings**


The
      Manager of the Fund has been named in two civil actions, Oakdale Heights Redding
      I, LLC et al v. Asset Real Estate & Investment Company, et al. filed April
      18, 2008 in Shasta Superior Court and Dean G. Nowacki, et al. v. Asset Real
      Estate & Investment Company, et al. filed May 21, 2008 in Shasta Superior
      Court. As a result of these civil actions the Manager’s legal counsel informed
      the California Department of Corporations that the Manager would voluntarily
      stop offering the Fund for investment until further notice.





The
      Fund
      is involved in various legal actions related to foreclosures and loans in
      default, which arise in the normal course of business. In the opinion of
      management, such matters will not have a material effect on the financial
      position of the Fund.





**Note
      7 – Regulatory Requirements**





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


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




16




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 months.





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





As
      of
      September 30, 2008, the Fund was in compliance with all applicable federal
      and
      state securities laws.





**Note
      8 – Subsequent Events**





In
      November 2008 the fund received a partial payment on loan 200704 of $194,000.
      This loan matures on June 4, 2009, however interest has been delinquent since
      October 2007. This leaves the remaining loan balance at $279,504.




17




**Item
      2. M** **anagement’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





**Critical
      Accounting Policies.**





In
      preparing the financial statements, management is required to make estimates
      based on the information available that affect the reported amounts of assets
      and liabilities as of the balance sheet dates and revenues and expenses for
      the
      reporting periods.  Such estimates relate principally to the
      determination of (1) the allowance for loan losses (i.e. the amount of allowance
      established against loans receivable as an estimate of potential loan losses)
      including the accrued interest that are estimated to be unrecoverable based
      on
      estimates of amounts to be collected plus estimates of the value of the property
      as collateral and (2) the valuation of real estate held.  At September
      30, 2008, there were eight real estate properties held, acquired through
      foreclosure during the prior year and through the nine months ended September
      30, 2008.





Loans
      and
      the related accrued interest and late fees are analyzed on a periodic basis
      for
      recoverability. Delinquencies are identified and followed up as part of the
      loan
      servicing procedures.  Delinquencies are determined based upon
      contractual terms.  A provision is made for loan losses to adjust the
      allowance for loan losses to an amount considered by management to be adequate,
      with due consideration to collateral values, and to provide for unrecoverable
      loans and receivables, including impaired loans, other loans, accrued interest,
      and late fees on loans.




The
      allowance for loan losses is established as losses are estimated to have
      occurred through a provision for loan losses that is charged to earnings. Loan
      losses are charged against the allowance when management believes the
      un-collectability of a loan balance is confirmed. Subsequent recoveries, if
      any,
      are credited to income. The allowance for loan losses is evaluated on a regular
      basis by management and is based upon management’s periodic review of the
      collectability 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.





**Forward-Looking
      Statements**




Certain
      statements in this Report on Form 10-Q which are not historical facts may be
      considered forward-looking statements within the meaning of Section 27A of
      the
      Securities Act of 1933, as amended, and Section 21E of the Securities and
      Exchange Act of 1934, as amended, including statements regarding the Fund’s
      expectations, hopes, intentions, beliefs and strategies regarding the future.
      Forward-looking statements include statements regarding future interest rates
      and economic conditions and their effect on the Fund and its assets, trends
      in
      the California real estate market, estimates as to the allowance for loan
      losses, estimates of future investor withdrawals, 2008 annualized yield
      estimates, the intention not to sell the Fund’s loan portfolio and the
      expectation foreclosures will not have a material effect on liquidity. Actual
      results may be materially different from what is projected by such
      forward-looking statements. Factors that might cause such a difference include
      unexpected changes in economic conditions and interest rates, the impact of
      competition and competitive pricing and downturns in the real estate markets
      in
      which the Fund has made loans. All forward-looking statements and reasons why
      results may differ included in this Form 10-Q are made as of the date hereof,
      and we assume no obligation to update any such forward-looking statement or
      reason why actual results may differ.




18




**Related
      parties**





The
      Fund’s Manager arranges, services, and maintains the loan portfolio of the Fund
      as well as managing the day-to-day affairs of the Fund. Pursuant to the
      Operating Agreement between the Fund and the Manager, the Manager is entitled
      to
      receive certain fees, compensation and expense reimbursements from the Fund.
      The
      Manager is also entitled to receive reimbursement from the Fund for
      organizational, syndication and other operating expenses incurred on behalf
      of
      the Fund, including out-of-pocket general and administrative expenses of the
      Fund related to the offering of membership interests, accounting and audit
      fees,
      legal fees and expenses, postage and other expenses related to the preparation
      of reports to members.





The
      Manager also receives other fees from third parties as compensation for acting
      as the 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. There was
      no
      significant new loan or refinancing activity in the nine months ended September
      30, 2008.





In
      accordance with the Operating Agreement, the Fund may invest 20% of its total
      assets in loans to entities affiliated with the Manager. Pursuant to the
      Operating Agreement the Manager is obligated to purchase, from the Fund, any
      related-party loan with respect to which any material event of default by the
      borrower has occurred and is continuing for thirty days.





At
      September 30, 2008 the Fund had an interest in three loans issued to entities
      affiliated with the manager. All of the affiliated loans, totaling $2,256,223
      including interest accrued since the corresponding default dates of $145,223,
      have had material events of default that has continued for at least thirty
      days
      as of September 30, 2008.





The
      Manager’s primary source of income is derived from the management of the Fund
      and is significantly based upon the value of the assets in the Fund. Throughout
      fiscal 2008, the Manager has elected to waive the majority of its fees, in
      accordance with the operating agreement, in order to strengthen the Fund’s
      financial position. Correspondingly, the Manager does not have the financial
      resources to meet its purchase obligation related to the three affiliated loans
      as noted above. In light of the current circumstances, the Fund is no longer
      recognizing interest income on these loans and is periodically analyzing their
      collectability. Further, the Fund is only recognizing fees payable to the
      Manager for the amounts essential to its continued operations.




The
      Manager and the Fund continue to work on alternatives related to curing the
      defaults. Based on the current market conditions for residential and commercial
      real estate in the State of California the Fund and the Manager are unable
      to
      determine when defaults are likely to be cured.





**Results
      of Operations**





The
      decrease in interest income for the three and nine month period ended September
      30, 2008 as compared to the same periods in 2007 is due to a decreased amount
      of
      loans receivable and a higher level of default. There were eleven non performing
      loans that have delinquent interest for periods ranging from 3-24 months at
      September 30, 2008 versus seven non-performing loans with past due interests
      ranging between 1-12 months at September 30, 2007. Additionally, there were
      eight real estate owned properties (REO) amounting to $8,723,531 (before a
      reserve of $517,471) at September 30, 2008 versus $2,225,634 on September 30,
      2007.





The
      increase in professional fees for the three and nine month period ended
      September 30, 2008 as compared to 2007 was due to increased audit and legal
      fees. Legal fees have increased and will continue to increase due to the volume
      of foreclosures and loans in default.




19




In
      the
      past, the Manager has received fees from third parties for
      acting as the broker in arranging loans from the Fund that were sufficient
      to
      cover its operations, and in turn, was able to waive additional management
      fees
      it was entitled to receive from the Fund. During the nine months ended September
      30, 2008, the amount of new loan and refinancing activity substantially
      decreased during the period, resulting in lower fees collected from third
      parties. As a result, the Manager has reduced the amount of waived fees and
      the
      Fund has expensed higher management fees.





The
      increase in interest expense for the three and nine months ended September
      30,
      2008 is the result of notes payable assumed in connection with taking control
      of
      the REO’s.





The
      increase in the provision for losses on loans and real estate properties for
      the
      three and nine months ended September 30, 2008 as compared to the same periods
      in 2007 was due to the increase in the allowance for loan losses and real estate
      owned based on management’s estimates of fair value and recoverability,
      reflecting current market conditions and the declining real estate
      market.





**Allowance
      for Losses**





The
      Manager periodically reviews the loan portfolio, examining the status of
      delinquencies, the underlying collateral securing these loans, real estate
      held
      for sale expenses, sales activities, borrower’s payment records and other data
      relating to the loan portfolio.  Data on the local real estate market
      and on the national and local economy are studied. Based upon this and other
      information, the allowance for loan losses is increased or decreased. Borrower
      foreclosures are a normal aspect of the Fund’s operations.  The Fund
      is not a credit based lender and hence while it reviews the credit history
      and
      income of borrowers, and if applicable, the income from income producing
      properties, the Manager expects on occasion to take back a real estate
      security.   At September 30, 2008, ten loans ($9,350,690 or 69% of
      total loan portfolio) have already matured and remained unpaid at the end of
      the
      period. Accrued interest receivable on these loans amounted to $109,530 as
      of
      September 30, 2008; these loans are classified under non-accrual status at
      the
      time the Manager deemed that collection of interest was doubtful; therefore
      interest has not been accrued on a majority of these loans for periods ranging
      from 1-24 months. In addition, one loan amounting to $473,504 that has not
      yet
      matured was delinquent in interest payments for 12 months. The Manager
      occasionally enters into workout agreements with borrowers who are past maturity
      or delinquent in their regular payments.   Typically, a workout
      agreement allows the borrower to extend the maturity date of the balloon payment
      and/or allows the borrower to make current monthly payments while deferring
      for
      periods of time, past due payments, or allows time to pay the loan in
      full.   The number of foreclosures and workout agreements will
      generally rise during difficult times and conversely fall during good economic
      times.   These factors have been considered by management to
      arrive at an appropriate level of allowance for loan losses. Due to the number
      of variables involved, the magnitude of possible swings and the Manager’s
      inability to control many of these factors, actual results may and do sometimes
      differ materially from estimates made by the Manager. Moreover, based on the
      current financial and real estate markets, and the volatility and uncertainty
      thereof, it is extremely difficult to assess the collectability of the Fund’s
      loans and obligations.





At
      September 30, 2008 the Fund had eight REO properties. The
      REOs
      are valued at the lower of the estimated net realizable values and carrying
      costs of the REOs. See Note 5, “Real Estate Owned (REOs) and Notes Payable, in
      the financial statements for a complete listing and detail of the REO held
      by
      the fund.





When
      the
      Fund forecloses on a loan the Manager works with real estate professionals
      to
      establish an appropriate listing price for the collateral property and to
      determine if any improvements to the property are required. The only other
      significant carrying costs that the Fund anticipates in connection with holding
      the properties are real estate property taxes and liability insurance. The
      taxes
      and insurance premiums are expensed when incurred.


The
      Manager made increases to the provision for loan loss reserves of $789,940
      and
      $151,489 during the nine month period ended September 30, 2008 and
      2007.  The total (affiliate and non-affiliate) allowance for loan loss
      reserve of $977,452 and $187,512 as of September 30, 2008 and December 31,
      2007,
      is considered to be adequate for the secured loan portfolio balances of
      $13,481,188 and $18,822,891, respectively. The reserve for losses on REOs as
      of
      September 30, 2008 and December 31, 2007 was $517,471 and $100,000,
      respectively.




20




**PORTFOLIO
      REVIEW**





**Loan
      Portfolio**





The
      Fund’s loan portfolio consists primarily of short-term (one to two years), fixed
      rate loans secured by real estate in the State of California. At
      September 30, 2008, the Fund’s loan portfolio consisted of sixteen real estate
      loans to unrelated parties totaling $11,370,188, and three loans receivable
      from
      related parties amounting to $2,111,000.





At
      September 30, 2008, the Fund held the following types of mortgages
      (gross):





Commercial
            
            $
            4,244,754Construction
            
            
            4,946,744Unimproved
                Land
            
            
            4,289,690Total
            
            $
            13,481,188First
                Mortgages
            
            $
            9,854,971Second
                Mortgages
            
            
            3,626,217Total
            
            $
            13,481,188





Scheduled
      maturities of loans secured by trust deeds as of September 30, 2008 and the
      interest sensitivity of such loans are as follows:





Year
                Ending December 31:
            
            Fixed
                Interest Rate2008
            
            $
            12,526,9852009
            
            
            954,203Total
            
            $
            13,481,188




The
      scheduled maturities for the year ending 2008 include ten loans ($9,350,690)
      that are past maturity at September 30, 2008. It is the Fund’s experience that
      loans can be refinanced or repaid before or after the maturity date. Therefore,
      the above tabulation for scheduled maturities is not a forecast of future cash
      receipts.





Four
      loans totaling $2,104,689 were made to separate entities controlled by the
      same
      person. The various borrowing entities were organized for different purposes,
      and own real properties in various places in California, mostly in the Central
      Valley. These loans represent 16% of the total loan portfolio. All four loans
      have matured and remained outstanding at September 30, 2008. Interest on these
      loans has not been accrued for periods ranging from 12-25 months. The loans
      are
      collateralized by the underlying real estate properties, and are personally
      guaranteed by the controlling person. A fifth loan made to an entity controlled
      by this same person was foreclosed on in July 2008 and is included in REO
      property.





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2008, we have sold a total of 232,045 Units, at $100 per Unit,
      for
      a total of $23,204,542. As of September 30, 2008, Fund members electing to
      reinvest their monthly income distributions have reinvested $2,492,224 back
      into
      the Fund. After deducting for broker commissions and offering expenses
      ($1,098,674), the net proceeds to the Fund from these sales (which include
      reinvestment of earnings) have been $24,598,092. Members withdrew a total of
      $3,686,240 through the period ended September 30, 2008. As of September 30,
      2008, the Fund has $13,481,188 invested in commercial mortgage loans. As of
      September 30, 2008, the Fund has 381 members.





Until
      recently the Fund has raised capital through the sale of membership interests
      and has invested that capital in commercial real estate loans. As noted in
      Part
      II, Item 1, however, the Manager has temporarily ceased offering the Fund as
      an
      investment and therefore is not currently a source of capital to the Fund.
      The
      Fund has no off-balance sheet arrangements.




21




The
      Fund
      also relies upon loan payoffs and borrowers’ mortgage payments as a source of
      funds for loans and operations.  The Fund has seen an increase in the
      number of slow paying loans and those in default, in addition to an increase
      in
      the real estate owned as a result of foreclosing on defaulted loans. The Manager
      is actively marketing most of these properties for sale, however, current
      economic and real estate market conditions have had a significant negative
      impact on the ability to recover the investments. Due to this slowdown and
      a
      decrease in the amount of new member contributions, the Fund has made only
      one
      new loan investment in the third quarter of 2008. The new loan is a construction
      loan approved for up to 668,000, of which $138,484 had been funded as of
      September 30, 2008.





The
      largest cash outflow during the nine months ended September 30, 2008; $1,026,303
      was related to member withdrawals. Fund
      members are allowed to withdraw from the Fund and receive a return of the amount
      in their capital accounts only after 12 months from the date of admission into
      the Fund (“Holding Period”). Members must give a 60-day written notice prior to
      withdrawing and payments to any withdrawing member are limited to $25,000 per
      quarter. 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.





As
      of
      September 30, 2008 the Fund has received requests for withdrawal from members
      representing $9,595,728 of membership interest which have not yet been paid,
      due
      to the limitations of the membership agreement that does not allow for total
      annual fund withdrawals of more than 10% of the total capital  account
      at the beginning of the year $2,244,000. Payment of moneys due to withdrawing
      members depends on the availability of cash and, based on the current financial
      and real estate markets and the volatility and uncertainties, there is no
      assurance the fund will have sufficient funds available to satisfy these
      financial obligations to current or future withdrawing members.





If
      interest rates were to increase substantially, the yield of the Fund’s loans may
      provide lower effective yields than other comparable debt-related
      investments.  Additionally, since the Fund has made primarily fixed
      rate loans, if interest rates were to rise, the likely result would be a slower
      prepayment rate for the Fund.  This could cause a lower degree of
      liquidity as well as a slowdown in the ability of the Fund to invest in loans
      at
      the then current interest rates.  Conversely, in the event interest
      rates were to decline, the Fund could experience significant borrower
      prepayments, which, if the Fund can only obtain the then existing lower rates
      of
      interest may cause a dilution of the Fund’s yield on loans, thereby lowering the
      Fund’s overall yield to the members.





**Current
      Economic Conditions**





The
      Fund
      primarily makes secured mortgage loans in the State of California, concentrating
      in the Northern California communities. California’s economic health plays a
      significant role in the performance of the real estate industry, and property
      values, which provide the underlying collateral for our loans. The vitality
      of
      California’s economy is driven by numerous diverse industries including,
      technology, finance, health, medical care, government, and
      entertainment.





The
      unemployment rate in the United States, a significant factor in the borrower’s
      ability to service their debt, decreased to a low of 4.4% in December 2006
      and
      gradually rose to 5.0% in December 2007. The unemployment rate in the United
      States for September 2008 was 6.0%. The most recent low in California’s
      unemployment occurred in November 2006 at 4.8%. This rate has gradually
      increased to 7.7% as of September 30, 2008.





In
      an
      attempt to counter the slowing economy, rising unemployment, and the turmoil
      created by a credit crisis stemming from the subprime mortgage loan market
      write
      downs, the Federal Reserve has made multiple rate reductions. The Federal Funds
      Rate now stands at 1.00% as of October 29, 2008, compared to 4.5% at this time
      last year. The prime rate offered by banks for borrowing has followed in step
      with the reductions in the Federal Funds Rate and is currently at 4.0%, a
      decrease of 3.5% compared to this time last year.





As
      some
      of our loans pertain to undeveloped land or construction loans planned for
      residential construction, residential mortgage rates can affect the viability
      of
      a project. Freddie Mac reports average interest rates for 30 year fixed rate
      conforming loans were 6.38% for September 2007, 6.10% for December 2007, and
      6.04% for September 2008.





There
      continues to be an increase in loan delinquencies and foreclosures in the real
      estate market in California and nationwide. In the third quarter of 2008, the
      national construction loan delinquencies rose to 10% from 5.5% in December
      2007.
      Lending institutions throughout California sent 94,240 default notices during
      the third quarter of 2008, an increase of 30% from the second quarter of 2007,
      but a decrease of 22.5% from the second quarter of 2008. (Dataquick) The
      California Association of Realtors, (CAR), reported 502,190 homes sold in
      September 2008, which was an increase of 97% from September 2007. The main
      factor driving these sales was a decrease in the median home price to $316,480
      at September 30, 2008 as compared to $535,760 at September 30, 2007. The drop
      in
      the median home price has been influenced by the large number of distressed
      sales where sizable price reductions were made. Moreover,
      based on the current financial and real estate markets, and the volatility
      and
      uncertainty thereof, it is extremely difficult to assess the collectability
      of
      the Fund’s loans and obligations.




22


**Item
      4T. Controls and Procedures.**





The
      Manager of the Fund strives to maintain disclosure controls and procedures
      designed to ensure that information required to be disclosed in reports filed
      under the Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported within the specified time periods and that such
      information is accumulated and communicated to management to allow timely
      decisions on required disclosure. Due to the departure of the Manager’s CFO
      on June 20, 2008, we have concluded that the Fund’s disclosure controls and
      procedures regarding information required to be included in SEC reports as
      of
      September 30, 2008 was not adequate.





In
      light
      of the above, the Manager performed additional analysis and other post-closing
      procedures to ensure the consolidated financial statements were prepared in
      accordance with generally accepted accounting principles. One way the Manager
      addressed this issue was by hiring an outside public accounting firm to assist
      in the preparation of the June 30, 2008 and September 30, 2008 financial
      statements and drafting of Form 10Q. Accordingly, the Manager believes the
      financial statements of the Fund included in this report fairly present, in
      all
      material respects, the financial condition, results of operations and cash
      flows
      for the periods presented. ****





The Fund ’s
      operations are managed by its fund manager, Lakeside Financial Group, Inc.
      The
      Manager does not own a membership interest in the Fund .




23




**PART
      II - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





The
      Manager of the Fund has been named in two civil actions, Oakdale Heights Redding
      I, LLC et al v. Asset Real Estate & Investment Company, et al. filed April
      18, 2008 in Shasta Superior Court and Dean G. Nowacki, et al. v. Asset Real
      Estate & Investment Company, et al. filed May 21, 2008 in Shasta Superior
      Court. As a result of these civil actions the Manager’s legal counsel informed
      the California Department of Corporations that the Manager would voluntarily
      stop offering the Fund for investment until further notice.





In
      the
      normal course of business, the Fund may become involved in various types of
      legal proceedings such as assignment of rents, bankruptcy proceedings,
      appointment of receivers, unlawful detainers, judicial foreclosure, etc. to
      enforce the provisions of the deeds of trust, collect the debt owed under the
      promissory notes, or to protect, or recoup its investment from the real property
      secured by the deeds of trust. None of these actions would typically be of
      any
      material importance. As of the date hereof, the Fund is not involved in any
      legal proceedings other than those that would be considered part of the normal
      course of business.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





During
      the period covered by this report the Fund made sales of unregistered securities
      set forth in the table below. All sales were of units of membership interest
      in
      the Fund, for the purchase price of $100 per unit of membership interest, and
      all sales were for cash consideration. No sales involved any underwriter, but
      all sales were effected through a licensed securities broker, ePlanning
      Securities, Inc., to whom a commission was paid of up to 6.5% of the sales
      price.





All
      sales
      were made under the exemption from registration provided by Section 3(a)(11)
      of
      the Securities Act of 1933, as amended, and under Rule 147 promulgated there
      under. The offering is limited to California residents only. The Fund derives
      100% of its revenues from loans secured by real property located in California.
      The Fund’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, all sales were made pursuant to
      a
      permit issued to the Fund by the California Department of Corporations (“DOC”)
      pursuant to Sections 25110 and 25113 of the California Corporations Code. The
      permit must be renewed each year by filing a renewal application and an updated
      Offering Circular for approval by the DOC. The renewed permit was issued by
      the
      DOC on February 29, 2008.





During
      the period covered by this report the Fund made the following sales of
      unregistered securities, to various investors meeting the Fund’s investor
      suitability standards, on the terms described above:


Date
                  of Sale
              
              Units
                  Sold
              
              Purchase
                  Price01/14/08
              
              
              294.51
              
              $
              29,45102/01/08
              
              
              252.25
              
              $
              25,22503/31/08
              
              
              233.38
              
              $
              23,33804/03/08
              
              
              149.10
              
              $
              14,91005/20/08
              
              
              167.30
              
              $
              16,73001/04/08
                  (reinvestment)
              
              
              628.54
              
              $
              62,85402/05/08
                  (reinvestment)
              
              
              628.03
              
              $
              62,80303/05/08
                  (reinvestment)
              
              
              381.74
              
              $
              38,17404/08/08
                  (reinvestment)
              
              
              392.54
              
              $
              39,25405/14/08
                  (reinvestment)
              
              
              193.00
              
              $
              19,30006/11/08
                  (reinvestment)
              
              
              178.55
              
              $
              17,85507/22/08
                  (reinvestment)
              
              
              207.58
              
              $
              20,758




24





**Item
      3.**  **Defaults
      on Senior Securities**




Three
      of
      the loans guaranteed by the same Principal (Note 6 - Concentration) were
      subordinated to first trust deed loans totaling $2,929,000 at interest rates
      of
      11%-12% per year. Interests on these notes have been delinquent for periods
      ranging from 10-18 months and the borrower has not paid the holder of the first
      trust deed as of September 30, 2008. Additionally, another loan that was
      guaranteed by the same Principal was foreclosed upon in January 2008, subject
      to
      a first trust deed amounting to $800,000 at 11% interest. Interest on this
      senior note was 22 months past due as of September 30, 2008, therefore, based
      on
      the terms of the note, the Fund is in default on this senior deed of
      trust.





A
      senior
      first trust deed amounting to $1,125,000 at 12% interest was assumed when the
      Fund foreclosed on a promissory note in August 2007. Interest on this senior
      note is 13 months past due, therefore, based on the terms of the note, the
      Fund
      is in default on this senior deed of trust.





**Item
      6.**  **Exhibits**


Exhibit
                  No.
              
              Description3.1.*
              
              Articles
                  of Organization3.1.*
              
              Operating
                  Agreement of Lakeside Mortgage Fund, LLC3.2.**
              
              Amendment
                  No. 1 to Operating Agreement31.1.
              
              Certification
                  of Chief Executive 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.





*
      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.





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
      of
      1934 the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereto duly authorized on this 14 th day of
      November, 2008.


LAKESIDE
                  MORTGAGE FUND, LLC,A
                  California Limited Liability CompanyBy:
              Lakeside
                  Financial Group, Inc.,ManagerBy:
              /S/
                  Paula M. LewisPaula M. Lewis, President &
CEO




25