Vestin Fund II, LLC - Post-Eff. Am #4 to Form S-11

Approximate date of commencement of proposed sale to the public: As soon as practicable following effectiveness of this Registration Statement.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o


(1)	The number of units being registered includes units offered under our distribution reinvestment plan.

(2)	This registration fee has already been paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Vestin Fund II, LLC is a Nevada limited liability company (the “Fund”). We invest in mortgage loans, which are loans where our collateral is real property. The loans will be selected for us by our Manager, Vestin Mortgage, Inc. (formerly Capsource, Inc. and doing business as Vestin, Inc.; “Vestin Mortgage”). Vestin Mortgage will originate and service our mortgage loans and will be responsible for our day to day operations.

We are offering and selling to the public up to a maximum of 50,000,000 units for $10.00 per unit. This Offering includes units to be issued under our distribution reinvestment plan.

Of the total net proceeds we receive from this Offering, we intend to use 3% as a cash reserve and we intend to invest 97% in mortgage loans. As of June 30, 2003, we raised approximately $397,783,000 from this Offering. If the maximum number of units are sold, we will have $485,000,000 to invest in mortgage loans.


	•	Restricted right to sell or transfer your units

	•	Investment in unspecified mortgage loans

	•	Restricted distributions and increased risk due to leveraging

	•	Total reliance on Vestin Mortgage

	•	Conflicts of interest for Vestin Mortgage

	•	Payment of substantial fees to Vestin Mortgage

	•	Recent organization, limited operating history, and lack of external financing sources

	•	Tax risks of the Offering and membership in the Fund

	•	Limited voting rights of investors

You should read the complete discussion of the risk factors beginning on page 10.

Units will be sold by Vestin Capital, Inc. (formerly DM Financial Services, Inc.; “Vestin Capital”), the lead dealer selling our units in this Offering, as well as by Vestin Mortgage, where permitted. Vestin Capital and Vestin Mortgage are both owned by the same company, Vestin Group, Inc. (formerly known as Sunderland Corporation; “Vestin Group”).

You must purchase at least 200 units for $2,000 (some states may require higher minimum purchases). To purchase units, you must first sign the enclosed subscription agreement and make the representations and warranties included in that agreement. We will sell up to 50,000,000 units. We will terminate the Offering on the earlier of June 12, 2004 or the date on which the sale of the 50,000,000 units offered is completed.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE UNITS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. NO ONE IS PERMITTED TO MAKE ANY ORAL OR WRITTEN PREDICTIONS ABOUT THE CASH BENEFITS OR TAX CONSEQUENCES YOU WILL RECEIVE FROM YOUR INVESTMENT.

Any certificates representing units resulting from any offers or sales of units to California residents will bear the following legend restricting transfer:


	It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the Commissioner of the Corporation of the State of California, except as permitted in the Commissioner’s Rules.

A copy of the applicable rule of the California Commissioner of Corporations will be furnished to each California investor by Vestin Mortgage.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

Because this is a summary, it does not contain all the information that may be important to you. Before you invest, you should read this entire prospectus carefully, including the section entitled “Risk Factors,” beginning at page 10, and the Financial Statements and Notes, beginning at page F-1.

The following chart shows the ownership structure of the various persons and entities that are affiliated with Vestin Group and Vestin Mortgage as of June 30, 2003:

Where the fees below are described as competitive fees or based on local market conditions, that means the fees are determined by price competition within a given market. To ensure that our fees remain competitive, we will directly contact our competition, such as major banks in the local market or other relevant commercial lenders. We expect that the interest rate on the loans in which we invest will be 2-3 points higher than comparable loans made by banks and that the fees paid to Vestin Mortgage will be 2-3 points higher than similar fees charged by conventional lenders. We believe that this rate structure is consistent with rates and fees charged by other non-conventional lenders. References below to local law also contemplate additional requirements imposed by local or state law, such as usury laws.

You should carefully consider the following risks and other information in the prospectus before purchasing units.

We were organized in December 2000 and began operation in June 2001. Accordingly we have a limited operating history. We have limited external sources of financing and are primarily relying on capital contributions received via this Offering. As a result, you will have only limited information regarding our past performance to determine the likelihood of our achieving our investment objectives. In addition, our operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance.

There will be no public trading market for your units, and you cannot freely sell or transfer your units or use them as collateral for a loan. Our Operating Agreement restricts the transfer of units so that we may avoid being classified as a “publicly traded partnership” under Section 7704 of the Internal Revenue Code. Because classification as a publicly traded partnership would significantly decrease the value of the units of all our members, Vestin Mortgage must consent to any sale or assignment of your units. Vestin Mortgage will withhold its consent to the extent necessary to prohibit transfers that could cause us to be classified as a publicly traded partnership. Further, the resale of the units may be restricted by state securities laws. Consequently, you may not be able to obtain cash for your units in a timely manner and you should anticipate holding the units for at least one year and possibly much longer.

Should you determine to redeem your units, you must deliver written notice requesting redemption to Vestin Mortgage at least 61 days prior to the redemption. You have a limited ability to have your units redeemed by us. The significant limitations on your ability to have your units redeemed are the following:


	•	You can only redeem your units after you have held them for one year.

	•	Redemption payments only return all or the requested part of your capital account and are not affected by the value of our underlying assets, except for any payment made upon final liquidation. The value of your capital account may fluctuate depending on our performance.

	•	There is no reserve fund for repurchases.

	•	Payments are made only to the extent we have available cash from proceeds of repayments of principal and capital contributions and the redemption would not impair the capital or operation of the Fund (“Net Proceeds”).


	•	The total amount withdrawn by all members during any calendar year cannot exceed 10% of the amount of capital accounts of all the members with a yearly limit per member of $100,000 subject to the Manager’s discretion to allow a greater amount.


	•	We will only make redemption payments once a month.

	•	If your units are redeemed, you will be paid within 61 to 91 days after you deliver written notice of withdrawal to Vestin Mortgage.

Because a substantial portion of our loans are made on an “interest only” basis, we will not receive Net Proceeds as frequently as we would with loans where the principal is repaid in periodic installments. To help permit redemptions, we will not refinance or invest in new loans using payments of loan principal

Our ability to achieve our investment objectives and to pay distributions to you depends upon Vestin Mortgage’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers. You will have no opportunity to evaluate the financial information or creditworthiness of borrowers, the terms of mortgages, the real property that is our collateral or other economic or financial data concerning our loans. You must rely entirely on the judgment of Vestin Mortgage in investing the proceeds of this Offering.

We invest in mortgage loans throughout the areas in which Vestin Mortgage and its correspondents have experience, primarily Arizona, California, Hawaii, Nevada and Texas. Depending on the market and on the Fund’s performance, we plan to expand our investments throughout the United States. However, Vestin Mortgage has limited experience outside of the Southwest. Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state. Vestin Mortgage’s limited experience in most U.S. real estate markets may impact its ability to make prudent investment decisions on our behalf. Accordingly, where Vestin Mortgage deems it necessary, it plans to utilize independent real estate advisors and local legal counsel located in markets where Vestin Mortgage lacks experience for consultation prior to making investment decisions. You will not have an opportunity to evaluate the qualifications of such advisors and no assurance can be given that they will render prudent advice to our Manager.

We do not have any directors, officers or employees. Our success depends upon the continued contributions of certain key personnel of Vestin Mortgage, including Michael V. Shustek, Peggy S. May, and Lance K. Bradford, each of whom would be difficult to replace because of their extensive experience in the field, extensive market contacts and familiarity with Vestin Mortgage’s activities. If any of these key employees were to cease employment, our operating results could suffer. Our future success also depends in large part upon Vestin Mortgage’s ability to hire and retain additional highly skilled managerial, operational and marketing personnel. Vestin Mortgage may require additional operations and marketing people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the market. The size of our loan portfolio may require Vestin Mortgage to hire and retain additional financial and accounting personnel to assist Mr. Bradford in managing Vestin Mortgage’s accounting services. Competition for accounting personnel is intense, and we cannot assure you that Vestin Mortgage will be successful in attracting and retaining skilled personnel. Should Vestin Mortgage be unable to attract and retain key personnel, the ability of Vestin Mortgage to make prudent investment decisions on our behalf may be impaired.

We anticipate that we will borrow funds to expand our capacity to invest in mortgage loans. We may borrow up to 70% of the fair market value of our outstanding mortgage loans at any time. Any such borrowings will require us to carefully manage our cost of funds. No assurance can be given that we will be successful in this effort. Should we be unable to repay the indebtedness and make the interest payments on the loans, the lender will likely declare us in default and require that we repay all amounts owing under the loan facility. Even if we are repaying the indebtedness in a timely manner, interest payments owing on the borrowed funds may reduce our income and the distributions you receive.

We may borrow funds from several sources, and the terms of any indebtedness we incur may vary. However, some lenders may require as a condition of making a loan to us that the lender will receive a priority on mortgage repayments received by us. As a result, if we do not collect 100% on our investments, the first dollars may go to our lenders and we may incur a loss which will result in a decrease of the amount available for distribution to you. In addition, we may enter into securitization arrangements in order to raise additional funds. Such arrangements could increase our leverage and adversely affect our cash flow and our ability to make distributions to you.

Pursuant to our Operating Agreement, we may be required to indemnify Vestin Mortgage or any of its affiliates, agents, or attorneys from any action, claim or liability arising from any act or omission made in good faith and in performance of its duties under the Operating Agreement. The availability of such indemnification may reduce the amount of funds we have available to distribute to you.

We are in the business of investing in mortgage loans and, as such, we are subject to risk of defaults by borrowers. Any failure of a borrower to repay loans or interest on loans will reduce our revenues and your distributions, the value of your units and your interest in the Fund as a whole.



	•	We depend upon our real estate security to protect us on the loans that we make. We depend upon the skill of independent appraisers to value the security underlying our loans. However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent events. Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower. Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals. In addition, most of the appraisals are prepared on an “as if-developed basis”. If the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute to you.



	•	We intend to invest approximately 15-25% of our assets in loans made for the purchase or development of raw, unimproved land. Generally, we determine whether to invest in these loans based upon the appraised value of the property and the borrower’s actual capital investment in the property. Typically, we will invest in loans with a face value of up to 60% of the as-if developed appraised value of the property and we usually require that the borrower have invested in the property actual capital expenditures of at least 25% of the property’s value. As-if developed values on raw and unimproved land loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection of a purchaser against multiple alternatives, and successful development by the purchaser; upon which development is dependent on availability of financing. These loans are riskier because the property is not capable of generating any income, as compared to a commercial property. As of June 30, 2003 approximately 7% of our loans were in this category.



	•	We may invest approximately 10-25% of our assets in acquisition and development loans. These loans enable borrowers to acquire and/or complete the basic infrastructure and development of their property prior to the construction of buildings or structures. Such development may include installing utilities, sewers, water pipes, and/or streets. Generally, we will invest in loans with a face value of up to 60% of the appraised value of the property. Loan to value ratios on some acquisition and development loans may be calculated using as-if developed appraisals. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above. As of June 30, 2003 approximately 8% of our loans were in this category.



	•	We intend to invest approximately 10-70% of our assets in construction loans. These are loans generally made to real estate developers to fund the construction of one or more buildings on real property. Funds under this type of loan will generally not be forwarded to the borrower until work in the previous phase of the project has been completed and an independent inspector has verified certain aspects of the construction and its costs. We will typically require material and labor lien releases by the borrower per completed phase of the project. We will review the appraisal of the value of the property and proposed improvements, and will arrange loans for up to 75% of the appraised value. Loan to value ratios on some construction loans may be calculated using as-if developed appraisals. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above. These loans are riskier than loans secured by income producing properties because during construction the borrower does not receive income from the property to make payments on the loan. As of June 30, 2003, approximately 33% of our loans were in this category.



	•	We intend to invest approximately 20-50% of our assets in commercial property loans. These loans provide funds to allow commercial borrowers to acquire income-producing property or to improve or renovate property to increase the value or net operating income of the property so that it may qualify for institutional refinancing. We will review the appraisal of the value of the property and will invest in loans for up to 75% of such appraised value. To the extent such loans include renovations, appraisals may include as-if valuations with the limitations described above. These loans are riskier because there is no assurance that the commercial borrower will qualify for the refinancing or that the improvements will yield the anticipated increase in value and income. As of June 30, 2003, approximately 42% of our loans were in this category.



	•	A small percentage of our assets may be invested in residential loans. Such loans facilitate the purchase or refinance of one to four family residential property units provided the borrower used one of the units on the property as such borrower’s principal residence. We will review the appraisal of the value of the property and will invest in loans for up to 75% of such appraised value. As of June 30, 2003, less than 4% of our loans were in this category.



	•	We may invest up to 15% of our assets in bridge loans. These loans provide interim financing (up to 12 to 24 months) to enable commercial borrowers to qualify for permanent refinancing. We will review the appraisal of the value of the property and will generally invest in loans of up to 75% of that value. Such appraisals may be based on either an as-is basis or as-if developed basis, depending on the circumstances, and therefore, may not be an accurate indicator of the fair value of the property. These loans are riskier because there is no assurance that the developer will qualify for the refinancing. As of June 30, 2003, approximately 6% of our loans were in this category.



	•	We may also invest up to 10% of our assets in second mortgage loans and, in rare instances, wraparound, or all-inclusive, mortgage loans. In a second mortgage loan, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the first mortgage lender. In a wraparound mortgage loan, our rights will be similarly subject to the rights of a first mortgage lender, but the aggregate indebtedness evidenced by our loan documentation will be the first mortgage loan plus the new funds we invest. We would receive all payments from the borrower and forward to the senior lender its portion of the payments we receive. Because both of these types of loans are subject to the first mortgage lender’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans. As of June 30, 2003, less than 1% of our loans were second mortgage loans.


	•	Currently, substantially all of the loans we invest in or purchase will require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. Loans with balloon payments are riskier than loans with even payments of principal over an extended time period like 15 or 30 years because the borrower’s repayment depends on its ability to sell the property profitably, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due. There are no


		specific criteria used in evaluating the credit quality of borrowers for mortgage loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

	•	We will generally invest in loans that constitute an amount equal to the lesser of 5% of the total amount raised in this Offering or $10,000,000. However, we may invest in a larger loan depending on such factors as the performance of the Fund and the value of the collateral; such larger loans shall not exceed an amount equal to 20% of the total capital contributions raised in this Offering. These larger loans are risky because they may reduce our ability to diversify our loan portfolio.


	•	Up to 20% of our assets may be invested in loans where the collateral is an interest in a lease. These loans are riskier because the only rights we will have is to assume the borrower’s obligations under the lease and to use the property for the length of time and in the limited manner permitted under the lease. As of June 30, 2003, we did not have any loans secured by a leasehold interest.


	•	Our underwriting standards and procedures are more lenient than conventional lenders in that we will invest in loans to borrowers who may not be required to meet the credit standards of conventional mortgage lenders, which may create additional risks to your return.

	•	We approve mortgage loans more quickly than other mortgage lenders. Generally, we will not spend more than 20 days assessing the character and credit history of our borrowers. Due to the nature of loan approvals, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to the borrower and the security. There may be a greater risk of default by our borrowers which may impair our ability to make timely distributions to you and which may reduce the amount we have available to distribute to you.

Our loans are not insured or guaranteed by a federally owned or guaranteed mortgage agency. Consequently, our recourse if there is a default may only be to foreclose upon the mortgaged real property. The value of the foreclosed property may have decreased and may not be equal to the amount outstanding under the corresponding loan, resulting in a decrease of the amount available to distribute to you.

We do not expect our mortgage loans to be marketable and we do not expect a secondary market to develop for them. As a result, we will generally bear all the risk of our investment until the loans mature. This will limit our ability to hedge our risk in changing real estate markets and may result in reduced returns to our investors.

We believe that our loan documents will enable us to enforce our commercial arrangements with borrowers. However, the rights of borrowers and other secured lenders may limit our practical realization of those benefits. For example:


	•	Judicial foreclosure is subject to the delays of protracted litigation. Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it.

	•	The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property.

	•	Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights.

	•	The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral.

	•	We may not be able to pursue deficiency judgments after we foreclose on collateral.

	•	State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.

We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale. Under applicable environmental laws, however, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment. Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person would be able to indemnify us to the full extent of our liability. Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.



	•	As of June 30, 2003, none of our loans have a prepayment penalty. Based on Vestin Mortgage’s historical experience, we expect that at least 90% of our loans will continue to not have a prepayment penalty. Should interest rates decrease, our borrowers may prepay their outstanding loans with us in order to receive a more favorable rate. This may reduce the amount of funds we have available to distribute to you.


	•	Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets. If the economy is healthy, we expect that more people will be borrowing money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too much and the cost of borrowing may become too expensive. Alternatively, if the economy enters a recession, real estate development may slow. A slowdown in real estate lending may mean we will have fewer loans to acquire, thus reducing our revenues and the distributions you receive.

	•	One of the results of interest rate fluctuations is that borrowers seek to extend their low-interest-rate mortgage loans after market interest rates have increased. Generally, our loan documents


		permit us to raise the interest rate we charge on extended loans anywhere from between 0.75% to 3% from the then-current rate on the loan. This creates two risks for us:


	•	There is no assurance that this permitted rate increase will be adequate if interest rates have increased beyond the range contemplated by our loan documents. If interest rates rise, borrowers under loans with monthly or quarterly principal payments may be compelled to extend their loans to decrease the principal paid with each payment because the interest component has increased. If this happens, we are likely to be at a greater risk of the borrower defaulting on the extended loan, and the increase in the interest rate on our loan may not be adequate compensation for the increased risk. Additionally, any fees paid to extend the loan are paid to Vestin Mortgage, not to us. Our revenues and distributions will decline if we are unable to reinvest at higher rates or if an increasing number of borrowers default on their loans.

	•	If, at a time of relatively low interest rates, a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in mortgage loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. This is a risk if the loans we invest in do not have prepayment penalties or exit fees.

	•	Our results will also reflect other economic conditions, such as a particular industry migrating to or from one of the states into which we make loans.

Our competitors consist primarily of conventional mortgage lenders and mortgage loan investors including commercial banks, insurance companies, mortgage brokers, pension funds and other institutional lenders. Many of the companies against which we and Vestin Mortgage compete have substantially greater financial, technical and other resources than either the Fund or Vestin Mortgage. Additionally, if our competition decreases interest rates on their loans or makes funds more easily accessible, yields on our loans could decrease and the costs associated with making loans could increase, both of which would reduce our revenues and the distributions you receive.

As a company investing in mortgage loans and raising funds through a public offering, we are subject to the NASAA Mortgage Program Guidelines (the “NASAA Guidelines”) promulgated by the state securities administrators. The NASAA Guidelines govern, among other things, our debt to equity ratio and the diversity and composition of our investments. For example, the NASAA Guidelines provide that we may not invest in or make mortgage loans to or from any one borrower which would exceed, in the aggregate, an amount greater than 20% of the capital contributions which we will raise. The NASAA Guidelines are intended to protect the interests of investors. However, our flexibility in making business decisions may be limited by our obligation to comply with the NASAA Guidelines.

The risk factors below describe material conflicts of interest that may arise in the course of Vestin Mortgage’s management and operation of our business. The list of potential conflicts of interest reflects our knowledge of the existing or potential conflicts of interest as of the date of this prospectus. We cannot assure you that no other conflicts of interest will arise in the future.

Vestin Mortgage is the manager of Vestin Fund I, LLC (“Vestin Fund I”) and inVestin Nevada, Inc., funds with investment objectives similar to ours. Vestin Mortgage and Mr. Shustek, who indirectly owns a controlling interest in Vestin Mortgage, anticipate that they will also sponsor other real estate programs having investment objectives similar to ours and engage in the business activities described in the “Conflicts of Interest” section in this prospectus. As a result, Vestin Mortgage and Mr. Shustek may have conflicts of interest in allocating their time and resources between our business and those other activities. During times of intense activity in other programs and ventures, Vestin Mortgage and its key people,

Mr. Shustek, Ms. May and Mr. Bradford will likely devote less time and resources to our business than they ordinarily would. The Operating Agreement does not specify a minimum amount of time and attention that Vestin Mortgage and its key people are required to devote to the Fund. Thus, Vestin Mortgage may not spend sufficient time managing our operations which could result in our not meeting our investment objectives.

Vestin Mortgage will receive substantial fees from borrowers for transactions involving loan mortgages. Many of these fees are paid on an up-front basis. These fees are quantified and described in greater detail under “Compensation to Vestin Mortgage and Affiliates” in the summary and in the compensation table contained in this prospectus. Vestin Mortgage’s compensation is based on the volume and size of the mortgages selected for us. Our interests may diverge from those of Vestin Mortgage and Mr. Shustek to the extent that Vestin Mortgage benefits from up-front fees which are not shared with us.

Vestin Mortgage will be receiving fees from borrowers that would otherwise increase our returns. Because Vestin Mortgage receives all of these fees, our interests will diverge from those of Vestin Mortgage and Mr. Shustek when Vestin Mortgage decides whether we should charge the borrower higher interest rates or Vestin Mortgage should receive higher fees from the borrower.

We expect to invest in mortgage loans when one or more other companies managed by Vestin Mortgage are also investing in mortgage loans. There is a risk that Vestin Mortgage may select for us a mortgage loan investment that provides lower returns than a mortgage loan investment purchased by another Vestin Mortgage program or entity. Vestin Mortgage also serves as a manager for Vestin Fund I which has the same investment objectives as our Fund. There are no restrictions or guidelines on how Vestin Mortgage will determine which loans are appropriate for us and which are appropriate for Vestin Fund I or another company which Vestin Mortgage manages.

We will consider investing in or purchasing loans jointly with other lenders, some of whom might be affiliates of Vestin Mortgage. All loans with non-affiliates shall be structured to provide us with a controlling interest. Although it is not our intention to lose control, there is a risk that we will be unable to remain as the lead lender in the loans in which we participate in the future. In the event of participation with a publicly registered affiliate, the investment objectives of the participants shall be substantially identical. There shall be no duplicate fees. The compensation to the sponsors must be substantially identical, and the investment of each participant must be on substantially the same terms and conditions. Each participant shall have a right of first refusal to buy the other’s interest if the co-participant decides to sell its interest. We will not participate in joint ventures or partnerships with affiliates that are not publicly registered except as permitted in the NASAA Guidelines. If our co-participant affiliate determines to sell its interest in the loan, there is no guarantee that we will have the resources to purchase such interest and we will have no control over a sale to a third party purchaser.

You cannot exercise control over our daily business affairs and implement changes in our policy. Vestin Mortgage, subject to the provisions in our Operating Agreement, may modify our investment strategies without your consent. Moreover, Vestin Mortgage may amend the Operating Agreement without the consent of a majority of our members to:


	•	remedy any ambiguity or formal defect or omission within the Agreement;

	•	conform the Agreement to applicable laws and regulations; and


	•	make any changes to the Agreement which, in the judgment of Vestin Mortgage, is not to the prejudice of the members.

You may vote only in a limited number of specific instances, in which case a majority of our members (not to include Vestin Mortgage) can take action and bind all of the members. These situations in which all members (except Vestin Mortgage) are entitled include votes to:


	•	dissolve the Fund;

	•	change the nature of our business;

	•	amend the Operating Agreement (in certain cases);

	•	remove and replace Vestin Mortgage;

	•	approve a merger with or into another company; or

	•	approve a sale of all or a majority of our assets.

Although Vestin Mortgage may not change the nature of our business without majority approval, Vestin Mortgage may change our investment policies consistent with the fiduciary duties it owes to all of the members. While you will not have any vote on these investment policies, you retain your vote to remove and replace Vestin Mortgage.

The value of your share of our underlying assets at any time may be less or more than $10.00 per unit, depending on when the unit was purchased. For example, if the fair market value of our assets at the time of a capital contribution or distribution reinvestment is less than the cost of these assets on our books, then the value of your units immediately after a capital contribution or distribution reinvestment may be less than $10.00 dollars.

Vestin Capital, the lead dealer in this Offering, is a securities brokerage firm formed in early 1999 that has previously participated only in the offering of Vestin Fund I. As a result, Vestin Capital has a limited history of selling publicly offered securities and in recruiting dealers to assist in the sale of publicly offered securities. The absence of this track record may make it more difficult for it to sell our units. If Vestin Capital does not sell a sufficient number of our units, we may not be able to diversify our portfolio to the extent necessary to achieve our objectives.

Vestin Capital is wholly-owned by Vestin Group Inc., which also owns Vestin Mortgage. Consequently, Vestin Capital may have a conflict of interest in performing its obligations to conduct a “due diligence” investigation of the statements made in this prospectus and may not conduct the investigation with the same degree of care as a non-affiliated dealer. An independent due diligence investigation assists in verifying the information provided in a prospectus. The fact that no independent underwriter will conduct an investigation in connection with this prospectus may increase the likelihood that this prospectus will not disclose risks or other matters you might consider important in determining whether or not to purchase our units.

If we do not qualify as a partnership for any taxable year, we would then be subject to federal income tax on any taxable income in that taxable year at regular corporate rates. You could not then take tax

deductions for your share of our deductions or credits. You would be subject to tax on your share of our income to the extent we distribute it to you out of current or accumulated earnings and profits, or as taxable gain in excess of the cost of your units. If we were taxed as a corporation, your cash flow, the distributions you receive and the value of your units will be significantly reduced. See “Federal Income Tax Consequences—General Principles of Partnership Taxation,” at page 82 and “Federal Income Tax Consequences—Tax Rates on a Member’s Share of Ordinary Income from the Fund,” at page 85.

If we are deemed to not be engaged in a trade or business, the tax benefits of partnership status will be adversely affected in that your share of our expenses would be deductible only to the extent that all of your miscellaneous itemized deductions exceed two percent of your adjusted gross income.

Our tax counsel did not opine as to the proper tax treatment of certain fees and expenses Vestin Mortgage may receive as such treatment depends on circumstances arising during and after the Offering. Such fees and expenses include: the credit Vestin Mortgage may receive for fees paid to non-affiliates in connection with the offering; the management fee of up to 0.25%; and administrative fees of up to 3% on the sale of foreclosed properties. The proper tax treatment of these fees and expenses depends on whether the Internal Revenue Service determines the fees and expenses to be commercially reasonable.

If we are audited by the IRS and it makes determinations adverse to us, including the disallowance of deductions we have taken, the IRS may decide to audit your income tax returns. Any such audit could result in adjustments to your tax return for items of income, deductions or credits, and the imposition of penalties and interest for the adjustments and additional expenses for filing amended income tax returns.

If we are treated as a partnership for federal income tax purposes but as a corporation for state or local income tax purposes, or if deductions that are allowed by the IRS are not allowed by state or local regulators, your cash flow and distributions would be adversely affected.

There are special considerations that apply to pension or profit sharing trusts or IRAs investing in units. If you are investing the assets of a pension, profit sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in the Fund, you could incur liability or subject the plan to taxation if:


	•	your investment is not consistent with your fiduciary obligations under ERISA and the Internal Revenue Code;

	•	your investment is not made in accordance with the documents and instruments governing your plan or IRA, including your plan’s investment policy.

	•	your investment does not satisfy the prudence and diversification requirements of Sections 40(a)(1)(B) and 404(A)(1)(C) of ERISA.

	•	your investment impairs the liquidity of the plan.

	•	your investment produces “unrelated business taxable income” for the plan or IRA.

	•	you will not be able to value the assets of the plan annually in accordance with ERISA requirements.

	•	your investment constitutes a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

The funds we receive pursuant to this Offering, or otherwise, will not be commingled with the funds of Vestin Mortgage or any other party. We will invest approximately 97% of the Offering proceeds in mortgage loans. We will maintain working capital reserves of approximately 3%. This reserve is available to pay any future expenses in excess of revenues, satisfy obligations of underlying security properties, expend money to satisfy our unforeseen obligations and for other permitted uses of our working capital. Working capital reserves of up to 3% in cash or cash equivalents are excluded from the funds committed to mortgage investments in determining what proportion of the Offering proceeds and reinvested distributions have been invested in mortgage loans.

The following table contains information about the estimated use of the gross proceeds of this Offering.

Although our expenses in connection with this Offering are billed directly to us, Vestin Mortgage will pay all selling commissions and expenses related to this Offering. Vestin Mortgage may pay normal sales commission to a registered broker-dealer or any other licensed person or entity; however, Vestin Mortgage shall not pay any compensation to any person or entity engaged by a potential investor for investment advice. To the extent that such expenses consist of filing and review fees, legal, accounting, printing and other expenses of this Offering paid to non-affiliates of Vestin Mortgage, payment of such expenses was deemed a capital contribution to us by Vestin Mortgage up to 2% of the total capital contribution received in this Offering, and in no event shall such amount exceed $1,100,000. As of June 30, 2003, such expenses exceeded $1,100,000. As a result, Vestin Mortgage received 110,000 units. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs. Such expenses are described further in the registration statement of which this prospectus forms a part.

Borrowers will pay to Vestin Mortgage all acquisition, selection, processing, extension and brokerage and selling expenses for loans made by Vestin Mortgage. Consequently, these expenses do not appear in the table.

We are responsible to pay our operational expenses. Such expenses include our annual management fee to our Manager (see “Compensation of Vestin Mortgage and Affiliates” beginning at page 54), legal fees, accounting fees, tax preparation fees and certain filing fees. We do not have any office expenses as such services are provided to us by our Manager in consideration of our management fee. The foregoing expenses are fully funded out of cash flow from operations or, if necessary, our capital reserve.

Vestin Mortgage has not set the amount of sales proceeds to be allocated to the various types of mortgage loans in which we invest, except to the extent of the guidelines described in “Investment Objectives and Policies” beginning at page 25. Vestin Mortgage reviews each loan to determine if it meets our investment criteria. We plan to invest the entirety of our cash available for investments in mortgage

Pending investment in mortgage loans, we may invest the proceeds of this Offering in relatively safe, short-term liquid investments such as U.S. Treasury bills, notes or bonds, certificates of deposit or commercial paper. We anticipate that these proceeds, once received, will be held in an account with US Bank in Las Vegas, Nevada or in an account at a financial institution or securities firm that has assets in excess of $50,000,000.

As a result of the risks inherent in an investment in units, the units are suitable only for persons who meet the financial suitability standards adopted by the states in which they live, as set forth below. Our units are only suitable for those who desire a relatively long term investment for which they do not need liquidity for at least one year, in light of the other limitations on redemption and transfer described in this prospectus.

You must meet one of the investor suitability standards contained in the second and third columns in the table below and the suitability standard contained in the fourth column, if applicable, to purchase units and to participate in our reinvestment plan. Fiduciaries must also meet one of these conditions. If the investment is a gift to a minor, the custodian or the donor must meet these conditions. For purposes of the net worth calculations below, net worth is the amount by which your assets exceed your liabilities, but excluding your house, home furnishings or automobile(s) among your assets. In the subscription agreement, you will have to confirm that you meet these minimum standards. The inclusion of a state in the chart below is for informational purposes only and is not intended to imply that the Offering of units has been qualified in the particular state at this time. We will not sell in a state in which we have not qualified the Offering.

In addition to the foregoing suitability standards, we cannot accept subscriptions from anyone if the representations required are either not provided or are provided but are inconsistent with our determination that the investment is suitable for the subscriber. In addition to the financial information we require, the representations we require of you state that you:


	•	understand that we will accept your subscription no sooner than five (5) business days following the date of the Subscription Agreement, but not later than 30 days;

	•	understand that no federal or state agency has made any finding or determination as to the fairness of public investment in, or made any recommendation or endorsement of, the units; and

	•	understand that an investment in us will not, in itself, create a retirement plan as described in the Internal Revenue Code and that, to create a retirement plan, you must comply with all applicable provisions of the Internal Revenue Code.

Each of these representations reflects that we are not indicating any approval by anyone other than Vestin Mortgage or that an investment will have an effect other than to make you a member of the Fund.

You will also acknowledge that you are familiar with some of the risk factors we describe and that this investment matches your investment objectives. Specifically, you represent to us that you:


	•	understand that we intend to be taxed as a partnership and not as a corporation, and that, among other things, this may result in your being required to pay taxes even though we may not have distributed cash to you;

	•	understand that there will be no public market for the units, that there are substantial restrictions on repurchase, sale, assignment or transfer of the units, and that it may not be possible readily to liquidate an investment in the units; and

	•	have been advised to read the risk factors set forth in this prospectus and to determine whether your investment objectives correspond to those stated in this prospectus; specifically, you acknowledge that the purpose of your investment is to receive monthly cash distributions from the income earned on our mortgage loans and to have us preserve and return your capital contributions.

You will also represent to us that you have the capacity to invest in the Fund by confirming that:


	•	you are legally able to enter into a contractual relationship with us, and, if you are an individual, have attained the age of majority in the state in which you live; and

	•	if you are a trustee, you are the trustee for the trust on behalf of which you are purchasing the units, and have due authority to purchase units on behalf of the trust.

If you are purchasing as a fiduciary, you will also represent that the above representations and warranties are accurate for the person(s) for whom you are purchasing units.

By executing the subscription agreement, you will not be waiving any rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The subscription agreement also contains a series of short questions so that we or our dealers may also assess for ourselves the accuracy of these representations. For employee benefit plans, the questions are more expansive because of the application of additional provisions of the Internal Revenue Code relating to retirement plans.

Due to the nature of our investments, it is likely that all or substantially all of our income will be taxable to you as ordinary income. See “Federal Income Tax Consequences” at page 79. The units may, therefore, be suitable for:


	•	persons seeking current taxable income;

	•	Keogh Plan accounts or corporation, pension or profit sharing plans, which we refer to collectively as qualified plans;


	•	IRAs or Roth IRAs;

	•	Simplified Employee Pensions, or SEP’s; and

	•	other entities exempt from federal income taxation such as endowment partnerships and foundations, and charitable, religious, scientific or educational organizations (assuming the provisions of their governing instruments and the nature of their tax exemptions permit such investment).

Our investment objectives and policies are intended to make the units suitable investments for employee benefit plans under current law. In this regard, ERISA provides a comprehensive regulatory scheme for plan assets. Further, Vestin Mortgage intends to manage us so that an investment by a qualified plan will not make our assets plan assets under ERISA. The ERISA regulations are also applicable to an IRA. See “Federal Income Tax Consequences—ERISA Considerations” at page 90.

Vestin Mortgage is not permitted to allow any qualified plan to purchase units if Vestin Mortgage has investment discretion over the assets of the qualified plan, or if Vestin Mortgage regularly gives individualized investment advice that serves as the primary basis for the investment decisions made for these assets. This prohibition is designed to prevent a violation of ERISA. You should obtain the advice of your attorney, tax advisor, or business consultant for the legal, tax and business aspects of this investment before subscribing for units.

To assure that this Offering complies with applicable state law, each dealer selling our units is required to:


	•	inquire diligently of all prospective investors to assure that our units are a suitable investment in light of the investor’s age, educational level, knowledge of investments, financial means and other pertinent factors;

	•	for at least six years, maintain records of the information used to determine that an investment in units is suitable and appropriate for each investor; and

	•	transmit promptly to us all properly completed and executed subscription agreements.

In addition, the NASAA Guidelines require each dealer selling our units to determine that an investment in our units is a suitable and appropriate investment for each prospective investor. In making this determination, the dealer shall ascertain that a prospective investor can meet the established minimum income and net worth standards, reasonably benefit from an investment in our units based on their overall investment objectives and portfolio structure and bear the risks of the investment based on their overall financial condition. They must also determine whether a prospective investor has an apparent understanding of the fundamental risks of the investment, the potential risk of losing the entire investment, the lack of liquidity and restrictions on transferability of the units, the background and qualifications of Vestin Mortgage and the tax consequences of the investment.

Our business strategy is designed to generate current income by investing in mortgage loans. We believe there is a significant market opportunity to make mortgage loans to owners and developers of real property whose financing needs are not met by traditional mortgage lenders. The strict underwriting standards and length of time required by traditional mortgage lenders such as commercial banks results in some potential borrowers who are unable to obtain such financing or who are unwilling to go through the time consuming process often required by traditional lenders.

We loan funds to such borrowers provided that they have sufficient equity in the underlying real estate and otherwise meet our lending criteria. We adopt the underwriting standards of Vestin Mortgage in evaluating potential investments in mortgage loans. Generally speaking, Vestin Mortgage’s underwriting standards are less strict than traditional mortgage lenders and Vestin Mortgage’s loan approval process is faster than traditional lenders. As a result, in certain cases we may make mortgage loans which are riskier than the mortgage loans made by commercial banks. However, in return we anticipate receiving a higher interest rate and Vestin Mortgage will take steps intended to mitigate the risks, such as imposing a lower loan to value ratio (thereby providing us with a bigger equity cushion if real estate values drop.)

We believe that by focusing on the value of the underlying real estate which will serve as collateral on our mortgage loans, Vestin Mortgage can expedite the loan approval process and approve loans to certain borrowers who might not qualify for loans from traditional mortgage lenders. Vestin Mortgage generally spends not more than 20 days assessing the character and credit history of our borrowers. Rather, Vestin Mortgage focuses its underwriting review on the value of the collateral which secures our loan.

As with all investments, there is a relationship between the risk assumed and the possible reward earned through our business strategy. We assume more risk than traditional mortgage lenders. In return, we seek to generate higher yields from our mortgage loans.

We invest in mortgage loans throughout the areas in which Vestin Mortgage and its correspondents have experience, primarily Arizona, California, Hawaii, Nevada and Texas. Depending on the market and on the Fund’s performance, we plan to expand our investments throughout the United States. However, Vestin Mortgage has limited experience outside of the Southwest. The loans we invest in are selected for us by Vestin Mortgage from among loans originated by Vestin Mortgage or non-affiliated mortgage brokers. When Vestin Mortgage or someone else originates a loan for us, that person identifies the borrower, processes the loan application, makes or invests in the loan, and brokers or sells the loan to us. We believe that our loans are attractive to borrowers because of the expediency of Vestin Mortgage’s loan approval process, which takes about 10 to 20 days. Vestin Mortgage obtains, negotiates and makes each loan, after which we acquire the loan, provided that the cost of the mortgage does not exceed the funds reasonably anticipated to be available to us to purchase the loan.

As a non-conventional lender, we are more willing to invest in mortgage loans to borrowers that conventional lenders would not deem to be creditworthy. See “Risk Factors—Risks of the Mortgage Lending Business” at page 12. Because of our increased willingness to fund riskier loan types and borrowers, borrowers are willing to pay us an interest rate that is 2–3 points above the rates charged by conventional lenders. We invest a significant amount of our funds in loans in which the real property being developed is not generating any income to the borrower. Up to 70% of our assets may be invested in construction loans and not more than 25% of our assets may be invested in unimproved land loans. Our second mortgage investments are riskier because our rights will be subject to the rights of the first mortgage lender. We may invest up to 10% of our assets in second mortgage loans. The “balloon payment” loans and bridge loans in which we invest are riskier because the borrower’s repayment depends on its ability to refinance the loan or develop the property so it can refinance the loan. Up to 15% of our assets may be invested in bridge loans. In addition, approximately 20% to 50% of our assets may be invested in commercial property loans, 10% to 25% in acquisition and development loans and a small

In addition to those policies contained in this prospectus and the Operating Agreement, Vestin Mortgage may establish written policies on loans and borrowings.


	•	Produce revenues from the interest income on our mortgage loans;

	•	Provide monthly cash distributions to you from the net income earned on our mortgage loans;

	•	Preserve your capital contributions; and

	•	Reinvest to the extent permissible payments of principal and proceeds of prepayments, sales and insurance proceeds, net of expenses.

We cannot assure you that we will achieve these objectives or that your capital will not decrease. Vestin Mortgage may change the overall investment strategy, subject to the fiduciary obligations that it owes to all members. However, Vestin Mortgage may not change the investment objectives above, except upon majority approval. Vestin Mortgage has no authority to do anything that would impair our ability to carry on our ordinary business as a mortgage investor.

We will seek to invest substantially all of the Offering proceeds and distribution reinvestments in mortgage loans, after paying applicable fees and expenses, if any. We anticipate that we will invest about 97% of the Offering proceeds and distribution reinvestments in mortgage loans. Approximately 3% will be held as a working capital cash reserve. Vestin Mortgage received a credit to its capital account in the amount of $1,100,000 for Offering expenses paid to non-affiliated third parties. Such expenses include those incurred by us and owed or paid to attorneys, accountants, brokers or other nonrelated third parties in connection with the preparation of this Offering. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs.

The majority of our collateral on our mortgage loans are the real property that the borrower is purchasing or developing with the funds that we make available. We sometimes refer to these real properties as the security properties. While we may invest in other types of loans, most of the loans in which we invest have been made to real estate developers with a lesser proportion of loans involving land loans and bridge financing. Our mortgage investments are not insured or guaranteed by any government agency.

We will not give any rebates or enter into any reciprocal agreement with Vestin Mortgage or any of its affiliates that enables Vestin Mortgage or its affiliates to receive a rebate. We do not anticipate that our mortgage investments will be insured or guaranteed by any government agency.

Vestin Mortgage continuously evaluates prospective investments, selects the mortgages in which we invest and makes all investment decisions on our behalf in its sole discretion, unless the Operating Agreement provides otherwise. You are not entitled to act on any proposed investment. In evaluating prospective mortgage loan investments, Vestin Mortgage considers such factors as the following:


	•	the ratio of the amount of the investment to the value of the property by which it is secured;

	•	the potential for capital appreciation or depreciation of the property securing the investment;

	•	expected levels of rental and occupancy rates (if applicable);

	•	potential for rental increases (if applicable);

	•	current and projected revenues from the property;

	•	the status and condition of the record title of the property securing the investment;

	•	geographic location of the property securing the investment; and

	•	the financial condition of the borrowers and their principals, if any, who guarantee the loan.

Vestin Mortgage may obtain our loans from non-affiliated mortgage brokers and previous borrowers, and by solicitation of new borrowers in those states where permissible. We may purchase existing loans that were originated by third party lenders and acquired by Vestin Mortgage to facilitate our purchase of the loans. Vestin Mortgage will sell the loans to us for no greater than Vestin Mortgage’s cost, not including its service fees and compensation. There are no specific requirements or guidelines governing Vestin Mortgage’s discretion in determining which mortgage loans it will place with us and which it will place with other funding sources.

When selecting mortgage loans for us, Vestin Mortgage uses the following guidelines, which are intended to control the quality of the collateral given for our loans:



	1. Priority of Mortgages. Generally, our assets are secured by first mortgages. First mortgages are mortgages secured by a full or divided interest in a first deed of trust secured by the property. Other mortgages that we invest in on the security property will not be junior to more than one other mortgage. The only subordinated mortgages we currently intend to invest in at this time are second mortgages, although in the future we may invest in wraparound, or all-inclusive, mortgages. As of June 30, 2003, more than 99% of our loans were first mortgages.


	2. Loan-to-Value Ratio. We generally use the following loan-to-value guidelines when originating loans:



	We may deviate from these guidelines under certain circumstances. For example, Vestin Mortgage, in its discretion, may increase any of the above loan-to-value ratios if, in its opinion, a given loan is supported by credit adequate to justify a higher loan-to-value ratio, including personal guarantees. Occasionally, our collateral may include personal property as well as real property. We do not have specific requirements with respect to the projected income or occupancy levels of a property securing our investment in a particular loan. These loan-to-value ratios will not apply to financing offered by us to the purchaser of any real estate acquired through foreclosure, or to refinance an existing loan that is in default when it matures. In those cases, Vestin Mortgage, in its sole discretion, shall be free to accept any reasonable financing terms it deems to be in our best interest. Nevertheless, in no event will the loan-to-value ratio on any loan exceed 80% of the independently appraised as-if developed value of the property at the time of loan origination. The target loan-to-value ratio for our loan portfolio as a whole is approximately 70%. As of June 30, 2003, our average loan-to-value ratio was 59.47%.


	Vestin Mortgage receives an appraisal at the time of loan underwriting, which may precede the placement of the loan with us. Copies of these appraisals will be available for your review at the offices of Vestin Mortgage for a period of six (6) years. Generally, these appraisals are completed within twelve months prior to funding of the loan. Also, the appraisal may have been previously performed for the borrower. The appraisal may be for the current estimated “as-if developed” value of the property. We use appraisers who are licensed or qualified as independent appraisers and certified by or hold designations from one or more of the following organizations: the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the National Association of Review Appraisers, the Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class IV Savings and Loan appraisers or from among appraisers with other qualifications acceptable to Vestin Mortgage. However, appraisals are only estimates of value and cannot be relied on as measures of

realizable value. The appraisals may be for the current estimated “as-if developed” or “as-if completed” value of the property or, in the case of acquisition and development loans or construction loans, for the estimated value of the property upon completion of the project. As-if completed or as-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection by a purchaser against multiple alternatives, and successful development by the purchaser; upon which development is dependent on availability of financing. An employee or agent of Vestin Mortgage reviews each appraisal report and conducts a physical inspection for each property. A physical inspection includes an assessment of the subject property, the adjacent properties and the neighborhood but generally does not include entering any structures on the property.

We depend upon our real estate security to protect us on the loans that we make. We depend upon the skill of independent appraisers to value the security underlying our loans. However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent events. In addition, most of the appraisals are prepared on an “as if-developed basis”. If the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute to you.


	3. Construction Mortgage Loans. We invest in construction loans other than home improvement loans on residential property, subject to the following guidelines:


	We do not anticipate that the loan-to-value ratio on construction loans in which we invest will exceed 75% of the independently appraised as-if developed value of the security property.



	4. Terms of Mortgage Loans. As of June 30, 2003, our loans ranged from a two-month term to a thirty-month term, however, a majority of our loans are for a term of 12 months. Our original loan agreements, however, permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take out financing.


	Currently, substantially all of our loans provide for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. In addition, we invest in mortgage loans which require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.

	5. Escrow Conditions. Our loans will often be funded by us through an escrow account held by a title insurance company, subject to the following conditions:


	•	Borrowers will obtain title insurance coverage for all loans, with the title insurance policy naming us as the insured and providing title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by other causes, such as diminution in the value of the security property.

	•	Borrowers will obtain fire and casualty insurance for all loans secured by improved real property, naming us as loss payee in an amount sufficient to cover the replacement cost of improvements.

	•	All insurance policies, notes, deeds of trust or mortgages, escrow agreements, and any other loan documents for a particular transaction will name us as payee and beneficiary. Mortgage loans will not be written in the name of Vestin Mortgage or any other nominee.


	6. Purchase of Mortgage Investments from Affiliates. We may acquire mortgage loans from our affiliates, including Vestin Mortgage, for a price not in excess of the par value of the note or its fair market value, whichever is lower, plus allowable fees and expenses, but without the allowance of any


	other compensation for the loans. Except for the compensation paid to Vestin Mortgage described elsewhere in this prospectus, any affiliate from which we purchase mortgage loans will remit to us all income it earns from the mortgage loan while the loan is in its portfolio.

	7. Note Hypothecation. We may also acquire mortgage loans secured by assignments of secured promissory notes. These mortgage loans must satisfy our stated investment standards, including our loan-to-value ratios, and also may not exceed 80% of the principal amount of the assigned note. For example, if the property securing a note we acquire is commercial property, the total amount of outstanding debts secured by the property must not exceed 75% of the appraised as-if developed value of the property, and the mortgage loan will not exceed 80% of the principal amount of the assigned note. For mortgage loans secured by promissory notes, we will rely on the appraised as-if developed value of the underlying property, as determined by a written appraisal which was conducted within the then-preceding twelve months at the time of loan origination. If an appraisal was not conducted within that period, then we will arrange for a new appraisal to be prepared for the property.

	8. Participation. We may also participate in loans with other lenders, including affiliates as permitted by NASAA Guidelines, by providing funds for or purchasing an undivided interest in a loan meeting our investment guidelines described above. Typically, we participate in loans if:


	•	we did not have sufficient funds to invest in an entire loan.

	•	we are seeking to increase the diversification in our loan portfolio.

	•	Vestin Mortgage originated a loan that fit within our investment guidelines but it would constitute more than 20% of our anticipated capital contribution or otherwise be disproportionately large given our then existing portfolio.


	We will participate in loans with non-affiliates if we acquire a controlling interest, alone or with any of our publicly registered affiliates meeting the requirements below, in such participation. A controlling interest would enable us to direct or cause the direction of the management and policies of such participation, which would include the authority to:


	•	review all material contracts;

	•	cause a sale of the mortgage or our interest therein subject in certain cases to limitations imposed by the participation agreement between the parties;

	•	approve budgets and major capital expenditures, subject to a stated minimum amount;

	•	veto any sale of a mortgage, or alternatively, to receive a specified preference on sale or proceeds; and

	•	exercise a right of first refusal on any desired sale by a participant of its interest in a loan except for transfer to its affiliate.


	In the event of participation with a publicly registered affiliate, the investment objectives of the participants shall be substantially identical. There shall be no duplicate fees. The compensation to the sponsors must be substantially identical, and the investment of each participant must be on substantially the same terms and conditions. Each participant shall have a right of first refusal to buy the other’s interest if the co-participant decides to sell its interest. We will not participate in joint ventures or partnerships with affiliates that are not publicly registered except as permitted by NASAA Guidelines.

	We will not give Vestin Mortgage, Vestin Group or any of their affiliates any consideration similar to rebates or give-backs or enter into reciprocal arrangements with Vestin Mortgage or its affiliates that might be entered into in lieu of participations.


	As of June 30, 2003, approximately 58% of our loans were loans in which we participated with other lenders.


	9. Diversification. The NASAA Guidelines provide that we neither invest in or make mortgage loans on any one property which would exceed, in the aggregate, an amount equal to 20% of our capital nor may we invest in or make mortgage loans to or from any one borrower which would exceed, in the aggregate, an amount greater than 20% of our capital.

	10. Reserve Fund. We have established contingency working capital reserves of approximately 3% of our capital to cover our unexpected cash needs.

	11. Credit Evaluations. Before making a loan, Vestin Mortgage must first determine that a borrower has sufficient equity in the security property to meet the loan-to-value ratios described above. Vestin Mortgage may also consider the income level and creditworthiness of a borrower to determine its ability to repay the mortgage loan.

	12. Sale of Mortgage Investments. Although Vestin Mortgage has no plan to do so, Vestin Mortgage may sell our mortgage loans or interests in our loans to either affiliates or non-affiliated parties when Vestin Mortgage believes that it is advantageous to us to do so. However, as noted elsewhere in this prospectus, we do not expect that the loans will be marketable or that a secondary market will ever develop for them.

We will not invest in mortgage loans made to Vestin Mortgage, Vestin Group or any of our affiliates. However, we may acquire an investment in a mortgage loan payable by Vestin Mortgage when Vestin Mortgage has assumed the obligations of the borrower under that loan through a foreclosure on the property.

In addition to those loans Vestin Mortgage selects for us, we purchase loans that were originated by Vestin Mortgage or other parties and first held for Vestin Mortgage’s own portfolio, as long as the loan satisfies all of our lending criteria. This requirement also applies to any loan originated by an affiliate of Vestin Mortgage, such as Vestin Group, Michael Shustek, Chief Executive officer of Vestin Group or another principal of Vestin Mortgage. However, we will not acquire a loan from or sell a loan to a mortgage program in which Vestin Mortgage has an interest unless in compliance with NASAA Guidelines.

We primarily invest in loans which are secured by first or second mortgages on real property. Such loans fall into the following categories: raw and unimproved land, acquisition and development, construction, commercial, residential and bridge loans.

Approximately 15% to 25% of our assets may be invested in loans made for the purchase or development of raw, unimproved land. Generally, we determine whether to invest in these loans based upon the appraised value of the property and the borrower’s actual capital investment in the property. Typically, we will invest in loans with a face value of up to 60% of the as-if developed appraised value of the property and we usually require that the borrower have invested in the property actual capital expenditures of at least 25% of the property’s value. As-if developed values on raw and unimproved land loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection of a purchaser against multiple alternatives, and successful development by the purchaser; upon which development is dependent on availability of financing. As of June 30, 2003, approximately 7% of our loans were in this category.

Approximately 10–25% of our assets may be invested in acquisition and development loans. These loans enable borrowers to acquire and/or complete the basic infrastructure and development of their property prior to the construction of buildings or structures. Such development may include installing utilities, sewers, water pipes, and/or streets. Generally, we will invest in loans with a face value of up to 60% of the appraised value of the property. Loan to value ratios on some acquisition and development loans may be calculated using as-if developed appraisals. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above. As of June 30, 2003, approximately 8% of our loans were in this category.

Approximately 10–70% of our assets may be invested in construction loans. A construction loan provides funds for the construction of one or more structures on developed land. Funds under this type of loan will generally not be forwarded to the borrower until work in the previous phase of the project has been completed and an independent inspector has verified certain aspects of the construction and its costs. We will typically require material and labor lien releases by the borrower per completed phase of the project. We will review the appraisal of the value of the property and proposed improvements, and will arrange loans for up to 75% of the appraised value. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above. As of June 30, 2003, approximately 33% of our loans were in this category.

Approximately 20–50% of our assets may be invested in commercial property loans. Commercial property loans provide funds to allow commercial borrowers to acquire income-producing property or to make improvements or renovations to the property in order to increase the value or net operating income of the property so that it may qualify for institutional refinancing. We will review the appraisal of the value of the property and will invest in loans for up to 75% of such appraised value. As of June 30, 2003, approximately 42% of our loans were in this category.

A small percentage of our assets may be invested in residential loans. Such loans facilitate the purchase or refinance of one to four family residential property units provided the borrower uses one of the units on the property as such borrower’s principal residence. We will invest in loans for up to 75% of value of the property. As of June 30, 2003, less than 4% of our loans were in this category.

Up to 15% of our assets may be invested in bridge loans. Such loans provide interim financing (up to 12 to 24 months) to enable commercial borrowers to qualify for permanent refinancing. We will review the appraisal of the value of the property and will generally invest in loans of up to 75% of that value. Such appraisals may be based on either an as-is basis or as-if developed basis, depending on the circumstances, and therefore, may not be an accurate indicator of the fair value of the property. As of June 30, 2003, approximately 6% of our loans were in this category.

The types of collateral that will secure the loans brokered by us include a first deed of trust, a second deed of trust or a leasehold interest.

The majority of the loans invested in by us are secured by a first deed of trust. Thus the applicable lender will have rights as a first mortgage lender of the collateralized property. As of June 30, 2003, more than 99% of our loans were secured by a first deed of trust.

Up to 10% of the loans invested in by us may be in second mortgage loans and in wraparound mortgage loans. In a second mortgage loan, the rights of the lender (such as the right to receive payment on foreclosure) will be subject to the rights of the first mortgage lender. In a wraparound loan, the lender’s rights will be comparably subject to the rights of a first mortgage lender, but the aggregate indebtedness evidenced by the loan documentation will be the first mortgage loan plus the new funds the lender invests. We would receive all payments from the borrower and forward to the senior lender its portion of the payments we receive. As of June 30, 2003, less than 1% of our loans were second mortgage loans.

Up to 20% of our assets may be invested in loans where the collateral is an interest in a lease. As of June 30, 2003, we did not have any loans secured by a leasehold interest.

Generally, the loans we invest in will not contain prepayment penalties or exit fees. If our loans are at a high rate of interest in a market of falling interest rates, the failure to have a prepayment penalty provision or exit fee in the loan allows the borrower to refinance the loan at a lower rate of interest, thus providing a lower yield to us on the reinvestment of the prepayment proceeds. However, these loans will usually be written with relatively high minimum interest rates, which we would expect to minimize the risk of lower yields.

Our original loan agreements permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take out financing. However, we only grant extensions when a borrower is in full compliance with the terms of the loan, including, but not limited to, the borrower’s obligation to make interest payments on the loan.

Currently, substantially all of the loans we invest in or purchase will require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. There are no specific criteria used in evaluating the credit quality of borrowers for mortgage loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due. To the extent that a borrower has an obligation to pay mortgage loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans can involve a higher risk of default than loans where the principal is paid at the same time as the interest payments.

We may require a borrower to repay a mortgage loan upon the sale of the mortgaged property rather than allow the buyer to assume the existing loan. We will require repayment if we determine that repayment appears to be advantageous to us based upon then-current interest rates, the length of time that

the loan has been held by us, the creditworthiness of the buyer and our objectives. We will either invest our net proceeds from any capital transaction in new mortgage loans, hold the net proceeds as cash or distribute them to our members. These net proceeds will also include the principal of a loan deemed to be repaid for tax purposes as a result of the nature of a loan modification or loan extension. Our Operating Agreement provides that whether we choose to distribute the proceeds or reinvest them, you will be deemed to have received a distribution of capital and recontributed the same amount to us. Capital transactions include payments of principal, foreclosures and prepayments of mortgages, to the extent classified as a return of capital under the Internal Revenue Code, and any other disposition of a mortgage or property.

To date, all of the loans we invest in are fixed rate loans. Occasionally we may acquire variable rate loans. Variable rate loans originated by Vestin Mortgage may use as indices the one and five year Treasury Constant Maturity Index, the Prime Rate Index and the Monthly Weighted Average Cost of Funds Index for Eleventh District Savings Institutions (Federal Home Loan Bank Board). Vestin Mortgage may negotiate spreads over these indices of 2.5% to 5.5%, depending upon market conditions when the loan is made.

It is possible that the interest rate index used in a variable rate loan will rise (or fall) more slowly than the interest rate of other loan investments available to us. Vestin Mortgage attempts to minimize this interest rate differential by tying variable rate loans to indices that are sensitive to fluctuations in market rates. Additionally, most variable rate loans originated by Vestin Mortgage contain provisions under which the interest rate cannot fall below the initial rate.

Variable rate loans generally have interest rate caps. We anticipate that the interest rate cap will be a ceiling that is 2–4% above the starting rate with a floor rate equal to the starting rate. For these loans there is the risk that the market rate may exceed the interest cap rate.

Variable rate loans of five to ten year maturities are not assumable without the prior consent of Vestin Mortgage. We do not expect to invest in or purchase a significant amount of other assumable loans. To minimize our risk, any borrower assuming an existing mortgage loan will be subject to the same underwriting criteria as the original borrower.


	•	to finance our investments in mortgage loans,

	•	to prevent a default under mortgage loans that are senior to our mortgage loans,

	•	to discharge senior mortgage loans if this becomes necessary to protect our investment in mortgage loans, or

	•	to operate or develop a property that we acquired under a defaulted loan.

Our indebtedness will not exceed 70% of the fair market value of our mortgage loans. This indebtedness may be with recourse to our assets.

In addition, we may enter into structured arrangements with lenders in order to provide them with a senior position in mortgage loans which we might jointly fund. For example, we might establish a wholly-owned special purpose corporation which would borrow funds from an institutional lender under an arrangement where the resulting mortgage loans would be assigned to a trust, and the trust would issue a senior certificate to the institutional lender and a junior certificate to the special purpose corporation. This

We have not qualified as a real estate investment trust under the Internal Revenue Code, and therefore we are not subject to the restrictions on its activities that are imposed on real estate investment trusts. We intend to conduct our business so that we are not an “investment company” within the meaning of the Investment Company Act of 1940. Last, we intend to conduct our business so that we are not to be deemed a “dealer” in mortgage loans for federal income tax purposes.


	•	issue securities senior to the units or issue any units or other securities for other than cash;

	•	invest in the securities of other issuers for the purpose of exercising control, except when exercising our rights as a secured lender;

	•	underwrite securities of other issuers;

	•	discontinue providing our members with the reports described in this prospectus; or

	•	offer securities in exchange for property.

There are hundreds of commercial banks, insurance companies, mortgage brokers, pension funds and other institutional lenders competing to make the type of loans in which we invest. No particular competitor dominates the market. For the past few years, the institutional lenders have not been as active in the commercial mortgage market as in prior years. Recently, however, many major institutional lenders have re-entered the commercial mortgage market due to a stronger economy, stabilized or increased property values and leasing rates, and the decrease in demand for residential loans. As a result, we anticipate competition for investments in mortgages secured by commercial properties, which creates pressure on lenders to lower interest rates. Consequently, we may not be able to obtain as high interest rates on mortgage investments as we would otherwise obtain, which would affect our revenues and the distributions you receive.

Our operations are conducted by Vestin Mortgage. Vestin Mortgage’s operations as a mortgage company are subject to extensive regulation by federal, state and local laws and governmental authorities. Vestin Mortgage conducts its real estate mortgage business under a license issued by the State of Nevada Financial Institutions Division. As of October 1, 2003, Vestin Mortgage is now regulated by the Mortgage Lending Division of the State of Nevada Financial Institutions Division. Under applicable Nevada law, the division has broad discretionary authority over Vestin Mortgage’s activities, including the authority to conduct periodic regulatory audits of all aspects of Vestin Mortgage’s operations.

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

Should we or Vestin Mortgage not adhere to these regulations, we could face potential disciplinary or other civil action that could have a material adverse effect on our business.

Our business is managed by Vestin Mortgage. The telephone number for Vestin Mortgage’s offices is (702) 227-0965. Vestin Mortgage is a mortgage broker licensed in the State of Nevada and a wholly-owned subsidiary of Vestin Group, Inc, a Delaware corporation, whose common stock is publicly held and traded on the NASDAQ under the symbol “VSTN.” Until early July 2000, Vestin Group traded under the symbol “DLMA.” Through its subsidiaries, Vestin Group, Inc. is engaged in asset management, real estate lending and other financial services. Vestin Group had a net worth of $16,344,180 as of December 31, 2002 and is briefly described later in this section.

Vestin Mortgage manages and controls our affairs and has responsibility and final authority in almost all matters affecting our business. These duties include dealings with members, accounting, tax and legal matters, communications and filings with regulatory agencies and all other needed management and operational duties. Additionally, because Michael Shustek owns a controlling interest in Vestin Group and Vestin Group wholly owns Vestin Mortgage, Mr. Shustek may be deemed to control our activities through Vestin Mortgage. As our only Manager, Vestin Mortgage has complete authority and responsibility for:


	•	evaluating and choosing the mortgage loans in which we will invest;

	•	deciding what agreements we will enter into and whether we will enter into joint ventures with other companies to invest in mortgage loans;

	•	originating, servicing and managing our mortgage loan investments; and

	•	managing all our other operations.

Notwithstanding that Vestin Mortgage has the broad authority described above, neither Vestin Mortgage directly nor Mr. Shustek indirectly may do any of the following:


	•	impair our ability to carry on or change the nature of our business;

	•	admit a Manager without prior approval of a majority of the members;

	•	sell all or over 50% of our assets or dissolve the Fund without prior majority approval; and

	•	anything else not permitted in the Operating Agreement.

You have no right to participate in the management or control of our business or affairs other than to exercise the limited voting rights provided for members in the Operating Agreement. Vestin Mortgage has primary responsibility for the initial selection, evaluation and negotiation of our mortgage loans. Vestin Mortgage will provide all executive, supervisory and administrative services for our operations, including servicing the mortgage loans we hold. Our books and records are maintained by Vestin Mortgage, subject to audit by independent certified public accountants.

Vestin Mortgage will cease to be our Manager upon its removal, withdrawal or dissolution, or if it is found to be bankrupt. A majority, excluding Vestin Mortgage’s interest, can remove Vestin Mortgage as our Manager upon the following conditions:


	•	if the members have not previously elected an additional Manager, the removal will not become effective for at least 120 days following the consent or authorizing vote by the majority;

	•	during the 120 days set forth above, a majority can agree in writing to continue our business and, within six months following the termination date of the last remaining Manager, elect and admit a new Manager who agrees to continue our existence; and


	•	the substitution of a new Manager shall be effective when the new Manager accepts in writing the duties and responsibilities of a Manager.

If our business continues after Vestin Mortgage is no longer our Manager, then we will pay Vestin Mortgage a sum equal to all amounts then owing to it. By majority vote, we may terminate Vestin Mortgage’s interest in the Fund by paying an amount equal to the then-present fair market value of Vestin Mortgage’s interest in the Fund, which would be Vestin Mortgage’s outstanding capital account at such time. In the event Vestin Mortgage and the Fund cannot agree as to the then present fair market value, then the dispute shall be settled by arbitration in accordance with the then current rules of the American Arbitration Association. All payments to a terminated Manager must be fair and must protect our solvency and liquidity.

If a majority does not designate and admit a new Manager within the time specified, we will dissolve. Vestin Mortgage may assign its interest in the Fund, but our Manager may not be changed except as set forth above.

Vestin Mortgage considers and evaluates prospective loans for us. In that regard, Vestin Mortgage evaluates the credit of prospective borrowers, analyzes the return to us of potential mortgage loan transactions, reviews property appraisals, and determines which types of transactions appear to be most favorable to us. We will not establish our own underwriting standards and will solely rely on Vestin Mortgage to provide such services.

Vestin Mortgage identifies a potential loan and then processes the application. When processing an application, Vestin Mortgage will


	•	order and review a property title search,

	•	perform an exterior property inspection,

	•	obtain an appraisal which is reviewed for reasonableness, and

	•	perform credit underwriting through borrower interviews, credit reports and review of borrower and principals’ financials.

After processing the application, Vestin Mortgage reviews the loan through its loan committee.

After we acquire mortgage loans, Vestin Mortgage also manages our mortgage loan portfolio. Vestin Mortgage is responsible for:


	•	reviewing loans;

	•	recommending changes in loans;

	•	employing and supervising employees who handle the loans;

	•	preparing and reviewing projected performance;

	•	reviewing reserves and working capital;

	•	collecting and maintaining all loans;

	•	creating and implementing investment policies in furtherance of those contained in the Operating Agreement;

	•	preparing and reviewing budgets, economic surveys, cash flow and taxable income or loss projections and working capital requirements;

	•	preparing and reviewing reports for securities filings, distribution to our members or otherwise;


	•	communicating with members;

	•	supervising and reviewing our bookkeeping, accounting and audits;

	•	supervising and reviewing the preparation of our state and federal tax returns; and

	•	supervising professionals employed by us, including attorneys, accountants and appraisers.

In April 1999, Vestin Group, then known as Sunderland Acquisition Corporation, acquired the customer lists, goodwill and certain other intangible assets of Del Mar Mortgage, Inc., the stock of which is wholly-owned by Michael Shustek, and assumed liabilities related to such assets. Neither Vestin Group (then Sunderland Acquisition Corporation) nor Vestin Mortgage (then known as Capsource, Inc.) acquired loans or other financial assets of Del Mar Mortgage, Inc., which continued to operate as an independent business. As part of a corporate reorganization, Vestin Group (then Sunderland Acquisition Corporation) transferred the assets it acquired from Del Mar Mortgage, Inc. to Vestin Mortgage (then Capsource, Inc.).

Vestin Mortgage holds a mortgage broker’s license in Nevada. As a licensed mortgage broker, Vestin Mortgage is subject to regular on site examinations by the Mortgage Lending Division of the State of Nevada, which also reviews its advertising, mandates strict record maintenance, and reviews its financial reporting, including its financial statements and monthly activity reports.

Vestin Mortgage obtains borrowers through approved advertisements, referrals and repeat business, and obtains investors interested in funding the loan in the same manner. It then matches the two together in compliance with Nevada law.

Vestin Mortgage does not charge any fees to investors. Vestin Mortgage’s compensation is primarily in the form of loan evaluation and processing fees as well as placement fees paid by borrowers, each ranging from two to six percent of the respective loan amount.

Upon obtaining a request for a loan, Vestin Mortgage processes the application by:


	•	ordering and reviewing a property title search;

	•	performing an exterior property inspection;

	•	obtaining an appraisal which is reviewed for reasonableness; and

	•	performing credit underwriting through borrower interviews, credit reports and review of borrower and principals’ financials.

After processing the loan request, Vestin Mortgage reviews the loan through its loan committee, and then, upon approval, presents the loan to investors. Investors select the loan(s) they wish to invest in and receive an assignment from Vestin Mortgage in the form of an individual promissory note and trust deed issued by the borrower. The investors receive a lender’s policy of title insurance reflecting their beneficial interest in the real property. Nevada law requires mortgage companies to provide copies of loan documentation and borrower information (credit underwriting criteria), as well as real estate lending risk disclosures, to the investors (lenders). Vestin Mortgage also services loans once they have closed.

Vestin Mortgage, licensed as a mortgage broker in Nevada, arranges loans which are funded by institutions and individuals. In contrast, here we will be the party investing in loans with our own funds. Our assets will be a pool of loans, the distributions from and proceeds of which will be passed through to you as described in this prospectus. Unlike the Fund, Vestin Mortgage does not and will not own the loans. The assets of Vestin Mortgage are primarily receivables in the form of evaluation, processing, extension, placement and servicing fees.

Since 1995 until the present, Vestin Mortgage and its predecessor Capsource, Inc. have acted as mortgage brokers for the investment by about 6,000 investors in approximately 700 commercial mortgage

loans totaling about $1.5 billion. As of June 30, 2003, Vestin Mortgage is servicing about 111 loans totaling approximately $723 million. The collateral for these loans are real properties primarily located in Nevada, Texas, Hawaii, California, and Arizona. Approximately 760 single family residential loans have been originated by Vestin Mortgage and its predecessor Capsource, Inc. between 1995 and 1999 with a face value of approximately $88,660,000. Vestin Mortgage closed down its Single Family Residential unit in the last quarter of 1999. Vestin Mortgage and Capsource, Inc. limit their businesses to mortgage lending, and have not acquired any real properties except in connection with loan foreclosures. The investors serviced by Vestin Mortgage have similar investment objectives to those of the Fund.

For the five-year period ended December 31, 2002, the properties securing these loans can be subdivided as follows:

Of the loans described in the foregoing table, 55% by dollar amount were development loans, including construction loans, the balance were land acquisition loans and loans secured by developed properties. There have been no major adverse conditions with respect to Vestin Mortgage’s or Del Mar Mortgage’s businesses.

The following table sets forth the type, amount of loan placements and the dollar value of such placements for each year by Vestin Mortgage since its incorporation to the present. Construction loans, except as indicated otherwise, are loans for the construction of buildings on property which has been improved through the installation of utilities, roads or infrastructure. Commercial loans are made to finance operations or improvements for property that has already been fully constructed.

Vestin Mortgage closed down its Single Family Residential unit in the last quarter of 1999. Vestin Mortgage originated these loans but then brokered them to other wholesale lenders who funded them.

The description above of Vestin Mortgage and its predecessors is not intended to provide a description of the loans to be invested in or purchased by us in the future.

Vestin Mortgage is currently acting as Manager of two other funds, Vestin Fund I and inVestin Nevada, which have investment objectives similar to ours. Vestin Fund I commenced a public offering of its securities and commenced business operations on September 1, 2000. Vestin Fund I has raised $100,000,000 for investment in mortgage loans. As of June 30, 2003, Vestin Fund I had total assets of approximately $93,642,048 of which 72% was invested in mortgage loans. inVestin Nevada is seeking to raise $100,000,000 through the sale of subordinated notes to Nevada residents pursuant to a registration statement filed with the Securities Division of the Nevada Secretary of State and in reliance on exemption from registration requirements provided by Section 3(a)(11) of the Securities Act of 1933 and Rule 147 thereunder.

For the year ended December 31, 2002, Vestin Fund I paid its investors an average rate of return of approximately 11.4%. For the nine months ended September 30, 2003, Vestin Fund I paid its investors an average rate of return of approximately 4%. Past performance, however, is not indicative of future results.

The rate is calculated based upon the accumulated earnings of the fund and distributions to members, divided by the average number of units held by members, compounded monthly.

The following tables set forth in rounded numbers certain information with respect to Vestin Fund I’s experience in raising and investing funds and operating results for the calendar year ended December 31, 2002.

As of December 31, 2002, there were no offering expenses or acquisition costs incurred by Vestin Fund I that were paid directly from the offering proceeds or earnings of Vestin Fund I. However, approximately 100,000 units were issued to Vestin Mortgage for offering expenses that were paid in behalf of Vestin Fund I. Additionally, Vestin Fund I did not make any payments, including real estate commissions and other fees in connection with the acquisition or disposition of a property, to Vestin Mortgage within the last three years. Vestin Mortgage will provide, at no charge, a copy of the Form 10-K Annual Report for Vestin Fund I for fiscal year ended June 30, 2002, upon request of an investor. Additionally, Vestin Mortgage will provide copies of the exhibits listed in such annual report, for a reasonable fee, if so requested by an investor. Inquiries should be directed to Vestin Mortgage at 2901 El Camino Avenue, Las Vegas, Nevada 89102.

Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc., a company wholly owned by Michael Shustek, the largest shareholder and CEO of Vestin Group, are defendants in a civil action entitled “Desert Land, L.L.C. et al. v. Owens Financial Group, Inc. et al.” (the “Action”). The Action was initiated by Desert Land, L.L.C. (“Desert Land”) on various loans arranged by Del Mar Mortgage, Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District Court for the District of Nevada (the “Court”) entered judgment jointly and severally in favor of Desert Land against Vestin Group, Vestin Mortgage and Del Mar Mortgage Inc. Judgment was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee from plaintiffs. Vestin Group and Vestin Mortgage, which did not receive any portion of the penalty fee, were found by the Court to be “successors” to Del Mar Mortgage. Vestin Group and Vestin Mortgage are appealing this finding.

Defendants subsequently filed a motion for reconsideration. The Court denied the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc. are jointly and severally liable for the judgment in the amount of $5,683,312.19 (which amount includes prejudgment interest and attorneys’ fees). On August 27, 2003, the Court stayed execution of the judgment against Vestin Group and Vestin Mortgage based upon the posting of the bond in the amount of $5,830,000. The bond was arranged by Michael Shustek and was posted without any cost or obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the Action, and Mr. Shustek has guaranteed the indemnification. All of the defendants held liable to Desert Land are planning to appeal the judgment. The Company is not a party to the Action.

All the directors of Vestin Mortgage and Vestin Group hold office until the next annual meeting of shareholders. The last annual meeting of Vestin Group shareholders was August 21, 2002. Vestin Group, as the only shareholder of Vestin Mortgage, can change the composition of Vestin Mortgage’s Board of Directors at its sole discretion. Similarly, Michael Shustek can cause a change in the Board of Directors of Vestin Group by virtue of his controlling ownership interest in Vestin Group. Vestin Group, which is a reporting company under the Securities Exchange Act of 1934, as amended, has established an audit committee consisting of three independent directors and requires that its audit committee be comprised of independent directors. Vestin Mortgage, which is privately held and has only three directors, has no audit committee and no requirement of independence at this time. The By-laws of Vestin Mortgage and Vestin Group provide for up to 10 directors and permit the Board of Directors to fill any vacancy on the Board of Directors. Officers of both companies serve at the discretion of the Board of Directors.

The principal occupation and business experience for each of our officers and directors and key employees, for at least the last five years, are as follows:

Robert J. Aalberts has been a director of Vestin Group since April 1999. Since 1991, Dr. Aalberts has held the Ernst Lied Professor of Legal Studies professorship at the University of Nevada, Las Vegas. From 1984 to 1991, Dr. Aalberts was an Associate Professor of Business Law at Louisiana State University in Shreveport, Louisiana. From 1982 through 1984, he served as an attorney for Gulf Oil Company. Dr. Aalberts has co-authored a book relating to the regulatory environment, law and business of real estate; and he is the author of numerous legal articles, dealing with various aspects of real estate, business and the practice of law. Dr. Aalberts received his Juris Doctor degree from Loyola University, in New Orleans, Louisiana and received a Master of Arts from the University of Missouri. He is a member of the State Bar of Louisiana.

John W. Alderfer was appointed the Chief Financial Officer of Vestin Group in September 2002. From October 1998 to September 2002, Mr. Alderfer was retired. From September 1996 to October 1998, Mr. Alderfer was a Director, Vice President, Treasurer, and Chief Financial Officer of Interactive Flight Technologies, Inc. From September 1990 to June 1996, Mr. Alderfer was Senior Vice President, Treasurer, and Chief Financial Officer of Alliance Gaming Corporation. Mr. Alderfer is the former Senior Vice President, Corporate Controller and Chief Accounting Officer of Summa Corporation and The Hughes Corporation, 100% owned by the Estate of Howard R. Hughes. Mr. Alderfer received his BBA degree in accounting from Texas Tech University. He is a Certified Public Accountant.

Lance K. Bradford has been the President of Vestin Group since January 2001. In addition, Mr. Bradford has been a director, Chief Financial Officer, Treasurer and Secretary of Vestin Mortgage and Treasurer and a director of Vestin Group since April 1999. Mr. Bradford also acts as the functional equivalent of a Chief Financial Officer for both Vestin Fund I and Vestin Fund II. Mr. Bradford was also the Chief Financial Officer of Vestin Group from 1999 to September 2002 and the Corporate Secretary of Vestin Group from 1999 to 2000. Since 1992, Mr. Bradford has been a partner in L.L. Bradford & Company, Las Vegas, Nevada, a Certified Public Accounting firm that he founded. From 1988 to 1991, Mr. Bradford served as an accountant with Ernst & Young International. Mr. Bradford received a Bachelor of Science degree in Accounting from the University of Nevada, in Reno, Nevada.

Stephen J. Byrne has been the Chief Operations Officer of Vestin Group since January 2001. Mr. Byrne has also been a director of Vestin Mortgage since 1997 and of Vestin Group since April 1999. From 2001 to 2003, Mr. Byrne was the Chief Executive Officer of Vestin Mortgage. From its inception in 1997 to 2000, Mr. Byrne was the President of Vestin Mortgage. From 1999 to 2000, Mr. Byrne also served as the President of Vestin Group. Mr. Byrne joined Del Mar Mortgage in June 1998 as its Senior Lending Officer. In 1997, Mr. Byrne founded Capsource, Inc., a predecessor of Vestin Mortgage, which he owned and operated before joining Del Mar Mortgage. From 1991 to 1997, Mr. Byrne served as Vice President of Wells Fargo Bank and of its predecessor First Interstate Bank of Nevada. Mr. Byrne served in various capacities with First Interstate Bank, including Manager of the Diversified Asset Group based in Las Vegas and the commercial Diversified Asset Group in Houston, Texas. Mr. Byrne received a Bachelor of Science degree in Business Administration from Hastings College, Hastings, Nebraska.

John E. Dawson has been a director of Vestin Group since March 2000. Since 1995, Mr. Dawson has been a partner at the law firm of Marquis & Aurbach. Before joining Marquis & Aurbach, Mr. Dawson was affiliated with the law firm of Jeffrey L. Burr & Associates. Mr. Dawson co-authored the Asset Protection Guidebook for Attorneys and Accountants and has presented seminars on asset protection. Mr. Dawson received his Bachelor’s Degree from Weber State and his Juris Doctor from Brigham Young University. Mr. Dawson received his Masters of Law (L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was admitted to the Nevada Bar in 1988 and the Utah Bar in 1989.

Steven Ducharme has been a director of Vestin Group since August 2001. Mr. DuCharme served as a member of the Nevada Gaming Control Board (the “Board”) for 10 years including two years as Chairman. First appointed to the Board on January 2, 1991 by Nevada Governor Bob Miller, he was

reappointed to a second term in January 1995. He served as the law enforcement representative on the three-member Board. Mr. DuCharme was named Chairman of the Board on September 19, 1998 by Governor Miller and served two years as Chairman. With his retirement from the Board in January 2001, he concluded more than 30 years of public service in Nevada. Mr. DuCharme began his career in law enforcement in 1970 as a Deputy Sheriff with the Clark County Sheriff’s Office, which later became the Las Vegas Metropolitan Police Department (the “LVMPD”). During 20 years with the LVMPD, he spent 12 years working undercover investigating vice and narcotic activities. As a Sergeant, he was the supervising detective in the Fraud Unit and later the Sexual Assault Unit. Mr. DuCharme’s last assignment with the LVMPD was as the department’s spokesman through the Office of Public Information as well as being the Commander of the Crime Prevention Bureau. He retired from the LVMPD to accept the Governor’s appointment to the Board. Mr. DuCharme holds a B.A. degree in Criminal Justice from the University of Nevada, Las Vegas and an associate’s degree in Law Enforcement from Clark County Community College. He is also a graduate of the Southern Police Institute at the University of Louisville in Kentucky. Mr. DuCharme is currently an advisor to the faculty of the National Judicial College and also serves as an instructor. He is the past Chairman of the International Association of Gaming Regulators and past President of the Board of Trustees for the Nevada Treatment Center, a non-profit service for substance abuse.

Robert L. Forbuss has been a director of Vestin Group since March 2000. Since February 1999, Mr. Forbuss has been the President of Strategic Alliances, a business and government affairs consulting organization. From March 1998 through February 1999, he was the President of Medical Transportation of America. From February 1997 to March 1998, Mr. Forbuss was the Chief Executive Officer of the Southwest Division of American Medical Response. From March 1994 to February 1997, he was Senior Vice President of Laidlaw Medical Transportation, which had acquired Mercy Medical Services, Inc., a company that Mr. Forbuss founded, owned and managed for 22 years. The latter four companies are all in the business of providing emergency ambulance and transportation services. Mr. Forbuss received his Bachelor of Arts in Public Administration and Political Science from the California State University at Long Beach, California.

Robert A. Groesbeck has been a director of Vestin Group since August 2000. Mr. Groesbeck received his Bachelor of Arts in Criminal Justice from the University of Nevada in 1985, his Juris Doctor from Thomas S. Cooley School of Law in 1990 and his Masters of Business Administration from National University in 1993. Mr. Groesbeck is the founder of Home Works, a full service home services company. From 1994 to June 2000, Mr. Groesbeck was the General Counsel of Republic Silver State Disposal, Inc. From 1993 to 1997, Mr. Groesbeck was the Mayor of Henderson, Nevada. Mr. Groesbeck currently serves on numerous charitable boards.

Jan Jones has been a director of Vestin Group since January 2002. Ms. Jones currently serves as Senior Vice President of Communications and Government Relations for Harrah’s Entertainment, Inc., a $3 billion company, publicly traded on the New York Stock Exchange. In her capacity, Ms. Jones oversees government relations, public relations, community relations, employee communications and financial communications for 25 casinos across the country under the Harrah’s, Showboat, Rio and Harveys brand names. She is responsible for communicating the company’s position on critical issues facing both Harrah’s and the gaming industry. Prior to joining the company in November 1999, Ms. Jones held the elected public office of Mayor of the City of Las Vegas from 1991 until 1999. During her tenure as Mayor, Las Vegas was the fastest growing city in America. Ms. Jones is a graduate of Stanford University with a bachelor of arts degree in English. Ms. Jones has an extensive background in business administration, marketing, and business development.

Ira S. Levine has been the Executive Vice President of Legal and Corporate Affairs since September 2000. Mr. Levine has also been the Corporate Secretary of Vestin Group since January 2001. Mr. Levine received his BS in Business Administration specializing in accounting from the University of Nevada in 1982, his Juris Doctor from Pepperdine University School of Law in 1985 and his Masters of Legal Letters in Taxation from New York University in 1986. Mr. Levine is a member of the state bars of both Nevada and California. Since July of 2003, Mr. Levine has been a partner in the law firm of Levine,

Garfinkel, & Katz, LLP. From 1997 to 2003, he was a partner in the law firm of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP. Prior to that he was a shareholder in the law firm of Levine, McBride & Garfinkel, LLP. From 1995 to 1997, Mr. Levine was a shareholder in the law firm of Quartes & Brady LLP, formerly known as Streich Lang. Prior to that, Mr. Levine was senior vice president, secretary and general counsel of United Gaming, Inc. now known as Alliance Gaming, Inc. Mr. Levine started his legal career with the law firm of McKenna Long & Aldridge LLP formerly known as McKenna, Conner & Cuneo in Los Angeles, California.

Peggy S. May has been with Vestin Group since September 1995, and has been the President of Vestin Mortgage since January 2001. From 1997 to 2000, Ms. May was the Senior Vice President of Vestin Mortgage. Ms. May is responsible for all new and existing clients, loan packages and manages investor relationships and serves as the administrator of the corporate offices. Ms. May has over ten years of experience in title, escrow and private lending.

Stephen A. Schneider has been Vice President of Vestin Mortgage since January 2001. From July 2000 to December 2000, Mr. Schneider was the Chief Operation Officer of Vestin Group. Mr. Schneider is responsible for the maintenance of all banking and financial relationships. Mr. Schneider has over 26 years experience in the financial services industry. He worked at US Bank where he managed the bank’s business banking department and underwrote loans for companies with sales of $1 million to $10 million and maintained relationships with the bank’s business customers. Mr. Schneider sits on the boards of Focus Las Vegas and Leadership Las Vegas Youth as well as several other organizations. He assisted in the creation of the Vestin Foundation, a non-profit organization aimed at funding local charitable organizations.

Michael V. Shustek has been a director of Vestin Mortgage and Chairman of the Board of Directors, Chief Executive Officer and a director of Vestin Group since April 1999. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects of the real estate industry in Nevada since 1990. In 1993, he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company that originally specialized in property valuations for third-party lenders or investors and which continues today as the primary vehicle for his private investment portfolio. In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada’s history. In 2000, Mr. Shustek co-authored a book, Trust Deed Investments, on the topic of private mortgage lending. Mr. Shustek is a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas.

On March 26, 1999, Del Mar Mortgage, a company controlled by Mr. Shustek, entered into a stipulated court order (the “Order”) with the State of Nevada, Department of Business and Industry, Financial Institutions Division (the “Division”) resolving a dispute regarding Del Mar Mortgage’s alleged noncompliance with various Nevada regulatory statutes. Without admitting any facts, and solely to settle these matters, Del Mar Mortgage agreed to assure compliance with applicable Nevada law in its advertising solicitation of mortgage borrowers and in its making and servicing of mortgage loans. Vestin Group and Vestin Mortgage, as successors to the mortgage company business of Del Mar Mortgage, agreed to adhere to the terms of the Order. Del Mar Mortgage paid the Division an aggregate of $50,000 to cover the Division’s costs. The Order contained no findings of wrongful conduct by Del Mar Mortgage.

Daniel B. Stubbs has been the Executive Vice President and Underwriting Administrator of Vestin Mortgage since January 2000. Mr. Stubbs is responsible for analyzing the risks of each loan as well as prescribing Title Insurance coverage for each individual transaction. In addition, Mr. Stubbs serves on the loan committee and acts as a liaison between Vestin Mortgage and the various banks that carry its lines of credit. Mr. Stubbs has over 13 years experience in the Title Insurance industry. Mr. Stubbs received his Bachelor of Arts in Communications Studies from the University of Nevada, in Las Vegas, Nevada.

James C. Walsh has been a director of Vestin Group since January 2001. Mr. Walsh has practiced law in New York City since 1966, after receiving his law degree from the University of Alabama.

Michael J. Whiteaker has been Vice President of Regulatory Affairs of Vestin Group since May 14, 1999 and is experienced in the banking and finance regulatory fields, having most recently served with the State of Nevada, Financial Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible for the financial and regulatory compliance audits of all financial institutions in Nevada. Mr. Whiteaker has worked extensively on matters pertaining to both state and federal statutes, examination procedures, policy determination and credit administration for commercial and real estate loans. From 1973 to 1982 Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible for a variety of matters including loan review.

The following information about executive compensation has been provided by Vestin Group and Vestin Mortgage. Vestin Group employees receive no extra pay for serving as directors. Each non-employee director receives $1,500 per monthly meeting, which includes personal attendance at one monthly board meeting. Each Vestin Group outside director (except for James C. Walsh) receives 15,000 options to acquire Vestin Group’s common stock at the then fair market value on the later of the date the non-employee director is elected to the Board. Vestin Group provides directors’ and officers’ liability insurance of $5,000,000 and also has agreed to indemnify each director to the fullest extent under Delaware law.

The following Summary Compensation Table sets forth the compensation paid or awarded for the fiscal year ended December 31, 2002 to Vestin Group’s and Vestin Mortgage’s Chief Executive Officers and the next most highly compensated executive officers whose compensation for the fiscal year ended December 31, 2002 exceeded $100,000.



(1)	The compensation for Mr. Byrne includes compensation for services rendered to Vestin Mortgage as its Chief Executive Officer in 2001 and 2002. Mr. Byrne resigned from that position in 2003.



(2)	The compensation for Ms. May includes compensation for services rendered to Vestin Mortgage and Vestin Capital, Inc. All of Ms. May’s 2002 and 2000 compensation was paid directly by Vestin Mortgage, and Vestin Mortgage and Vestin Capital each paid 50% of her compensation in 2001.

The following Option and Warrant/ SAR Grants Tables set forth the individual grants of stock options made in fiscal 2002 to Vestin Group’s and Vestin Mortgage’s Chief Executive Officers and the next most highly compensated executive officers named in the Summary Compensation Table above.

Michael V. Shustek entered into an Employment Agreement with Vestin Group in December 1999 as its Chief Executive Officer. Pursuant to the agreement, Mr. Shustek is entitled to receive a minimum annual salary of $720,000 and such additional salary as the Board of Directors deems appropriate. Mr. Shustek is also entitled to receive an automobile allowance in the amount of $1,000 per month during the term of the agreement. The agreement additionally provides that Mr. Shustek is to receive warrants to purchase up to 500,000 shares of Vestin Group’s common stock each year during the term of the agreement. The agreement terminates on November 30, 2002, but will continue for successive one year periods unless either Vestin Group or Mr. Shustek provides thirty days notice. In May 2002, Mr. Shustek voluntarily reduced his annual salary to $150,000 effective the fourth quarter of 2002.

On November 3, 1998, Stephen J. Byrne entered into an Employment Agreement with Vestin Group (formerly known as Del Mar Mortgage) to serve as its Chief Loan Officer for the operation of the mortgage broker business in the State of Nevada. The terms of such employment include an initial annual salary of $240,000 and performance bonuses as the Board of Directors deems appropriate. The agreement is terminable by either Vestin Group or Mr. Byrne with thirty days notice.

Lance K. Bradford entered into an Employment Agreement with Vestin Group on April 1, 2000 to serve as its Chief Financial Officer. Pursuant to the agreement, Mr. Bradford is entitled to receive an initial annual salary of $296,000 and performance bonuses as the Board of Directors deems appropriate. Mr. Bradford is also entitled to receive an automobile allowance in the amount of $1,000 per month during the term of the agreement. The agreement terminates March 31, 2003 but will continue for successive one year periods unless either Vestin Group or Mr. Bradford provides thirty days notice.

Peggy S. May entered into an Employment Agreement with Vestin Mortgage, with an effective date of July 1, 2002, to serve as its President. The term of the agreement begins on July 1, 2002 and ends on December 31, 2004. Pursuant to the agreement, Ms. May is entitled to receive an initial annual salary of $160,000, subject to review by the Board of Directors. Ms. May is also eligible for bonuses but subject to the discretion of the Board of Directors. The agreement additionally provides that Ms. May is to receive a one-year salary if Vestin Mortgage terminates the agreement without cause.

The following table indicates the beneficial ownership of Vestin Group’s voting securities by each person known by Vestin Group to be the beneficial owner of more than 5% of such securities, as well as the securities of Vestin Group beneficially owned by all officers and directors of Vestin Group as of

September 30, 2003. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or that will become execisable within 60 days of September 30, 2003, are deemed outstanding even if they have not actually been exercised. Those shares, however, are not deemed outstanding for purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the stockholders listed possess sole voting and investment power with respect to the shares shown.



(1)	Based upon 5,324,340 shares outstanding on September 30, 2003.


(2)	Includes warrants to purchase up to 1,500,000 shares of Common Stock.

(3)	Includes options to purchase up to 100,000 shares of Common Stock.

(4)	Includes options to purchase up to 150,000 shares of Common Stock.

(5)	Includes options to purchase up to 45,000 shares of Common Stock.

(6)	Includes options to purchase up to 15,000 shares of Common Stock.

(7)	Includes options to purchase up to 30,000 shares of Common Stock.

(8)	Includes options to purchase up to 50,000 shares of Common Stock.


(10)	Includes options to purchase up to 15,000 shares of Common Stock.

(11)	Includes 1,850 shares of Common Stock owned by a family partnership indirectly controlled by Mr. Dawson.

(12)	Includes options to purchase up to 15,000 shares of Common Stock.

(13)	Includes options to purchase up to 15,000 shares of Common Stock.

(14)	Includes warrants to purchase up to 1.2 million shares of Common Stock granted to Planned Licensing, Inc. (“PLI”). Mr. Walsh has a majority equity interest in PLI.

(15)	Includes options to purchase up to 10,000 shares of Common Stock.

(16)	Includes options to purchase up to 10,000 shares of Common Stock.

(17)	Includes warrants and options to purchase up to 3,170,000 shares of Common Stock.


(18)	Includes warrants to purchase 12,336 shares of Common Stock held by the Millennium 2001 Trust, which has common beneficiaries as the Redd 1996 Trust. The Redd 1996 Trust and the Millennium 2001 Trust are hereinafter referred to collectively as the “Redd 1996 Trust.”



(19)	The holders of Vestin Group’s preferred stock are entitled to convert their preferred shares into common shares at a ratio of $6.08 for one common share. If all of the preferred shareholders were to convert into common stock, the Redd 1996 Trust would own approximately 15.7% of the total issued and outstanding shares and the Bernard Greenblatt Trust would own approximately 7.0%. In addition, the beneficial ownership of the following shareholders would be reduced as follows: Michael Shustck 58.1%, Stephen Byrne 2.0%, Ira Levine 2.6%, Peggy May 1.4%, James C. Walsh 15.5% and all directors and officers as a group 66.8%.

Vestin Mortgage and affiliates of the Fund receive up to .25% in management fees for conducting our operations. Should we raise the maximum amount possible under this prospectus, Vestin Mortgage and affiliates shall receive up to $1,250,000 annually in management fees. Vestin Mortgage shall not receive any incentive fee related to the Fund’s operating results.

Although our expenses in connection with this Offering are billed directly to us, Vestin Mortgage will pay all selling commissions and expenses related to this Offering. To the extent that such expenses consist of filing fees, legal, accounting, printing and other expenses of this Offering paid to non-affiliates of Vestin Mortgage, payment of such expenses was deemed a capital contribution by Vestin Mortgage of $1,100,000. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs

The credit in the amount of $1,100,000 received by Vestin Mortgage was reimbursement for the following approximate Offering expenses paid to non-related third parties:

Where the fees below are described as competitive fees or based on local market conditions, that means the fees are determined by price competition within a given market. Additionally, the amount of the fees is dependent upon the size of a particular loan. To ensure that our fees remain competitive, we will directly contact our competition, such as major banks in the local market or other relevant commercial lenders. We expect that the interest rate on the loans in which we invest will be 2-3 points higher than comparable loans made by banks and that the fees paid to Vestin Mortgage will be 2-3 points higher than similar fees charged by conventional lenders. We believe that this rate structure is consistent with rates and fees charged by other non-conventional lenders. References below to local law also contemplate additional requirements imposed by local or state law, such as usury laws.

Vestin Mortgage will make arrangements with the respective borrowers for Vestin Mortgage’s fees owing from those borrowers. Vestin Mortgage anticipates that borrowers will pay its compensation out of the proceeds of loans or upon closing the relevant transaction. For loan servicing fees, subject to regulatory requirements, Vestin Mortgage will receive, where permitted, these fees monthly in arrears along with the payments it receives on loans that we have acquired.

The Manager may, in its sole discretion, share with us the loan placement fees it receives from borrowers. The Manager is under no obligation to share its placement fees and investors should not assume that any placement fees will be shared with the Fund.

The relationships among us, Vestin Mortgage and the directors and other affiliates of Vestin Mortgage will result in various conflicts of interest. Vestin Mortgage and its directors and other affiliates are engaged in business activities involving real estate lending, including the management of Vestin Fund I, a fund with investment objectives similar to ours. Vestin Mortgage anticipates engaging in additional business activities in the future that may be competitive with us. Vestin Mortgage and its officers and directors will exercise their fiduciary duties to us and to you in a manner they believe will preserve and protect your rights as a member. Additionally, our Operating Agreement contains provisions that limit our ability to enter into transactions with Vestin Mortgage and its affiliates.

In addition, we will comply with the NASAA Guidelines in all of our transactions with Vestin Mortgage or any of its affiliates. The NASAA guidelines are the Mortgage Program Guidelines of the North American Securities Administrators Association, Inc. further described in our Operating Agreement. We may purchase mortgage loans from Vestin Mortgage if they were acquired for the purpose of facilitating our acquisition of such loans. Vestin Mortgage must sell such loans to us for a price no greater than the lesser of Vestin Mortgage’s cost, excluding certain service fees and compensation, or the fair market value of such loans. However, we will not sell our mortgage loans to Vestin Mortgage, nor acquire mortgage loans from, or sell mortgages to, a program in which Vestin Mortgage has an interest, except as permitted under the NASAA Guidelines.

We may participate in mortgage loans with publicly registered affiliates if the investment objectives of the participants are substantially identical, there are no duplicate fees, the sponsors receive substantially identical compensation, the investment of each participant is on substantially the same terms, and the participants have a right of first refusal with regard to the sale of any participant’s interest in such loans. In addition, we will not participate in mortgage loans with non-publicly registered affiliates, except as permitted under the NASAA Guidelines.

The paragraphs below describe material conflicts of interest that may arise in the course of Vestin Mortgage’s management and operation of our business. The list of potential conflicts of interest reflects our knowledge of the existing or potential conflicts of interest as of the date of this prospectus. We cannot assure you that no additional conflicts of interest will arise in the future.

The organizational structure of Vestin Group, Vestin Mortgage and their affiliates is as described in the organizational chart at page 4.

1. Payment of Fees and Expenses. Vestin Mortgage and its affiliates will receive substantial fees and expenses from the proceeds of the Offering and our ongoing operations, including:


	•	loan brokerage fees,

	•	loan evaluation and processing fees,

	•	loan servicing fees (where permitted), and

	•	loan extension or modification fees.


	•	annual management fee, and

	•	real estate brokerage commissions payable upon the resale of foreclosed properties.

Fees charged to us will be payable even if we are not profitable or the particular transaction causes us to incur a loss.

We record an annual management fee to Vestin Mortgage of up to 0.25% of the aggregate capital contributions to the Fund. Vestin Mortgage pays and is not reimbursed by us for any general or administrative overhead expenses it incurs in connection with managing the operation of the Fund even if

such amounts exceed its annual management fee. However, Vestin Mortgage may be reimbursed for expenses paid to non-affiliates on our behalf. We anticipate such expenses will consist of legal, accounting and tax preparation fees. Such amounts will be paid from available cash. In the event available cash is inadequate to cover such expenses, Vestin Mortgage shall advance such expenses on our behalf and will be repaid for such advances when there are adequate funds in the cash reserve.

2. Purchase of Mortgage Notes from Vestin Mortgage. We acquire our mortgage loans from or through Vestin Mortgage pursuant to NASAA Guidelines. Vestin Mortgage is in the business of obtaining, processing, making, brokering and selling, and managing and servicing mortgage loans. All our mortgage loans purchased from Vestin Mortgage are at prices no higher than the lesser of the cost of the mortgage loan to Vestin Mortgage or the then current market value of the mortgage loan. A committee of officers and directors of Vestin Mortgage makes all decisions concerning the mortgage loans in which we will invest or purchase. This committee is currently comprised of Stephen J. Byrne, Steve A. Schneider, Daniel B. Stubbs, Lance Bradford, John Alderfer and Rod Rodriguez. Because Vestin Mortgage’s fees are generated by the volume of the mortgage loans we purchase, Vestin Mortgage will face a conflict of interest in determining whether a loan not squarely within our investment guidelines is appropriate for our loan portfolio.

3. Non-Arm’s Length Agreements. Our agreements and arrangements for compensating Vestin Mortgage are not the result of arm’s-length negotiations. Additionally, none of the three directors of Vestin Mortgage are independent.

4. Competition for the Time and Services of Common Officers. We will rely on Vestin Mortgage and its directors and officers for the management of our operations. When performing their duties, the officers, directors and employees of Vestin Mortgage may, for their own account or that of others, originate mortgages and acquire investments similar to those made or acquired by us. The directors of Vestin Mortgage also may act as trustees, directors or officers, or engage in other activities for themselves and/or other entities and may acquire, broker and originate similar mortgage investments for their own account or that of others. Vestin Mortgage is the manager of Vestin Fund I, a fund which has raised $100 million with investment objectives similar to ours. Accordingly, conflicts of interest will arise in operating more than one entity for allocating time between the entities. The directors and officers of Vestin Mortgage will devote such time to our affairs and as they determine in good faith and in compliance with their fiduciary obligations to us and our members, to be necessary for our benefit.

Vestin Mortgage believes it has sufficient staff to be capable of discharging its responsibility to us and to all other entities to which they or their officers or affiliates are responsible. However, during times when we and the other businesses are handling a high volume of loans, a conflict will arise as to which company’s loan processing to complete first.

5. Competition between the Fund, Vestin Fund I, Vestin Mortgage and Vestin Mortgage’s Affiliates for Investment Opportunities. Vestin Mortgage anticipates that it or its affiliates will engage in businesses which are or will be competitive with ours or which have the same management as we do. To the extent that these other entities with similar investment objectives have funds available for investment when we do and a potentially suitable investment has been offered to us or one of these programs, conflicts of interest will arise as to which entity should acquire the investment.

If any conflict arises between us and any other affiliated program as to which company will have the right to invest in a particular mortgage loan or other investment, Vestin Mortgage will make the determination largely based on a review of the respective loan portfolios. Vestin Mortgage will also base the decision on factors such as the amount of funds available for investment, yield, portfolio diversification, type and location of the property on which Vestin Mortgage will make the mortgage loan, and proposed loan or other transaction terms. The officers and directors of Vestin Mortgage will be responsible for monitoring this allocation method to be sure that it is applied fairly.

Vestin Mortgage remains subject to a fiduciary duty to us and our members described in this prospectus. Subject to this fiduciary duty, neither Vestin Mortgage nor its affiliates will be obligated to present to us any particular investment opportunity that comes to their attention, even if the opportunity is of a character that might be suitable for us.

6. Lack of Separate Representation. We are represented by the same counsel as Vestin Mortgage and its affiliates, and we anticipate that this multiple representation by our attorneys will continue in the future. If a dispute arises between us and Vestin Mortgage or any of its affiliates, Vestin Mortgage or the affiliate will either obtain separate counsel or facilitate our retaining separate counsel for such matters. However, we do not anticipate obtaining separate counsel should there be a need in the future to negotiate or prepare contracts or other agreements between us and Vestin Mortgage for services including those contemplated by this prospectus, and as a result these agreements will not reflect arm’s length bargaining.

7. Rights of Affiliates. Any director or officer of Vestin Mortgage and any other affiliate may acquire, own, hold and dispose of units for his individual account and may exercise all rights of a member, except for voting rights with respect to the Manager, to the same extent and in the same manner as if he were not an affiliate of ours.

8. We May Co-Invest in Mortgages Acquired by Vestin Mortgage. If Vestin Mortgage determines that an entire loan is not suitable for our loan portfolio, we may co-invest in the loan with Vestin Mortgage or Vestin Fund I pursuant to NASAA Guidelines. If we co-invest in a loan with Vestin Mortgage, our investment will be on substantially the same terms as those of Vestin Mortgage. A conflict of interest may arise between us and Vestin Mortgage if the borrower defaults on the loan and each of us seeks to protect our interests in the loan and in the security property. Also, we have no written or oral agreement or understanding with Vestin Mortgage concerning our relative priority when a borrower defaults; as a result, you must rely on Vestin Mortgage to act in accordance with its fiduciary duty under the Operating Agreement to protect your interest.

9. inVestin Nevada, Inc. Vestin Mortgage has recently entered into an agreement to provide management services to inVestin Nevada, Inc. (“inVestin Nevada”). inVestin Nevada is a Nevada corporation wholly owned by Mr. Shustek, the Chief Executive Officer and majority shareholder of Vestin Group, Inc., the parent of our Manager, Vestin Mortgage. inVestin Nevada was formed on September 12, 2002, and is seeking to raise up to $100,000,000 through the sale of subordinated notes to Nevada residents pursuant to a registration statement filed with the Securities Division of the Nevada Secretary of State and in reliance upon the exemptions from such registration requirements provided for under Section 3(a)(11) of the Securities Act of 1933 and Rule 147 thereunder relating to intrastate offerings. As of August 31, 2003, inVestin Nevada has raised approximately $6,836,179 inVestin Nevada has investment objectives similar to ours; however, it will make at least 80% of its investments in mortgages in properties in Nevada. As a result, the following additional conflicts of interest may arise involving inVestin Nevada: (i) Vestin Mortgage and its key people, Mr. Shustek, Ms. May, Mr. Bradford and Mr. Byrne, may have conflicts of interest in allocating their time and resources between our business and the activities of inVestin Nevada; (ii) Vestin Mortgage’s management of inVestin Nevada may also result in conflicts of interest over how Vestin Mortgage determines which loans are appropriate for us and which are appropriate for inVestin Nevada; and (iii) if Vestin Mortgage determines that we should co-invest in a loan with inVestin Nevada (pursuant to NASAA Guidelines), our investment will be on substantially the same terms as those of inVestin Nevada and a conflict of interest may arise between us and inVestin Nevada if the borrower defaults on the loan and each of us seeks to protect our interests in the loan and in the property securing the loan.

10. Our Participation in Loans with Publicly Registered Affiliates. We may participate in mortgage loans with publicly registered affiliates if the investment objectives of the participants are substantially identical, there are no duplicate fees, the sponsors receive substantially identical compensation, the investment of each participant is on substantially the same terms, and the participants have a right of first refusal with regard to the sale of any participant’s interest in such loans. There is a potential risk of impasse on joint venture decisions among the participants if any such investment is made on a 50/50 basis and no participant has control. In addition, there is a potential risk that, while a participant may have the right to buy an asset from the partnership or joint venture, it may not have the resources to do so. We will not participate in mortgage loans with non-publicly registered affiliates, except as permitted under the NASAA Guidelines.

The information in this table should be read in conjunction with the accompanying audited financial statements and notes to financial statements included elsewhere in this document.

Prior to June 14, 2001, we were a development stage company with no operational activities. We commenced the offering of our Units in June 2001; that offering continues. Our financial results reflect the amount of capital we had available for investment in mortgage loans. Our past performance may not be indicative of future results. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding the Company appearing elsewhere in this prospectus.

Our primary business objective is to generate monthly income by investing in mortgage loans. We believe there is a significant market opportunity to make mortgage loans to owners and developers of real property whose financing needs are not met by traditional mortgage lenders. The loan underwriting standards our Manager utilizes are less strict than traditional mortgage lenders. In addition, one of our competitive advantages is our ability to approve loan applications more quickly than traditional lenders. As a result, in certain cases, we may make mortgage loans which are riskier than mortgage loans made by commercial banks. However, in return we seek a higher interest rate and our Manager takes steps to mitigate the lending risks such as imposing a lower loan to value ratio. While we may assume more risk than traditional mortgage lenders, in return, we seek to generate higher yields from our mortgage loans.

Our operating results are affected primarily by: (i) the amount of capital we have to invest in mortgage loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of foreclosures and related loan losses which we may experience. In June 2001, we commenced the sale of our Units, raising approximately $398 million by June 30, 2003. The Company may continue to sell units to existing members until June 2004 or until $500 million units have been sold. These funds, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in mortgage loans. We do not have any arrangements in place to materially increase the funds we will have available to invest from any other sources. See discussion — “Capital and Liquidity.”

The US economy has suffered from a mild recession over the recent past few years, and we have experienced a slowdown in commercial real estate lending in the markets which we service. A prolonged recession may continue to dampen real estate development activity, thereby diminishing the market for our loans. In addition, the continuing decline in interest rates, which is largely attributable to the weak economy, may be expected to diminish the interest rates we can charge on our loans. The average interest rate on our loans at June 30, 2003 was 12.5% as compared to 13.4% at June 30, 2002. Moreover, a prolonged recession or poor credit decisions by our Manager may continue the increase in non-performing assets. Non-performing assets total $50.8 million or 12.5% of our total assets as of June 30, 2003 as compared to $6.5 million or 2.8% of our assets as of June 30, 2002. To the extent that the efforts of our borrowers to develop and sell commercial real estate projects are adversely impacted by the status of the economy, we may experience an increase in loan defaults which may reduce the amount of funds we have for distribution to our Members. In this regard, it should be noted that the weighted average maturity of our outstanding loans as of June 30, 2003 was 12.9 months, compared to 11.4 months at June 30, 2002. As a of result of these economic conditions, our annualized rate of return to Members for the fiscal year June 30, 2003 was 7.6%, compared to 11.9% for the fiscal year ended June 30, 2002.

Adverse economic conditions during the next year could have a material impact on the collectibility of our loans. Recognizing this risk, we seek to maintain a low loan-to-value ratio which, as of June 30, 2003, was 60% on a weighted average basis, generally using appraisals prepared on an as-if developed basis in connection with the loan origination. In this manner, we hope to retain sufficient cushion in the underlying equity position to protect the value of our loan in the event of a default. Nevertheless, no

Historically, our Manager has focused its operations on Nevada and certain Western states. Because our Manager has a significant degree of knowledge with respect to the real estate markets in such states, it is likely most of our loans will be concentrated in such states. As of June 30, 2003, 31% of the principal amount of our loans were secured by real estate in Nevada, while 27%, 13%, and 15% were secured by real estate in Texas, California, and Arizona, respectively. Such geographical concentration creates greater risk that any downturn in such local real estate markets could have a significant adverse effect upon our results of operations. Commercial real estate markets in Nevada have continued to prosper, with significant borrowing activity, throughout the current recession. However, the rate of growth appears to be slowing. The commercial real estate markets in Texas, Arizona and California also appear to be relatively unaffected by the recession. As noted above, if the recession continues for an extended period or deepens, particularly in any of the identified states, our operating results could be adversely affected.

Total Revenues. For the fiscal year ended June 30, 2003, total revenues were approximately $40.3 million compared to $15.3 million for the fiscal year ended June 30, 2002, an increase of $25.0 million or 163.6%. Growth in revenue was mainly due to an increase in our investments in mortgage loans with the portfolio totaling $352.5 million as of June 30, 2003 compared to $222.6 million as of June 30, 2002. Our average interest yields on our investments in mortgage loans for the year ended June 30, 2003 was 12.5% compared to 13.4% for the year ended June 30, 2002. While more money was available to loan as a result of addition unit sales in fiscal 2003 compared to fiscal 2002, the rates declined based on overall economic conditions.

Total Expenses. In fiscal 2003, total expenses were $16.5 million compared to $0.9 million for fiscal 2002, an increase of $15.6 million. The increase in expenses resulted from several factors, including an increase in management fees due to the higher capital accounts, interest expense related to secured borrowing (see Note F), a provision for loan losses (see Note C), losses on real estate held for sale (see Note D) and the write-off of deferred offering costs (see Note H). See also — “Asset Quality and Loan Reserves.”

Net Income. Overall, net income for fiscal 2003 was $23.8 million compared to $14.4 million in fiscal 2002, an increase of $9.4 million or 64.8%.

Annualized Rate of Return to Members. For fiscal 2003, the annualized rate of return to members was 7.6% compared to 11.9% for fiscal 2002. The decrease in annualized rate of return to members was primarily related to the increase in total expenses as outlined above.

The following is a schedule of maturities of investments in mortgage loans as of June 30, 2003:

The following is a schedule by geographic location of investments in mortgage loans as of:

Losses may occur from investing in mortgage loans. The amounts of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.

The conclusion that a mortgage loan is uncollectible or that collectibility is doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates the Company’s mortgage loan portfolio for impairment. The fact that a loan is temporarily past due does not necessarily mean that the loan is impaired. Rather, all relevant circumstances are considered by our Manager to determine impairment and the need for specific reserves. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters:



	•	prevailing economic conditions;



	•	historical experience;



	•	the nature and volume of the loan portfolio;



	•	the borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;



	•	evaluation of industry trends; and



	•	estimated net realizable value of any underlying collateral in relation to the loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. As of June 30, 2003, our Manager had provided for $2.2 million as a general allowance for

loan losses. At June 30, 2003, six of our loans were non-performing (more than 90 days past due on principal or interest payments) totaling $34.9 million. Our Manager evaluated the loans and concluded that the underlying collateral was sufficient to protect us against a loss of principal or interest with the exception on the loan described below. Our Manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded.

As of June 30, 2003, the Company re-evaluated the underlying collateral for one of the above mentioned loans currently in foreclosure with a principal balance of $13,000,000. The collateral is 570 acres of land near Austin, Texas. The Company made the loan for construction of an 18-hole golf course and clubhouse. The Company ceased funding the construction loan when it determined that the borrower was significantly over budget for construction costs and behind in the timely completion of the project. The Company and the borrower are involved in litigation in Austin, Texas regarding the cessation of funding and the foreclosure. It is impossible to determine the timing or eventual outcome of this litigation. It is possible that regardless of the outcome of the litigation, the borrower may declare bankruptcy which will stay the foreclosure. The Company has obtained estimates of current value for the partially completed golf course and estimates of the costs to complete construction. Based on those estimates, the Company has provided for a specific allowance for loan loss of $7,000,000 related to this impaired loan.

The Company is also involved in discussions with the other lenders who hold first trust deeds on the property surrounding the golf course to determine the feasibility of some type of joint arrangement to complete the project. At this time, it is too early to determine if any such arrangements might be agreed.

In addition to the above-mentioned loans, at June 30, 2003, our Manager had granted extensions on 18 loans pursuant to the terms of the original loan agreements which permit extensions by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take out financing. The aggregate amount due to us from borrowers whose loans had been extended as of June 30, 2003 was approximately $87,967,000. At June 30, 2003, all such loans were performing. Accordingly, our Manager concluded that no additional allowance for loan losses was necessary with respect to such loans.

Because of the fact that any decision regarding the allowance for loan losses reflects a judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect. In such event, actual losses may exceed (or be less than) the amount of any reserve. To the extent that we experience losses greater than the amount of our reserves, we may incur a charge to our earnings that will adversely affect our operating results and the amount of any distributions payable to our Members.



		based upon the daily number of outstanding units beginning on June 14, 2001. The weighted average number of outstanding units for the period from June 14, 2001 through June 30, 2001 is calculated based upon the daily number of outstanding units beginning on June 14, 2001.



(b)		The annualized net rate of return to unit holders is calculated based upon the net income allocated to unit holders per weighted average units then divided by the number of months during each period and multiplied by 12 months, then divided by ten (the $10 cost per unit).

Prior to June 14, 2001, we were a development stage company with no operational activities. We commenced the offering of our Units in June 2001; that offering continues. Our financial results reflect the amount of capital we had available for investment in mortgage loans. Our past performance may not be indicative of future results. In June 2002, the Company changed its fiscal year end from December 31 to June 30. The transition period ended June 30, 2002 reflects six months of operating activities as a result of the change in fiscal year end.

Total Revenues. In 2002, total revenues were $11.5 million compared to $3.8 million in 2001, an increase of $7.7 million or 203%. Growth in revenue was mainly due to an increase in our investments in mortgage loans of approximately $105 million and a full year of operations. Overall, our average interest yields on our investments in mortgage loans during 2002 were not significantly different as compared to 2001, with average interest yields of 12.5% and 12.4% for 2002 and 2001, respectively.

Total Expenses. In 2002, total expenses totaled $0.8 million compared to $0.1 million for 2001, an increase of $0.7 million or 798%. Increase in total expenses for 2002 mainly related to an allowance for loan losses of $0.5 million and management fees of $0.2 million. Management fees are a monthly recurring expense based upon an amount up to 0.25% of aggregate outstanding capital.

Net Income. Overall, net income for 2002 totaled $10.7 million compared to $3.7 million for 2001, an increase of $7 million or 187%.

Annualized Rate of Return to Members. For 2002, annualized net rate of return to members totaled 11.7% compared to 12.4% for 2001. The decrease in annualized net rate of return to members was primarily due to allowance for loan losses which our Manager decided to establish during the transition period ended June 30, 2002. To date, no specific loans have been written off or written down. See discussion — “Asset Quality and Loan Reserves.”

The following is a summary of our investment in mortgage loans as of June 30, 2002:

The following is a schedule of maturities of investment in mortgage loans as of June 30, 2002 for the calendar years ending December 31:

The following is a schedule by geographic location of investment in mortgage loans as of June 30, 2002:

Interest is recognized as revenue when earned according to the terms of the loans, using the effective interest method. The Company does not recognize interest income on loans once they are determined to be impaired. A loan is impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction or when management does not believe the Company’s investment in the loan is fully recoverable.

Investment in mortgage loans secured by trust deeds and mortgages are originated by our Manager in accordance with terms contained in our operating agreement. Currently, all of the mortgage loans are fixed rate loans with maturities ranging from one to two years, secured by first and second deeds of trust on properties securing commercial, land, construction, residential, bridge, and acquisition and development loans. Bridge loans provide interim financing (12 to 24 months) to enable commercial borrowers to attempt to qualify for permanent financing. Currently, all of our mortgage loans require interest only payments with a balloon payment of the principal at maturity. We have both the intent and ability to hold mortgage loans until maturity and, therefore, mortgage loans are classified and accounted for as held for investment and are carried at cost.

We maintain an allowance for loan losses on our investment in mortgage loans for estimated and expected credit impairment which is considered inherent to our investment in mortgage loans portfolio. Our Manager’s estimate of expected losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may effect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the reserve are

provided through a charge to earnings and are based on an assessment of certain factors including, but not limited to, estimated losses on the loans. Actual losses on loans are recorded as a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the reserve. Our Manager believes that the allowance for loan losses totaling $9.2 million as of June 30, 2003, included in the accompanying balance sheet is adequate to address estimated and expected credit impairment.

Real estate held for sale includes real estate acquired through foreclosure and is carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell. At June 30, 2003 and June 30, 2002, the Company had $15.8 million and $0, respectively, in real estate held for sale.

Our business is subject to numerous factors affecting our operating results. In addition to the factors discussed above, our operating results may be affected by:



	•	Our underwriting standards and procedures are more lenient than conventional lenders in that we will invest in loans to borrowers who will not be required to meet the credit standards of conventional mortgage lenders.



	•	We approve mortgage loans more quickly than other mortgage lenders. Due to the nature of loan approvals, there is a risk that the credit inquiry our Manager performs will not reveal all material facts pertaining to the borrower and the security.



	•	Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets.



	•	If the economy is healthy, we expect that more people will borrow money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too much and the cost of borrowing may become too expensive. This could result in a slowdown in real estate lending which may mean we will have fewer loans to acquire, thus reducing the our revenues and the distributions to our Members.



	•	If, at a time of relatively low interest rates, a borrower should prepay obligations that have a higher interest rate from an earlier period, investors will likely not be able to reinvest the funds in mortgage loans earning that higher rate of interest. In the absence of a prepayment fee, the investors will receive neither the anticipated revenue stream at the higher rate nor any compensation for their loss. This in turn could harm our reputation and make it more difficult for us to attract investors willing to acquire interest in mortgage loans.

Our performance will be directly impacted by any defaults on the loans in our portfolio. As noted above, we may experience a higher rate of defaults than conventional mortgage lenders. We seek to mitigate the risk by estimating the rate of the underlying collateral and insisting on low loan to value ratios. However, no assurance can be given that these efforts will fully protect us against losses on defaulted loans. Moreover, during the period of time when a defaulted loan is the subject of foreclosure proceedings, it is likely that we will earn less (if any) income from such loans, thereby reducing our earnings.

We consider our competitors for borrowers to be the providers of non-conventional mortgage loans, that is, lenders who offer short-term, equity-based loans on an expedited basis for higher fees and rates than those charged by conventional lenders and mortgage loans investors, such as commercial banks, thrifts, conduit lenders, insurance companies, mortgage brokers, pension funds and other financial institutions that offer conventional mortgage loans. Many of the companies against which we compete have substantially greater financial, technical and other resources than we do. Competition in our market niche depends upon a number of factors including price and interest rates of the loan, speed of loan processing, cost of capital, reliability, quality of service and support services.

Our sole business, making loans secured by real estate, is particularly vulnerable to changes in macroeconomic conditions. Any significant decline in economic activity, particularly in the geographical markets in which we concentrate our loans, could result in a decline in the demand for real estate development loans. In order to stay fully invested during a period of declining demand for real estate loans, we may be required to make loans on terms less favorable to us or to make loans involving greater risk to us. Declines in economic activity are often accompanied by a decline in prevailing interest rates. Although our lending rates are not directly tied to the Federal Reserve Board’s discount rate, a sustained and widespread decline in interest rates will impact the interest we are able to earn on our loans. Since our loans generally do not have prepayment penalties, declining interest rates may also cause our borrowers to prepay their loans and we may not be able to reinvest the amounts prepaid in loans generating a comparable yield. Moreover, any significant decline in economic activity could adversely impact the ability of our borrowers to complete their projects and obtain take out financing. This in turn could increase the level of defaults we may experience.

Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and for general operating purposes. Subject to a 3% reserve, we use all of our available funds to invest in mortgage loans. Income generated from such loans is paid out to our Members unless they have elected to reinvest their dividends. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months because Vestin Mortgage will manage our affairs. We may pay Vestin Mortgage a monthly management fee of up to 0.25% of our aggregate capital contributions.

During the year ended June 30, 2003, cash flows provided by our operating activities approximated $33,729,000. Our investing activities for the year ended June 30, 2003 consisted of investment in loans secured by real estate in the amount of $146,478,000 (net of proceeds from payoffs and sales of mortgage loans), and investment in certificates of deposits of $4,650,000. Our financing activities primarily consisted of proceeds from the sale of Units in the amount of $156,984,000 offset by Member withdrawals of $12,773,000 and Members’ distributions, net of reinvestments, of $25,269,000.

As the offering of our Units is continuing, we currently rely upon the sale of Units, loan repayments and dividend reinvestments to provide the cash necessary to carry on our business. We will continue to sell our Units until June 2004 or until we raise a total of $500 million. Approximately 2,542 of our Members, currently reinvest their distributions. Our ability to attract investors to purchase Units and the level of distribution reinvestment depends upon a number of factors, some of which are beyond our control. The key factors in this regard include general economic conditions, the conditions of commercial real estate markets, the availability and attractiveness of alternative investment opportunities, our operating performance and the track record and reputation of our Manager. We believe our ability to attract investors has been enhanced by the high historical yields generated by our mortgage investments and by comparable yields earned by Vestin Fund I, LLC which is also managed by our Manager. These yields may prove particularly attractive to the extent that equity markets are viewed as risky or volatile and to

the extent that most fixed income investments provide a lower yield. Notwithstanding our high historical yields, our ability to raise additional funds from investors may be impaired by our relatively small size and our limited operating history. In addition, the mortgage loans in which we invest are not federally insured as are certain bank deposits and are generally illiquid as compared to government and certain corporate bonds. Thus, our ability to generate high yields is critical to offsetting some of these disadvantages. Our ability to raise additional funds would suffer if the performance of our loan portfolio declines or if alternative investment vehicles offering comparable yields and greater safety and/or liquidity become available.

Any significant level of defaults on outstanding loans could reduce the funds we have available for investment in new loans. Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds. This would diminish our capital resources and would impair our ability to invest in new loans. See the discussion “Asset Quality and Loan Reserves.” In addition, redemptions by our Members would reduce the capital we have available for investment. Such redemptions are limited by the terms of our operating agreement to not more than 10% per year and not more than $100,000 per member per calendar year and are subject to other conditions.

Beginning capital as of January 1, 2003 was $315.0 million, which would limit redemptions to $31.5 million for calendar 2003. On September 12, 2003, the Company discontinued accepting requests for the redemption of units for the 2003 calendar year. As of September 12, 2003, the total of redemptions made and redemptions requested and awaiting payment was $30.9 million. All redemptions requests received after that date have been logged for redemption beginning in January 2004. As of September 19, 2003, requests to redeem 234,910 units had been logged.

Our Manager believes that total non-performing assets at June 30, 2003 have increased primarily as a result of factors unique to specific borrowers. Because of the estimated value of the underlying properties, the Company does not believe that any losses beyond those already recognized will be incurred from these assets upon final disposition. However, it is possible that the Company will not be able to realize the full estimated carrying values upon disposition, particularly if continuing economic weakness results in declining real estate values.

As of June 30, 2003, the Company had secured borrowings of $26.7 million related to an intercreditor agreement. Pursuant to the intercreditor agreement, the Investor may participate in certain loans with Vestin Mortgage, Vestin Fund I, and the Company (collectively, “the Lead Lenders”). In the event of borrower non-performance, the intercreditor agreement gives the Lead Lenders the right to either (i) continue to remit to the investor the interest due on the participation amount; (ii) substitute an alternative loan acceptable to the investor; or (iii) repurchase the participation from the investor for the outstanding balance of the participation plus accrued interest. Consequently, mortgage loan financing under the participation arrangement is accounted for as a secured borrowing in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

As of June 30, 2003, we have only one revolving line of credit, which is from First Hawaiian Bank in the amount of $2,000,000. The balance as of June 30, 2003 for that line of credit was $2,000,000. As of June 30, 2003, the Company was in compliance with all applicable covenants related to the line of credit.

We may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. Other than the line of credit mentioned above, we currently do not have in place any commitments to borrow any funds or securitize any of our assets. No assurance can be given that, if we should seek to borrow funds or to securitize our assets we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.

We do not currently have any interest in any special purpose entities nor do we have any commitments or obligations which are not reflected on our balance sheet. We do not have any interest in derivative contracts.

We maintain working capital reserves of approximately 3% of aggregate members’ capital accounts in cash and cash equivalents, certificates of deposits and short-term investments. This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying security properties, expend money to satisfy our unforeseen obligations and for other permitted uses of the working capital. At June 30, 2003, the Company had $5.7 million in cash, $11.1 million in certificates of deposit, and $406.6 million in total assets. It appears the Company has sufficient working capital to meet its operating needs in the near term.

Vestin Mortgage is the promoter of the Fund. Currently, Vestin Mortgage serves as our Manager (see “Management” Section of this prospectus). Vestin Mortgage is wholly owned by Vestin Group, a publicly traded company. Mr. Shustek owns a controlling interest in Vestin Group and thus indirectly determines policies the Manager chooses to implement in connection with providing services to the Fund.

Vestin Mortgage is a fiduciary for you and the Fund. As a fiduciary, Vestin Mortgage must exercise good faith and integrity when handling our affairs. Vestin Mortgage must not take advantage of us, and must make full disclosure of any conflicts of interest or benefit to it in its dealings with us. As set forth in the Operating Agreement, Vestin Mortgage has fiduciary responsibility for the safekeeping and use of all of our funds and assets and Vestin Mortgage will not use, or permit another to use our funds or assets in any manner except for our exclusive benefit. Vestin Mortgage will not allow our assets to be commingled with its assets or the assets of any other person or company. Vestin Mortgage and its affiliates may engage in activities similar to or identical with our business, but Vestin Mortgage must devote such of its time to our business as it determines, in good faith, to be reasonably necessary. Vestin Mortgage also acts for its own account as a mortgage broker. In connection with this activity, it also brokers, arranges and services mortgage loans for investors that it obtains in the ordinary course of its mortgage brokerage business, including by way of seminars, general solicitations and referrals. When it acts in those capacities, it has a fiduciary duty to each company as set forth in the respective organizational documents, if any, and under applicable law, and Vestin Mortgage is bound to treat each fairly and with appropriate access to investment opportunities.

Additionally, Vestin Mortgage could change our investment guidelines when a reasonably prudent person would do likewise, subject to its fiduciary duties to our members. However, Vestin Mortgage can only change our investment objectives upon approval of a majority of our members.

The above described fiduciary duty is both contractual, arising by virtue of the Operating Agreement, and imposed by Nevada common law.

You have the following legal rights and remedies concerning Vestin Mortgage and the conduct of our operations:


	•	you may bring individual actions on behalf of yourself or class actions on behalf of yourself and other members to enforce your rights under the Operating Agreement and Nevada limited liability company law, including for breaches by Vestin Mortgage of its fiduciary duty;

	•	a majority may remove Vestin Mortgage as our Manager, as described elsewhere in this prospectus;

	•	you may bring actions on our behalf for claims we might have as derivative actions, if Vestin Mortgage refuses to bring suit; and

	•	you may bring actions under federal or state securities laws, either individually or as part of a class of members, if Vestin Mortgage has violated those laws in connection with the offer and sale, or repurchase of units.

This is a rapidly changing and developing area of law. If you have questions concerning the fiduciary duties of Vestin Mortgage in its role as our Manager, you should consult with your own legal counsel.

We may indemnify Vestin Mortgage or hold it harmless under certain circumstances. We will not indemnify Vestin Mortgage or any of its affiliates, agents, attorneys, nor any person acting as securities broker or dealer for any loss or liability suffered by the Fund, unless all of the following conditions are met:


	•	Vestin Mortgage has determined in good faith, that the course of conduct which caused the loss or liability was in the best interests of the Fund;

	•	Vestin Mortgage was acting on behalf of or performing services for the Fund;

	•	such liability or loss was not the result of negligence or misconduct by the Manager; and

	•	such indemnification or agreement to hold harmless is recoverable only out of the assets of the Fund and not from the members.

Notwithstanding the statements regarding indemnification in the preceding paragraph, we will not indemnify Vestin Mortgage or any of its affiliates, agents, or attorneys, nor any person acting as securities broker or dealer for the units from any liability, loss or damage incurred by them arising due to an alleged violation of federal or state securities laws unless:


	•	there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular party;

	•	the claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular party; or

	•	a court of competent jurisdiction approves a settlement of the claims against the particular party and finds that indemnification of the settlement and related costs should be made.

Before seeking a court approval for indemnification, the party seeking indemnification must apprise the court of the position of the Securities and Exchange Commission and the Nevada Administrator concerning indemnification for securities violations.

We will not purchase any insurance that protects a party from any liability for which we could not indemnify that party.

We will advance funds to Vestin Mortgage or its affiliates for legal expenses and other costs incurred as a result of any legal action if the following conditions are satisfied:


	•	the legal action relates to acts or omissions with respect to the performance of duties or services on our behalf;

	•	the legal action is initiated by a third party who is not a Member, or the action is initiated by a Member and a court specifically approves such advancement; and

	•	the Manager or its affiliates undertake to repay the advanced funds to us in the event Vestin Mortgage or its affiliates is not entitled to indemnification.

This is a summary of the Operating Agreement and does not contain all the information that may be important to you. Furthermore, you will be bound by the Operating Agreement by purchasing your units. Consequently, you should read carefully both this prospectus and the Operating Agreement, which is attached as Exhibit A to this prospectus.

Our acceptance of your subscription agreement is effective when we countersign it. Subscriptions will be accepted or rejected no sooner than 5 business days after the date of the Subscription Agreements and within 30 days of their receipt. If we reject your subscription agreement, your funds will be returned to you within 10 business days. If we accept your subscription and payment for units, you will receive units in, and be a member of, the Fund within 5 business days after we accept your subscription. We will promptly send you a confirmation of the number of units you have acquired. This will be evidence that you are a member of the Fund. As a member, you have the rights that are outlined in this prospectus.

The Nevada statute under which the Fund has been formed provides that members are not personally liable for the obligations of their limited liability company. The Operating Agreement also provides that every written agreement entered into by us is not enforceable against our members personally.

The Fund will cease operating on December 31, 2020. Before then, the members may vote by a majority to extend its life or to dissolve it sooner. Additionally, we may dissolve earlier if Vestin Mortgage ceases serving as the Manager and the members cannot agree on a new Manager within six months.

Either Vestin Mortgage or members owning capital accounts with at least 10% of the amounts in all capital accounts may call meetings of the members. Vestin Mortgage has informed us that it has no present intention of calling any meetings of the members. Any voting by the members is anticipated to be by written consent.


	•	remedy any ambiguity or formal defect or omission,

	•	conform it to applicable laws and regulations, and

	•	make any change which, in the judgment of Vestin Mortgage, is not to the prejudice of the members.


	•	We require the vote or consent of a majority of members (excluding Vestin Mortgage) to do any of the following:


	•	amend the Operating Agreement, except in the instances mentioned above,

	•	dissolve the Fund and wind up our business,

	•	add or remove a Manager,

	•	cause us to merge with another company, and

	•	approve or disapprove the sale of more than 50% of our assets.

You may inspect certain of our books and records at our principal office during our regular business hours. We also maintain a copy of each appraisal for the security property where we have invested in a mortgage loan at our principal office for at least six years after the last date that we held the related mortgage. You may inspect and copy these appraisals during our regular business hours. We may charge you a fee for copying them.

Each unit represents an undivided equity interest in a Nevada limited liability company. The units in the Fund are not evidenced by a certificate. Units are non-assessable and are entitled to a pro rata share of the Fund’s profits and losses in accordance with the terms of the Operating Agreement. There are various limitations on the transfer of units. The Manager may reject any proposed transfer which would jeopardize the tax status of the Fund. Owners of units must hold their units for at least one year. After the one year holding period, an owner may redeem his/her units by submitting a written request for redemption to our Manager, subject to our having adequate Net Proceeds to make the requested redemption and subject to an overall cap that not more than 10% of the units may be redeemed in any 12 month period. There are no outstanding securities senior to the units and senior securities may only be issued with the approval of a majority of the holders of the units. Each holder of units is entitled to vote on matters pertaining to the Fund in accordance with the terms of the Operating Agreement.

Vestin Mortgage will credit the capital account it establishes for you when we receive your initial investment. We will allocate to your capital account the percentage of our income, gains, losses and distributions that the amount in your capital account bears to all members’ capital accounts. Your capital account will increase by the amount of additional capital contributions you make, including distribution reinvestments, and by your share of income and gains realized by us. Your capital account will decrease by your share of losses realized by us and any income or capital we distribute to you. Increases and decreases in your capital account do not depend on the number of units you own.

Except for when we write down our investments, we do not adjust capital accounts to reflect unrealized appreciation or depreciation of our underlying assets. Consequently, the amount in your capital account may not reflect your portion of the fair market value of our underlying assets. This is a continuous offering in which allocations will be made based on the proportionate interest of capital accounts. As a result, depending upon when units are purchased, the units purchased by our members for ten dollars will likely have:


	•	differing distribution and income amounts from our mortgage loans due to the variance in the capital accounts of members, and

	•	different proportionate interests in the fair market value of our underlying assets.

If the fair market value of our assets is less than the cost of the assets on our books when you make a capital contribution, then the value of your units’ interest in the fair market value of our underlying assets may be less than ten dollars. Conversely, if the fair market value of our assets is greater than the cost of the assets on our books when a new member makes a capital contribution, then your units’ interest in the realized gains in the fair market value of our assets will be shared with the new members making the contribution or reinvestment. This will result in a dilution in the value of your units’ interest in the fair market value of our underlying assets. These principles apply equally for when a member makes a distribution reinvestment.

Vestin Mortgage’s capital account has been credited in the amount of $1,100,000 for expenses of this Offering paid to non-affiliated third parties. Vestin Mortgage will not be reimbursed or credited for any

The number of units you hold will decrease when we return capital to you and will increase when you contribute or are deemed to recontribute capital. If we return capital to you, we will treat it as a redemption of units in an amount proportionate to the amount in your capital account. We will provide statements to you reflecting the number of units that we have redeemed and the number of units that you still own as a result of the redemption.

Additionally, for tax purposes you will be deemed to have received a return of capital and recontributed to us any proceeds we receive from loan repayments, foreclosures or other capital transactions, or any loan modifications or extensions treated as a disposition for tax purposes. While we believe that this characterization will not affect the tax liability of our members, if the Internal Revenue Service unexpectedly were to disagree, you may have a tax liability with no cash distributions to pay that liability.

As indicated above, we make quarterly downward adjustments to the fair market value of our assets to reflect then-current market conditions. We refer to these downward adjustments as write-downs. We will make any necessary write-downs within 30 days following the end of each calendar quarter. Our accountants will then evaluate the write-downs in accordance with generally accepted accounting principles. If a write-down is required, the write-down shall be effective on the last day of the calendar quarter and the capital accounts of all members on that date shall be reduced accordingly.

Our mortgage loans will generate monthly payments of interest and/or principal to us. We intend to distribute these payments to you as described below. These distributions will be paid monthly in arrears in cash or via reinvestment. We will not accumulate assets other than mortgage notes or similar instruments and we will not accumulate cash on hand, except for working capital reserves of approximately 3% of capital contributions. We cannot make distributions to you until we have received the proceeds from the Offering, and invested them in mortgage loans. Thereafter, our first distribution to you will be your share of our distribution for the month in which your contribution is actually received by us and invested. We calculate the amount of your distributions on a pro rata basis, based upon the monthly return, if any, on all of our assets, the size of your capital account and, if applicable, when during the month we received your contribution.

We will distribute all net income attributable to interest and fee payments we receive from borrowers. When we distribute net income attributable to these payments, all distributions will be made to the members, including Vestin Mortgage, in proportion to their contributed capital.

Net proceeds will include the proceeds from the repayment of principal or the prepayment of a mortgage loan, or the net proceeds of a foreclosure sale. Vestin Mortgage may consider the alternatives listed below in determining whether and how much of the net proceeds to distribute in cash:


	•	reinvesting in new loans,

	•	improving or maintaining any properties that we acquire through foreclosure,

	•	paying permitted operating expenses, or

	•	distributing to the members.

Before making a distribution, we will pay our expenses and other liabilities and confirm that our working capital reserves are adequate.

You can elect to participate in the distribution reinvestment plan by so indicating in your completed subscription agreement, or you can later elect to become a participant. We will treat you as a distribution reinvestment plan participant on the date we actually receive your initial investment, if you indicate in your subscription agreement that you want to participate in the plan. You may also make an election or revoke a previous election at any time by sending us written notice. Units purchased under the plan will be credited to your capital account as of the first day of the month following the month in which the reinvested distribution was made. If you notify us prior to 10 days before the end of any given month, you will be removed from the reinvestment plan during that month and any distribution you receive that month will be paid in cash. If you notify us within ten days of the end of the month, you will need to wait a month to receive cash instead of units.

Your continued participation in the plan depends on whether you meet our investor suitability standards. While you are a participant, for each $10.00 in distributions you reinvest, you will acquire one unit. Vestin Mortgage may terminate or reinstate, as applicable, the distribution reinvestment plan at any time. Vestin Mortgage shall not earn any fees when you reinvest net proceeds.

If you choose to reinvest your distributions in units, we will send you a report within 30 days after each time you receive units describing the distributions you received, the number of units you purchased, the purchase price per Unit, and the total number of units accumulated. We will also send you a current prospectus and tax information for income earned on units under the reinvestment plan for the calendar year when you receive annual tax information from us. You must pay applicable income taxes upon all distributions, whether the distribution is paid in cash or reinvested.

No reinvestment participant shall have the right to draw checks or drafts against his distribution reinvestment account.

Units you acquire through the distribution reinvestment plan carry the same rights as the units you acquired through your original investment. However, as previously noted, the value of the new units issued for ten dollars will not necessarily be the same as those previously acquired for ten dollars.

We may amend or end the distribution reinvestment plan for any reason at any time by mailing a notice to you at your last address of record at least 30 days before the effective date of our action. Vestin Mortgage specifically reserves the right to suspend or end the distribution reinvestment plan if:


	•	Vestin Mortgage determines that the distribution reinvestment plan impairs our capital or operations;

	•	Vestin Mortgage determines that an emergency makes continuing the plan unreasonable;

	•	any governmental or regulatory agency with jurisdiction over us requires us to do so;

	•	in the opinion of our counsel, the distribution reinvestment plan is no longer permitted by federal or state law;

	•	if transactions involving units within the previous twelve (12) months would result in our being considered terminated under Section 708 of the Internal Revenue Code; or

	•	Vestin Mortgage determines that allowing any further reinvestments would create a material risk that we would be treated as a “publicly traded partnership” within the meaning of Section 7704 of the Internal Revenue Code.

We will either invest our net proceeds from any capital transaction in new mortgage loans, hold the net proceeds as cash or distribute them to the members. Capital transactions include payments of principal, foreclosures and prepayments of mortgages, to the extent classified as a return of capital under the Internal Revenue Code, and any other disposition of a mortgage or property. Net proceeds of capital

transactions will also include the principal of a loan deemed to be repaid for tax purposes as a result of a loan modification or loan extension. Our Operating Agreement provides that if we reinvest the proceeds, you will be deemed to have received a distribution of capital and recontributed the same amount to us for tax purposes. We will reinvest proceeds from a capital transaction only within 7 years of the effective date of this Prospectus. We will not reinvest proceeds from a capital transaction unless we have sufficient funds to pay any state or federal income tax in connection with the disposition or refinancing of mortgages. Units purchased by virtue of a deemed recontribution of distributed capital will be credited to your capital account as of the day when the distribution was deemed to be made. Units you acquire through the deemed recontribution of capital carry the same rights as the units you acquired through your original investment. However, as previously noted, the value of the new units issued for ten dollars will not necessarily be the same as those previously acquired for ten dollars.

Your rights to sell or transfer units are limited. There is no public market in which you may sell your units. We do not expect a public market to emerge anytime in the future. You may not sell parts of units unless required by law and you may not transfer any units if, as a result, you would own fewer than 200 units. You may transfer your units using a form approved by Vestin Mortgage and must obey all relevant laws when you are permitted to transfer units. Any person who buys units from you must meet the investor suitability requirements in his home state. Vestin Mortgage must approve any new members and all transfers of membership must comply with the Operating Agreement. Vestin Mortgage’s consent to transfers will be withheld to the extent needed to prohibit transfers that would cause us to be classified as a publicly traded partnership under the Internal Revenue Code. In the event Vestin Mortgage approves of such transfers or assignment, our records will be amended to reflect such transfer or assignment within one month of the transaction.

You may withdraw, or partially withdraw, from the Fund and obtain the return of all or part of your capital account within 61 to 91 days after you deliver written notice of withdrawal to Vestin Mortgage, subject to the following additional conditions:


	•	You may not withdraw from the Fund until one year after you purchased units.

	•	We can only make cash payments in return of an outstanding capital account from net proceeds and capital contributions.

	•	The Manager must determine that your proposed withdrawal will not impair the capital or operation of the Fund.

	•	We are not required to sell any portion of our assets to fund a withdrawal.

	•	The amount to be distributed to you depends solely on your capital account on the date of the distribution, even if this is not the same as your proportionate share of the then fair market value of our assets.

	•	We will not permit more than 10% of the outstanding capital accounts of members to be withdrawn during any calendar year, except upon dissolution of the Fund.

	•	If your capital account is reduced below $2,000 due to any withdrawal payment, we may distribute all remaining amounts in your capital account to you in cancellation of your units, and you will then cease to be a member.

	•	All payments to meet requests for withdrawal are on a “first-come, first-served” basis. If the sums needed to fund withdrawals in any particular month exceed the amount of cash available for withdrawals, funds will be distributed first to the member whose request we received first, until his withdrawal request is paid in full.

Under the terms of the Operating Agreement and the subscription agreement, you appoint Vestin Mortgage your attorney-in-fact for certain documents, including the signing of the Operating Agreement. You cannot revoke this special power of attorney, which will survive your death and stays with your units even if they are assigned.

The following is a summary of the anticipated federal income tax aspects of an investment in units. Because this is a summary, it does not contain all the information that may be important to you. This summary is based on the Internal Revenue Code as in existence on the date of this prospectus, existing laws, judicial decisions and administrative regulations, rulings and practice, any of which are subject to change, and these changes could be retroactive.

We and our members may be subject to state and local taxes in states and localities in which the IRS or state authorities deem us to be doing business, and except where we reference specific states, this discussion does not cover state or local tax consequences you may incur in connection with your investment.

Some of the deductions we intend to claim or positions we intend to take for tax purposes may be challenged by the IRS. The IRS has increased its audit efforts with respect to limited partnerships and limited liability companies, and an audit of our information return may result in, among other things, an increase in our gross income, the disallowance of certain deductions or credits we have claimed or in an audit of your income tax returns.

Any audit adjustments made by the IRS could adversely affect you even if none of these adjustments are ultimately sustained, since you and the other members will, directly or indirectly, bear the expense of contesting the adjustments.

We advise you to consult your own tax advisors, with specific reference to your own tax situation and potential changes in applicable laws and regulations.

Vestin Mortgage will prepare our information returns, which will not be reviewed by our independent accountants or tax counsel. Vestin Mortgage will handle all of our other tax matters, often with the advice of independent accountants and/or tax counsel.

Tax counsel has delivered an opinion letter to us which is attached as an exhibit to the Registration Statement of which this prospectus forms a part. This letter contains the following opinions with respect to tax matters affecting us:


	•	we will be classified as a partnership rather than as an association taxable as a corporation for federal income tax purposes and

	•	we will not be classified as a publicly traded partnership for federal income tax purposes.

In addition, unless otherwise expressly indicated, the following discussion concerning other federal income tax matters constitutes tax counsel’s opinion as to the material federal income tax consequences of an investment in units.

The discussion considers existing laws, applicable current and proposed Treasury Regulations, current published administrative positions of the IRS contained in revenue rulings, revenue procedures and other IRS pronouncements, and published judicial decisions. We do not know whether a court would sustain any position we take for tax purposes, if contested, or whether there might be legislative or administrative changes or court decisions that would modify this discussion. Any of these changes may or may not be retroactive with respect to transactions prior to the date of the changes.

Moreover, it is possible that the changes, even if not applied retroactively, could reduce the tax benefits anticipated to be associated with an investment in units.

This discussion on federal income tax consequences sets forth the general principles of taxation and does not address how such principles may affect an individual. Thus, we recommend that you consult and rely upon your own tax advisor to determine your individual federal and state consequences and impact arising from an investment in units. The cost of the consultation could, depending on the amount charged to you, decrease any return anticipated on the investment. Nothing in this prospectus is or should be construed as legal or tax advice to any specific investor as individual circumstances may vary. This federal

Under Treasury Regulations issued in December 1996, a domestic limited liability company with more than one member will be classified as a partnership for federal income tax purposes unless it makes an election to be classified as an association taxable as a corporation. We are a domestic limited liability company, and we have more than one member. Vestin Mortgage will not cause us to make an election to be classified as an association taxable as a corporation. Based on the foregoing, it is the opinion of tax counsel that we will be classified as a partnership for federal income tax purposes.

Assuming that we will be classified as a partnership for federal income tax purposes, in the discussion that follows, as the context requires:


	•	the use of the term partnership will be construed to refer also to a limited liability company classified as a partnership for federal income tax purposes;

	•	the use of the term partner will be construed to refer also to a member of a limited liability company; and

	•	the use of the terms partnership interest or interest in the partnership or similar terms will be construed to refer also to the interest of a member in a limited liability company.

Section 7704 of the Internal Revenue Code treats publicly traded partnerships as corporations for federal income tax purposes. Section 7704(b) of the Internal Revenue Code defines the term publicly traded partnership as any partnership, including a limited liability company otherwise classified as a partnership for federal income tax purposes, where the equity interests are:


	•	readily traded on an established securities market; or

	•	readily tradable on a secondary market or the substantial equivalent of a secondary market. In the discussion that follows, the references to a secondary marked also include the substantial equivalents to a secondary market.

In 1995, the IRS issued final Treasury Regulations under Section 7704 of the Internal Revenue Code. These regulations provide that an established securities market includes:


	•	a national securities exchange registered under the Securities Exchange Act of 1934;

	•	a national securities exchange exempt from registration because of the limited volume of transactions;

	•	a foreign securities exchange;

	•	a regional or local exchange; and

	•	an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers by electronic means or otherwise.

In determining when partnership interests will be treated as readily tradable on a secondary market, there are a number of safe harbors that allow certain transactions to be disregarded including a safe harbor that is available if the sum of the percentage interests in partnership capital or profits that are sold or otherwise disposed of during the taxable year does not exceed two percent (2%) of the total interests in partnership capital or profits.

The IRS will disregard certain transfers for purposes of determining whether this safe harbor is met:


	•	transfers at death,

	•	transfers in which the basis is determined under Section 732 of the Internal Revenue Code,

	•	interests issued by the partnership for cash, property or services, and

	•	interests in the partnership which are redeemed pursuant to the safe harbor discussed in the next paragraph.

The IRS also will disregard transfers of an interest in a partnership pursuant to a redemption or repurchase agreement where the partnership maintains a plan of redemption or repurchase in which the partners may tender their partnership interests for purchase by the partnership, another partner or persons related to another partner. These transfers will be disregarded in determining that our units are readily tradable on a secondary market if:


	•	the redemption agreement requires that the redemption cannot occur until at least 60 calendar days after the partner notifies the partnership in writing of the partner’s intention to exercise the redemption rights;

	•	the redemption agreement requires that the redemption price cannot be established until at least 60 days after receipt of the notification by the partnership or the price is established not more than 4 times during the partnership’s taxable year; and

	•	the sum of the percentage interests in partnership capital and profits represented by partnership interests that are transferred, other than in transfers otherwise disregarded, as described above, during the taxable year of the partnership, does not exceed 10% of the total interests in partnership capital or profits.

Our Operating Agreement provides that, subject to the limitations described elsewhere in this prospectus, you may withdraw or partially withdraw as a member and obtain the return of your outstanding capital account. These provisions constitute a redemption or repurchase agreement within the meaning of these regulations.

The limitations on your right to withdraw your capital account set forth in our Operating Agreement include:


	•	a requirement that the withdrawal will not be made until at least 61 days after written notice of withdrawal is delivered to Vestin Mortgage;

	•	the amount distributed to you will be a sum equal to your capital account as of the date of the distribution; and

	•	in no event will Vestin Mortgage permit the withdrawal during any calendar year of more than 10% of the outstanding units.

In the opinion of tax counsel, the foregoing limitations satisfy the requirements applicable to the safe harbor for transfers made pursuant to a redemption or repurchase agreement.

Our Operating Agreement provides that you may not transfer your units if Vestin Mortgage determines that the transfer would result in our being classified as a publicly traded partnership within the meaning of Section 7704(b) of the Internal Revenue Code. To prevent this classification, our Operating Agreement provides that:


	•	Vestin Mortgage will not permit trading of units on an established securities market within the meaning of Section 7704(b) of the Internal Revenue Code;

	•	Vestin Mortgage will prohibit any transfer of units which would cause the sum of percentage interests in our capital or profits represented by partnership interests that are transferred during any taxable year to exceed the limitation under the safe harbor which applies if the sum of the


		percentage interests in the partnership capital or profits that are sold or otherwise disposed of during the taxable year does not exceed two percent of the total interests in partnership capital or profits; and

	•	Vestin Mortgage will not permit any withdrawal of units except in compliance with the provisions of our Operating Agreement.

Based upon the provisions of our Operating Agreement and the representations of Vestin Mortgage, tax counsel’s opinion is that:


	•	units will not be traded on an established securities market within the meaning of Section 7704 of the Internal Revenue Code;

	•	our operation with regard to the withdrawal by members will qualify for the safe harbor that applies to interests which are transferred pursuant to a redemption or repurchase agreement;

	•	our operation with regard to the transfer of units by members will qualify for the above-referenced safe harbor that applies based upon the percentage interests in the partnership capital or profits that are sold or otherwise disposed of during the taxable year;

	•	units will not be considered as readily tradable on a secondary market; and

	•	we will not be classified as a publicly traded partnership for purposes of Section 7704 of the Internal Revenue Code.

A partnership which is classified as a publicly traded partnership under Section 7704 of the Internal Revenue Code will not be treated as a corporation for federal income tax purposes if 90% or more of its gross income is qualifying income. Qualifying income under Section 7704(c) includes for these purposes, among other passive-type items, interest, dividends, real property rents, and gains from the sale of real property, but excludes interest derived in the conduct of a financial business.

If a publicly traded partnership is not taxed as a corporation because it meets the qualifying income test, the passive loss rules discussed below are applied separately to the partnership, and a tax-exempt partner’s share of the partnership’s gross income is treated as income from an unrelated trade or business under the unrelated trade or business taxable income rules discussed below.

It is not clear whether we would satisfy the qualifying income test of Section 7704(c) of the Internal Revenue Code, and tax counsel is unable to give an opinion on this issue. This would be relevant only if it were determined that we should be classified as a publicly traded partnership. Vestin Mortgage expects that more than 90% of our income will be qualifying income. However, it is not clear whether we will be engaged in the conduct of a financial business, and tax counsel is unable to give an opinion on this issue. If we were classified as a publicly traded partnership and considered to be engaged in a financial business, we would be treated as a corporation for federal income tax purposes.

A partnership is not subject to any federal income taxes. We will file information returns reporting our operations on the accrual basis for each calendar year.

You will not be taxed on distributions you receive from us unless the distributions exceed your adjusted basis in your units. Your adjusted basis in your units is the amount you originally paid for the units increased by:


	•	your proportionate share of partnership indebtedness with respect to which no member is personally liable;

	•	your proportionate share of our taxable income, and


	•	any additional capital contributions made by you, and decreased by:

	•	your proportionate share of our losses,

	•	the amount of cash, and fair value of noncash, distributions to you, and

	•	any decreases in your share of any of partnership nonrecourse liabilities.

Any increase in nonrecourse liabilities is treated as a cash contribution and a decrease in nonrecourse liabilities is treated as a cash distribution, even though you do not actually contribute or receive cash. Distributions in excess of your basis generally will be treated as gain from the sale or exchange of your units.

We will allocate to the members profits and losses and cash distributions in the manner described in our Operating Agreement. Any allocation of profits and losses will be recognized as long as it has substantial economic effect under the Treasury Regulations promulgated under Section 704(b) of the Internal Revenue Code by satisfying one of these tests:


	•	it has substantial economic effect;

	•	it is in accordance with the partners’ interest in the partnership, determined by taking into account all facts and circumstances; or

	•	it is deemed to be in accordance with the partners’ interest in the partnership.

We have decided to establish the validity of the allocations of profits and losses under our Operating Agreement by demonstrating that these allocations will be in accordance with the partners’ interest in the partnership. The allocations of profits, losses and cash distributions contained in our Operating Agreement will be substantially proportionate to the capital accounts of the members. For this reason, in the opinion of tax counsel, the IRS should treat the allocations as being substantially in accordance with the partners’ interests in the partnership within the meaning of this alternative method for establishing the validity of allocations.

We do not expect that we will incur net losses in any taxable year. However, if we were to incur losses in any year, your ability to deduct your distributive share of the losses would be subject to the potential application of the limitations discussed below.

Section 704(d) of the Internal Revenue Code provides that a partner’s share of partnership losses is deductible only to the extent of his adjusted basis in his partnership interest at the end of the year in which the losses occur. Losses disallowed under Section 704(d) of the Internal Revenue Code may be carried forward indefinitely until adequate basis is available to permit their deduction. Due to this limitation, you will be precluded from deducting losses in excess of your adjusted basis in your units.

Section 465 of the Internal Revenue Code provides that a partner’s share of partnership losses is deductible only to the extent the partner is at risk. The primary effect of this provision is to limit the availability of tax losses of a partnership as offsets against other taxable income of a partner to the partner’s adjusted basis in his partnership interest, excluding any portion of adjusted basis attributable to partnership nonrecourse indebtedness. In addition, the at risk amount does not include contributions by a partner to the extent the partner used the proceeds of a nonrecourse borrowing to make the contributions.

Section 469 of the Internal Revenue Code limits the deductibility of losses from passive activities for individuals, estates, trusts and certain closely-held corporations. A passive activity includes an activity which involves the conduct of a trade or business in which the taxpayer does not materially participate. Losses from passive activities are only allowed to offset income from passive activities and will not be allowed to offset portfolio income, trade or business income or other nonpassive income, including wages or salaries. Suspended losses and credits attributable to passive activities are carried forward and treated as deductions and credits from passive activities in the next year. Suspended losses from a passive activity are allowed in full when the taxpayer disposes of his entire interest in the passive activity in a taxable transaction.

The Treasury Regulations under Section 469 of the Internal Revenue Code provide that in certain situations, net income, but not net loss from a passive activity is treated as nonpassive. One of the items covered by these regulations is net income from an equity-financed lending activity. An equity-financed lending activity is defined as an activity that involves a trade or business of lending money, if the average outstanding balance of liabilities incurred in the activity for the taxable year does not exceed 80% of the average outstanding balance of the interest-bearing assets held in the activity for the year.

Vestin Mortgage expects that at no time will the average outstanding balance of our liabilities exceed 80% of the average outstanding balance of our mortgage loans. If we are deemed to be engaged in the trade or business of lending money, our income will generally be recharacterized as nonpassive income, even though our net losses or your loss on the sale of a unit will be treated as passive activity losses.

If we are not considered engaged in a trade or business of lending money, then income and loss will be considered portfolio income and loss, and you will not be permitted to offset passive losses from other activities against your share of our income.

Section 67(a) of the Internal Revenue Code provides that most miscellaneous itemized deductions are deductible by an individual taxpayer only to the extent that they exceed 2% of the taxpayer’s adjusted gross income and are subject to additional limitations for certain high-income taxpayers. Deductions from a trade or business are not subject to these limitations. Your allocable share of our expenses will be considered miscellaneous itemized deductions subject to this 2% limitation only if we are not considered to be in the trade or business of lending money.

If you sell your units, including a sale of your units to us in a redemption transaction, you will recognize gain or loss on the sale measured by the difference between the amount realized and your adjusted basis in the units.

Generally, gain on the sale of units which have been held over 12 months should be taxable as long-term capital gain, except for that portion of the gain allocable to substantially appreciated inventory items and unrealized receivables, as those terms are defined in Section 751 of the Internal Revenue Code, which would be treated as ordinary income. We may have unrealized receivables arising from the ordinary income component of market discount bonds. In addition, if we hold property as a result of foreclosure, which is unsold at the time you sell your units, or hold an investment in a mortgage loan that is classified as an equity interest, the amount of ordinary income that would result if we were to sell the property is expected to be an unrealized receivable.

In general, for noncorporate taxpayers, in taxable years ending on or after May 6, 2003, long-term capital gain for assets held longer than 12 months is subject to a maximum rate of 15%, or 5% for individuals in the 10% or 15% tax bracket. The amount of ordinary income against which a noncorporate taxpayer may

Your tax liability with respect to an investment in units will depend upon your individual tax bracket. Currently, there are six tax brackets for individuals. For calendar year 2003,



	•	the first bracket is at 10% on taxable income not over $14,000 in the case of married taxpayers filing joint returns,



	•	the second at 15% on taxable income from $14,000 to $47,450,



	•	the third at 25% on taxable income from $47,450 to $114,650 ,



	•	the fourth at 28% on taxable income from $114,650 to $174,700 ,



	•	the fifth at 33% on taxable income from $174,700 to $311,950, and



	•	the sixth at 35% on taxable income over $311,950.

Distributions to you from us may take the form of either actual cash distributions or so-called “deemed distributions.” A deemed distribution is treated as a cash distribution and can result from your decision to participate in our distribution reinvestment plan. If you elect to participate in our distribution reinvestment plan, under the terms of our Operating Agreement, you will be deemed to have received a distribution of your share of net income and to have recontributed the same amount to the Fund.

Our Operating Agreement also provides that a deemed distribution and an equivalent recontribution will result if we reinvest our net proceeds from any capital transactions in new mortgage loans. Capital transactions are defined in the Operating Agreement to include payments of principal, foreclosures and prepayments of mortgages, or any other disposition of a mortgage or property. For this purpose, a disposition of a mortgage is deemed to occur if “significant modifications” to the mortgage are made within the meaning of Section 1001 of the Internal Revenue Code and the regulations thereunder.

Distributions to you, including deemed distributions, will not generate taxable income to you unless and to the extent the amount of any such distribution exceeds your basis in your units. We do no anticipate that you will recognize any taxable income as a result of any deemed distributions resulting from your election to participate in our distribution reinvestment plan or from our decision to reinvest net proceeds from any capital transactions (including significant modifications of any existing mortgage).

From time to time we may acquire equity or leasehold interests in real property by foreclosure. The cost of the improvements on any of these owned real property may be recovered through depreciation deductions over a period of 39 years.

Section 163(d) of the Internal Revenue Code, applicable to noncorporate taxpayers and S corporation shareholders, limits the deductibility of interest incurred on loans used to acquire or carry property held for investment. Property held for investment includes all investments held for the production of taxable income or gain, but does not include trade or business property or interest incurred to construct trade or business property. Investment interest is deductible by noncorporate taxpayers and S corporation shareholders only to the extent it does not exceed net investment income for the taxable year.

Net investment income is the excess of investment income over the sum of investment expenses. Interest expense we incur and interest expense you incur to acquire your units will not be treated as

Interest attributable to debt you incur in order to purchase or carry units may constitute investment interest subject to these deductibility limitations. You should consider the effect of investment interest limitations on using debt financing for your purchase of units.

Sections 511 through 514 of the Code impose a tax on the “unrelated business taxable income” of organizations otherwise exempt from tax under Section 501(a) of the Code. The entities subject to the unrelated business income tax include:

Other charitable and tax-exempt organizations are also generally subject to the unrelated business income tax. Interest income is not subject to this tax unless it constitutes debt-financed income.

Unrelated business taxable income includes gross income, which may be subject to certain deductions and modifications, derived from any trade or business regularly carried on by a partnership. Among the items excluded from unrelated business taxable income are:


	•	interest and dividend income (except to the extent such income is debt-financed);

	•	rents from real property (other than debt-financed real property or property from which participating rentals are derived); and

	•	gains on the sale, exchange or other disposition of assets held for investment.

The receipt of unrelated business taxable income by an entity subject to tax on unrelated business taxable income has no effect on such entity’s tax-exempt status or on the exemption from tax of its other income. In certain circumstances, the continual receipt of unrelated business taxable income may cause charitable organizations which are tax exempt to lose their exemption. In the case of a charitable remainder annuity trust or unitrust, the receipt of any unrelated business income taxable will cause all income of the entity to be subject to tax. If you are a tax exempt entity, we urge you to consult your own tax advisors concerning the possible adverse tax consequences resulting from an investment in units.

We incur indebtedness for certain purposes and have obtained a revolving line of credit with a financial institution which provides for borrowing up to $2,000,000. We intend to borrow money pursuant to this line of credit (or other lending sources) from time to time to acquire or make mortgage loans, operate and develop for resale properties on which we have foreclosed and for other general business purposes. We also incur secured indebtedness in connection with structured arrangements with other lenders in order to provide them with a senior position in mortgage loans that are jointly funded with such other lenders. Our total indebtedness under the line of credit, pursuant to these structured arrangements and any other source of borrowing will not exceed 70% of the fair market value of the outstanding mortgage loans in our loan portfolio.

Any taxable income attributable to such borrowing, including net interest income from mortgage investments, net rental income from property acquired as a result of foreclosure and gain from the sale of property acquired through foreclosure will be subject to characterization as debt-financed income and, therefore, as unrelated business taxable income. As a result, a portion of each tax exempt member’s distributive share of income from its investment in any year may be classified as unrelated business taxable income.

Except as described in the preceding two paragraphs, we intend to invest our assets and structure our operations in such a manner that tax-exempt members will not derive unrelated business taxable income or unrelated debt-financed income with respect to their membership interests. However, if we acquire

Sales of foreclosure property might also produce unrelated business taxable income if we are characterized as a “dealer” with respect to that property. Mortgage loans which we invest in or purchase made which permit us to participate in the appreciation in value of the properties may be recharacterized by the IRS as an equity interest and such recharacterization could result in unrelated debt-financed income. The IRS might not agree that our other income is not subject to tax under the unrelated business income and unrelated debt-financed income tax provisions.

If an IRA or qualified plan is a member and its partnership income constitutes unrelated business taxable income, this income is subject to tax only to the extent that its unrelated business taxable income from all sources exceeds $1,000 for the taxable year.

In considering an investment in units of a portion of the assets of a qualified plan or IRA, a fiduciary should consider:


	•	whether the investment is in accordance with the documents and instruments governing the plan;

	•	whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 (“ERISA”);

	•	whether the investment is prudent considering, among other matters, that there probably will not be a market created in which the investment can be sold or otherwise disposed of; and

	•	whether the investment would cause the IRS to impose an excise tax under Section 4975 of the Code.

We do not expect an investment by an IRA to be subject to the above diversification and prudence requirements of ERISA unless the IRA also is treated under Section 3(2) of ERISA as part of an employee pension benefit plan which is established or maintained by an employer, employee organization, or both.

Vestin Mortgage will prepare our information income tax returns. In connection with the preparation of our income tax returns, Vestin Mortgage will prepare and distribute to the Members not later than seventy-five (75) days after the close of each fiscal year all information necessary in the preparation of the Members’ federal income tax returns, including our Schedule K (Form 1065), Partner’s Share of Income, Credits, Deductions, and each Member’s respective Schedule K-1. Such information will not be supplied to assignees who are not substitute Members.

You are required to report your distributive share of the items set forth on your Schedule K-1 on your individual tax return consistent with our treatment of the items on our returns. You may report an item inconsistently if you file a statement with the IRS identifying the inconsistency. Otherwise, the IRS may summarily assess additional tax necessary to make your treatment of the item consistent with our treatment of the item without a notice of deficiency or an opportunity to protest the additional tax in the Tax Court being afforded to you. Penalties for intentional disregard of the consistency requirements may also be assessed.

Our tax returns may be audited by the IRS. Tax audits and adjustments are made at our level in once unified proceeding, the results of which are binding on all members. You may, however, protest the additional tax paying the full amount thereof and suing for a refund in either the U.S. Claims Court or a U.S. District Court.

A limited liability company which is classified as partnership for tax purposes must designate a tax matters partner to represent it in dealing with the IRS. Vestin Mortgage will serve as the tax matters partner to act on our behalf and on behalf of the members with respect to partnership items, to deal with the IRS and to initiate any appropriate administrative or judicial actions to contest any proposed adjustments at the partnership level.

If you own less than a 1% of the units, you will not receive notice from the IRS of these administrative proceedings unless you form a group with other members, having an aggregate interest of 5% or more, and request the notice. However, all members have the right to participate in the administrative proceedings will be our responsibility and may adversely affect the profitability, if any, of our operations.

Adjustments, if any, resulting from any audit may require you to file an amended tax return, and may result in an audit of your own tax return. Any audit of your tax return could result in adjustments of items unrelated to our operations as well as income and losses from our operations.

The original issue discount rules under the Internal Revenue Code pertain to mortgage loans and obligations issued by us. The effect will be that we will realize as interest income the amount that economically accrues under a mortgage loan during the course of the year, using compound interest concepts, even where a lesser amount is actually paid or accrued under its terms. Identical concepts will be used for determining our interest deduction on our obligations, if any.

We may purchase mortgage investments for an amount substantially less than the remaining principal balance of the mortgage investments. Each monthly payment which we receive from a mortgagor will consist of interest at the stated rate for the investment in a mortgage loan and a principal payment. If we purchase an investment in a mortgage loan at a discount, for federal income tax purposes the principal portion of each monthly payment will constitute the return of a portion of our investment in the investment in a mortgage loan and the payment of a portion of the market discount for the investment in a mortgage loan.

We will recognize the amount of each monthly payment attributable to market discount as ordinary income, but the amount of each monthly payment representing the return of our investment will not constitute taxable income to us. The Internal Revenue Code also treats accrued market discount as ordinary income on the sale of an investment in a mortgage loan.

Section 754 of the Internal Revenue Code permits a partnership to elect to adjust the basis of its property in the case of a transfer of an interest in the partnership. The effect of this election would be that, with respect to the transferee only, the basis of our property would either be increased or decreased by the difference between the transferee’s basis for his units and his proportionate share of our basis for all proportionate share of our basis for all property we own.

Vestin Mortgage has decided that due to the accounting difficulties which would be involved, it will not cause us to make an election pursuant to Section 754 of the Internal Revenue Code. Accordingly, our basis in our assets will not be adjusted to reflect the transferee’s purchase price of his units.

This treatment might not be attractive to prospective purchasers of units, and you might have difficulty for that reason in selling your units or you might be forced to sell at a discounted price.

Vestin Mortgage’s capital account in the Fund has been credited in the amount of $1,100,000 for offering expenses it paid to attorneys, brokers, accountants, and other charges incurred in connection with this Offering that were paid to non-related third parties. As a result, Vestin Mortgage received 110,000 units. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs. Such expenses are described further in the registration statement of which this prospectus forms a part We will pay Vestin Mortgage and its affiliates certain fees and expenses for services relating to the conduct of our business, including administrative fees of up to 3% of proceeds from the resale of foreclosed property and annual management fee of up to 0.25%.


	•	to reduce our gain from the resale of any foreclosed property sold during such year by the amount of all administrative fees paid to Vestin Mortgage and its affiliates, and

	•	to allocate income and losses to Vestin Mortgage consistent with its capital account.

Our ability to obtain the foregoing tax treatment relative to these fees depends in large measure on the value of the services rendered in exchange therefore, which is a question of fact that may depend on events to occur in the future. Due to this uncertainty, tax counsel was unable to give an opinion as to the proper tax treatment of such fees. The tax risk associated with this uncertainty is the possibility that the IRS may attempt to disallow (in whole or in part) the deduction of fees paid. If these deductions were disallowed (in whole or in part) by the IRS, our taxable income would be increased by the amount of the disallowed deductions, and the amount of income you would be required to include in your tax return would increase by your share of such increase in our taxable income.

Vestin Mortgage will also be entitled to fees payable by borrowers in connection with our investing in or purchasing a mortgage loan. These fees include loan placement fees for loan selection and brokerage (2%–6% of each loan), loan evaluation and processing fees (2%–5% of each loan), and loan extension or modification fees (2%–5% of outstanding principal). The exact amount of the foregoing fees will be negotiated with prospective borrowers on a case-by-case basis. In addition, Vestin Mortgage will act as a servicing agent with respect to our investments, for which, subject to regulatory requirements, it will be paid by the relevant borrower, where permitted, an annual fee of up to one-quarter of one percent (0.25%) of the unpaid balance of the respective mortgage loan serviced.

Since any of the commissions or fees described in the preceding paragraph will be payable by the borrowers, such payment should not have any effect on the calculation of our taxable income. However, the IRS could take the position that these commissions or fees, or any of them, are: (a) constructively paid by us, and (b) not deductible to the extent they exceed reasonable compensation for the services rendered. Since this is ultimately an issue of fact which may depend on future events, tax counsel was unable to give an opinion regarding the issue.

If the IRS were to make and prevail on such an assertion as to the treatment of these fees or commissions, the tax effect would be that our income would be increased by the amount of the fees and commissions, and the fees and commissions would be deductible by us only to the extent they constitute reasonable compensation for the services rendered. This would result in an increase in our taxable income to the extent the deductibility of the fees and commissions is disallowed, and the amount of income you would be required to include in your taxable income would be increased by your share of such increase in our taxable income.

In recent years there have been a number of proposals made in Congress by legislators, government agencies and by the executive branch of the federal government for changes in the federal income tax laws. In addition, the IRS has proposed changes in regulations and procedures, and numerous private interest groups have lobbied for regulatory and legislative changes in federal income taxation. It is

We strongly urge you to consider ongoing developments in this uncertain area and to consult your own tax advisors in assessing the risks of investment in units.

We currently contemplate investing in or purchasing loans in Nevada, California, Hawaii and Arizona. Nevada does not have an income tax law, and, we believe that no taxes will be imposed by the State of Nevada or any of its localities on our assets or income or on any member’s share of any income derived from our activities in Nevada.

California, Hawaii and Arizona may impose a tax on our assets or income, or on each member based on his share of any income derived from our activities in those states. In addition, we may decide to invest in or purchase loans secured by properties in other states and localities which also may impose these taxes.

If you are an entity that is exempt from federal income taxation, it is likely that you are also exempt from state and local taxation.

The state in which you reside may impose taxes on your share of any income derived from your interest in us. You should consult with your own tax advisors concerning the applicability and impact of any state and local tax laws in your state of residence.

ERISA requires that the assets of qualified plans be held in trust and that the trustee, or a duly authorized investment Manager, within the meaning of Section 3(38) of ERISA shall have exclusive authority and sole discretion to manage and control the assets of the plan. ERISA also imposes certain duties on persons who are fiduciaries of employee benefit plans subject to its provisions and prohibits certain transactions between ERISA and an employee benefit plan and the parties in interest with respect to qualified plans, including fiduciaries.

Under the Internal Revenue Code, similar prohibitions apply to all qualified plans and IRAs. Under ERISA, any person who exercises any authority or control respecting the management or disposition of the assets of a qualified plan or IRA is considered to be a fiduciary of the plan or IRA, subject to certain exceptions not here relevant.

ERISA and the Internal Revenue Code also prohibit parties in interest, including fiduciaries of an IRA or qualified plan, from engaging in various acts of self-dealing. To prevent a possible violation of these self-dealing rules, Vestin Mortgage may not permit the purchase of units with assets of any IRA or qualified plan if Vestin Mortgage:


	•	has investment discretion with respect to the assets of the plan or IRA, or

	•	regularly gives individualized investment advice which serves as the primary basis for the investment decisions made with respect to the assets of the plan or IRA.

Fiduciaries of any qualified plan subject to ERISA are required to determine annually the fair market value of the assets of the plan as of the close of the plan’s fiscal year. Although Vestin Mortgage will provide annually upon the written request of a member an estimate of the value of the units based upon, among other things, outstanding mortgage investments, fair market valuation based on trading will not be possible because there will be no market for the units.


	•	our investment will be subject to the prudence standards and other provisions of ERISA applicable to investments by qualified plans and their fiduciaries would extend to investments made by us,

	•	certain transactions that we might seek to enter into might constitute prohibited transactions under ERISA and the Internal Revenue code because Vestin Mortgage would be deemed to be a fiduciary of the plans, and

	•	our audited financial information would have to be reported annually to the Department of Labor.

In 1986, the Department of Labor promulgated final regulations defining the term plan assets. Under these regulations, when a plan makes an equity investment in another entity, the underlying assets of that entity will be considered plan assets unless one or more of the following exemptions applies:


	•	equity participation by benefit plan investors is not significant,

	•	the entity is a real estate operating company, or

	•	the equity interest is a publicly-offered security.

Exemption for Insignificant Participation by Qualified Plans. This exemption is available if less than 25% of each class of equity interests in the corporation or partnership is held in the aggregate by qualified plans or IRAs.

For purposes of this 25% rule, the interests of any person who had discretionary authority or control with respect to the assets of the entity, or who provides investment advice for a fee with respect to the assets of the entity, or any affiliate of a person who has that authority or control, shall be disregarded.

Thus, while Vestin Mortgage and its affiliates are not prohibited from purchasing units, any purchases of units by any of them will be disregarded in determining whether this exemption is satisfied. We cannot assure you that we will always qualify for this exemption.

Exemption for a Real Estate Operating Company. For purposes of this exemption, an entity is a real estate operating company if at least 50% of its assets valued at cost, other than short-term investments pending long-term commitment, are invested in real estate which is managed or developed and with respect to which the entity has the right substantially to participate directly in the management or development of real estate.

The preamble to these regulations states the Department of Labor’s view that an entity would not be engaged in the management or development of real estate if it merely services mortgages on real estate. Thus, it is unlikely that we would qualify for an exemption from plan assets treatment as a real estate operating company.

Exemption for Publicly Offered Securities. For purposes of this exemption, a publicly offered security is a security that is:


	•	freely transferable,

	•	part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another, and

	•	either part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or sold to the plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933 and the class of securities of which the security is a part is registered under the Securities Exchange Act of 1934 within 120 days, or such later time as may be allowed by the Securities and Exchange Commission, after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred.

For purposes of this definition, whether a security is freely transferable is a factual question to be determined on the basis of all relevant facts. If a security is part of an offering in which the minimum is $10,000 or less, however, certain customary restrictions on the transferability of partnership interests necessary to permit partnerships to comply with applicable federal and state laws, to prevent a termination or of the entity for federal or state tax purposes and to meet certain enumerated administrative needs not, alone or in combination, affect a finding that such securities are freely transferable.

The units will be sold as part of an offering of securities to the public pursuant to registration under the Securities Act, and Vestin Mortgage has represented that it will cause us to register the units under the Securities Exchange Act of 1934 within 120 days, or such later time as may be allowed by the Securities and Exchange Commission, after the end of our fiscal year during which the Offering of units to the public occurred. The units will not be subject to any restrictions on transfer other than those enumerated in the Operating Agreement, these regulations and referenced in the preceding paragraph. Based on the foregoing, the units should be publicly offered securities within the meaning of these regulations. As a result, our underlying assets should be not considered to be plan assets under these regulations.

The following discussion is a summary of legal aspects of mortgage loans. Because this is a summary, it does not contain all the information that may be important to you. Many of the legal aspects of mortgage loans are governed by applicable state laws, which may vary substantially. The following material does not reflect the laws of any particular state, unless specifically indicated.

We invest in mortgage loans. In connection with these loans, we receive mortgages or other similar instruments such as deeds of trust, granting us rights in the security properties. Our authority under a mortgage is governed by applicable law and the express provisions of the mortgage.

Priority of liens on mortgaged property created by mortgages depends on their terms and on the order of filing with a state, county or municipal office, although this priority may be altered by the mortgagee’s knowledge of unrecorded liens against the security property. However, filing or recording does not establish priority over governmental claims for real estate taxes and assessments. In addition, the Internal Revenue Code provides priority for certain tax liens over the mortgage.

If a mortgage loan secured by a deed of trust is in default, we will protect our rights by foreclosing by a non-judicial sale. Deeds of trust differ from mortgages in form, but are in most other ways similar to mortgages. Deeds of trust will contain specific provisions enabling non-judicial foreclosure in addition to those provided for in applicable statutes upon any material default by the borrower. Applicable state law controls the extent that we have to give notice to interested parties and the amount of foreclosure expenses and costs, including attorney’s fees, which may be covered by a lender, and charged to the borrower.

Foreclosure under mortgage instruments other than deeds of trust is more commonly accomplished by judicial action initiated by the service of legal pleadings. When the mortgagee’s right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming. A judicial foreclosure is subject to most of the delays and expenses of other litigation, sometimes requiring up to several years to complete. For this reason, we do not anticipate using judicial foreclosure to protect our rights due to the incremental time and expense involved in these procedures.

When foreclosing under a mortgage instrument, the sale by the designated official is often a public sale. The willingness of third parties to purchase the property will depend to some extent on the status of the borrower’s title, existing redemption rights and the physical condition of the property. It is common for the lender to purchase the security property at a public sale where no third party is willing to purchase the property, for an amount equal to the outstanding principal amount of the indebtedness and all accrued and unpaid interest and foreclosure expenses. In this case, the debt owed to the mortgagee will be extinguished. Thereafter, the mortgagee would assume the burdens of ownership, including paying operating expenses and real estate taxes and making repairs. The lender is then obligated as an owner until it can arrange a sale of the property to a third party. If we foreclose on the security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal our investment in the property. A lender commonly incurs substantial legal fees and court costs in acquiring a mortgaged property through contested foreclosure and/or bankruptcy proceedings.

Lenders also need to comply with procedure-related environmental rules and regulations. An increasing number of states require that any environmental hazards are eliminated before a property may be resold. A lender may be responsible under federal or state law for the cost of cleaning up a mortgaged property that is environmentally contaminated. As a result, a lender could realize an overall loss on a

In foreclosure proceedings, courts frequently apply equitable principles, which are designed to relieve the borrower from the legal effects of his immaterial defaults under the loan documents or the exercise of remedies that would otherwise be unjust in light of the default. These equitable principles and remedies may impede our efforts to foreclose.

Our security property may be subject to potential environmental risks. Of particular concern may be those security properties which are, or have been, the site of manufacturing, industrial or disposal activity. These environmental risks may give rise to a diminution in value of the security property or liability for clean-up costs or other remedial actions. This liability could exceed the value of the real property or the principal balance of the related mortgage loan. For this reason, we may choose not to foreclose on contaminated property rather than risk incurring liability for remedial actions.

Under the laws of certain states, an owner’s failure to perform remedial actions required under environmental laws may give rise to a lien on mortgaged property to ensure the reimbursement of remedial costs. In some states this lien has priority over the lien of an existing mortgage against the real property. Because the costs of remedial action could be substantial, the value of a mortgaged property as collateral for a mortgage loan could be adversely affected by the existence of an environmental condition giving rise to a lien.

The state of law is currently unclear as to whether and under what circumstances clean-up costs, or the obligation to take remedial actions, can be imposed on a secured lender. If a lender does become liable for clean up costs, it may bring an action for contribution against the current owners or operators, the owners or operators at the time of on-site disposal activity or any other party who contributed to the environmental hazard, but these persons or entities may be bankrupt or otherwise judgment-proof. Furthermore, an action against the borrower may be adversely affected by the limitations on recourse in the loan documents.

For the foregoing reasons, we anticipate that Vestin Mortgage will protect us and you by requiring a Phase I Environmental Site Assessment of the security properties prior to selecting a loan for us to invest in.

We do not presently intend to acquire mortgages that are subordinate to more than one other mortgage. Our rights as mortgagee or beneficiary under a second mortgage will be subordinate to those of the mortgagee under the senior mortgage, including the prior rights of the senior mortgagee to receive rents, hazard insurance and condemnation proceeds and to cause the security property to be sold upon default of the mortgagor. This can extinguish a second mortgage unless we assert our subordinate interest in foreclosure litigation or satisfy the defaulted senior loan. In many states a junior mortgagee may satisfy a defaulted senior loan in full, or may cure the default, and bring the senior loan current, in either event adding the amounts expended to the balance due on the junior loan. Absent a provision in the senior mortgage, or unless required by state law, a senior mortgagee need not give notice of default to a junior mortgagee.

The form of mortgage used by many institutional lenders confers on the mortgagee the right both to receive insurance proceeds and condemnation awards. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the first mortgagee will have the prior right to collect any insurance proceeds payable and any condemnation award of damages in and to apply the same to the indebtedness secured by the senior mortgage. Proceeds in excess of the amount of senior indebtedness will, in most cases, be applied to the indebtedness secured

The form of mortgage used by many institutional lenders also contains a “future advance” clause, which provides that additional amounts advanced to or on behalf of the mortgagor by the mortgagee are to be secured by the mortgage. While this type of clause is valid under the laws of most states, the priority of any advance made under the clause may depend on whether the advance was an “obligatory” or “optional” advance. If the mortgagee is obligated to advance the additional amounts, the advance may be entitled to receive the same priority as amounts initially made under the mortgage, notwithstanding that there may be intervening junior mortgages and other liens and notwithstanding that the mortgagee or beneficiary had actual knowledge of them. Where the mortgagee is not obligated to advance the additional amounts and has actual knowledge of the intervening junior mortgages and other liens, the advance may be subordinate to these intervening junior mortgages and other liens. Priority of advances under a “future advance” clause may also rest on state law giving priority to advances made under the loan agreement up to a “credit limit” amount stated in the recorded mortgage.

We can also protect ourselves by including provisions obligating the mortgagor to do the following:


	•	pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property which appear prior to the mortgage,

	•	to provide and maintain fire insurance on the property,

	•	to maintain and repair the property,

	•	not to commit or permit any waste on the property, and

	•	to appear in and defend any action or proceeding purporting to affect the property or the rights of the mortgagee under the mortgage.

Upon a failure of the mortgagor to perform any of these obligations, we would have the right under the mortgage to perform the obligation, with the mortgagor agreeing to reimburse us for any sums we expend on behalf of the mortgagor. All sums we expend become part of the indebtedness secured by the mortgage.

After a foreclosure sale pursuant to a mortgage, the borrower and foreclosed junior lienors may have a statutory period in which to redeem the property from the foreclosure sale. Redemption may be limited to where the mortgagee receives payment of all or the entire principal balance of the loan, accrued interest and expenses of foreclosure. The statutory right of redemption diminishes the ability of the lender to sell the foreclosed property. The right of redemption may defeat the title of any purchaser at a foreclosure sale or any purchaser from the lender subsequent to a foreclosure sale. One remedy we may have is to avoid a post-sale redemption by waiving our right to a deficiency judgment. Consequently, as noted above, the practical effect of the redemption right is often to force the lender to retain the property and pay the expenses of ownership until the redemption period has run.

We may acquire interests in mortgage loans which limit our recourse to foreclosure upon the security property, with no recourse against the borrower’s other assets. Even if recourse is available pursuant to the terms of the mortgage loan against the borrower’s assets in addition to the mortgaged property, we may confront statutory prohibitions which impose prohibitions against or limitations on this recourse. For example, the right of the mortgagee to obtain a deficiency judgment against the borrower may be precluded following foreclosure. A deficiency judgment is a personal judgment against the former borrower equal in most cases to the difference between the net amount realized upon the public sale of the security and the amount due to the lender. Other statutes require the mortgagee to exhaust the security afforded

under a mortgage by foreclosure in an attempt to satisfy the full debt before bringing a personal action against the borrower. We may elect, or be deemed to have elected, between exercising our remedies with respect to the security or the deficiency balance. The practical effect of this election requirement is that lenders will usually proceed first against the security rather than bringing personal action against the borrower. Other statutory provisions limit any deficiency judgment against the former borrower following a judicial sale to the excess of the outstanding debt over the fair market value of the property at the time of the public sale.

In Nevada, we can pursue a deficiency judgment against the borrower or a guarantor if the value of the property securing the loan is insufficient to pay back the debt owed to us. In jurisdictions like California, however, if we desire to seek a judgment in court against the borrower for the deficiency balance, we may be required to seek judicial foreclosure and/or have other security from the borrower. We would expect this to be a more prolonged procedure, and is subject to most of the delays and expenses that affect other lawsuits.

We may be subject to delays from statutory provisions that afford relief to debtors from our ability to obtain payment of the loan, to realize upon collateral and/or to enforce a deficiency judgment. Under the United States Bankruptcy Code of 1978, which we refer to as the Bankruptcy Code, and analogous state laws, foreclosure actions and deficiency judgment proceedings are automatically suspended upon the filing of the bankruptcy petition, and often no interest or principal payments are made during the course of the bankruptcy proceeding. The delay and consequences in obtaining our remedy can be significant. Also under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of the holder of a second mortgage may prevent the senior lender from taking action to foreclose out the junior lien.

Under the Bankruptcy Code, the amount and terms of a mortgage on property of the debtor may be modified under equitable principles or otherwise. Under the terms of an approved bankruptcy plan, the court may reduce the outstanding amount of the loan secured by the real property to the then current value of the property in tandem with a corresponding partial reduction of the amount of the lender’s security interest. This leaves the lender having the status of a general unsecured creditor for the differences between the property value and the outstanding balance of the loan. Other modifications may include the reduction in the amount of each monthly payment, which may result from a reduction in the rate of interest and/or the alteration of the repayment schedule, and/or change in the final maturity date. A court may approve a plan, based on the particular facts of the reorganization case that effected the curing of a mortgage loan default by paying arrearage over time. Also, under the Bankruptcy Code, a bankruptcy court may permit a debtor to de-accelerate a mortgage loan and to reinstate the loan even though the lender accelerated the mortgage loan and final judgment of foreclosure had been entered in state court prior to the filing of the debtor’s petition. This may be done even if the full amount due under the original loan is never repaid. Other types of significant modifications to the terms of the mortgage or deed of trust may be acceptable to the bankruptcy court, often depending on the particular facts and circumstances of the specific case.

In a bankruptcy or similar proceeding action may be taken seeking the recovery as a preferential transfer of any payments made by the mortgagor under the related mortgage loan to the lender. Payments on long-term debt may be protected from recovery as preferences if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business. Whether any particular payment would be protected depends upon the facts specific to a particular transaction.

Federal law pre-empts state constitutional, statutory and case law that prohibits the enforcement of due-on-sale clauses and permits lenders to enforce these claims in accordance with their terms. As a result, due-on-sale clauses are enforceable except in those states whose legislatures exercised their limited

We may invest in mortgage loans which contain a “debt-acceleration” clause, which permits us to accelerate the full debt upon a monetary or nonmonetary default of the borrower. The courts of most states will enforce clauses providing for acceleration in the event of a material payment default after we give appropriate notices. The equity courts of any state, however, may refuse to foreclose a mortgage when an acceleration of the indebtedness would be inequitable or unjust. Furthermore, a borrower may avoid foreclosure and reinstate an accelerated loan by paying only the defaulted amounts and the costs and attorney’s fees incurred by the lender in collecting these defaulted payments.

State courts also are known to apply various legal and equitable principles to avoid enforcement of the forfeiture provisions of installment contracts. For example, a lender’s practice of accepting late payments from the borrower may be deemed a waiver of the forfeiture clause. State courts also may impose equitable grace periods for payment of arrearage or otherwise permit reinstatement of the contract following a default. If a borrower under an installment contract has significant equity in the property, a court may apply equitable principles to reform or reinstate the contract or to permit the borrower to share the proceeds upon a foreclosure sale of the property if the sale price exceeds the debt.

In the absence of state statutory provisions prohibiting prepayment fees, we expect that the courts will enforce claims requiring prepayment fees. However, in some states prepayment fees may be unenforceable for residential loans or after a mortgage loan has been outstanding for a number of years. Applicable law may limit the amount of any prepayment fee to a specified percentage of the original principal amount of the mortgage loan, to a specified percentage of the outstanding principal balance of a mortgage loan, or to a fixed number of month’s interest on the prepaid amount. We may have to contend with laws that render prepayment provisions on default or other involuntary acceleration of a mortgage loan unenforceable against the mortgagor or trustor. Some state statutory provisions may also treat prepayment fees as usurious if they exceed statutory limits. We anticipate that our loans will not have prepayment provisions.

Some mortgage loans may have no restrictions on secondary financing, thereby permitting the borrower to use the mortgaged property as security for one or more additional loans. We are more likely to invest in mortgage loans that permit us, as first lender, to accelerate the maturity of a loan if the borrower grants a second mortgage or in mortgage loans that require our consent to any junior or substitute financing.

Where a borrower encumbers the mortgaged property with one or more junior liens, the first lender is subjected to the following additional risks:


	•	the borrower may have difficulty servicing and repaying multiple loans;

	•	acts of the senior lender which prejudice the junior lender or impair the junior lender’s security may create a superior equity in favor of the junior lender;

	•	if the borrower defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and actions taken by junior lenders can impair the security available to the senior lender and can interfere with, delay and even prevent the taking of action by the senior lender;

	•	the bankruptcy of a junior lender may operate to stay foreclosure or similar proceedings by the senior lender.

We expect that our loans will prohibit junior mortgages and intend to monitor our loans closely so that we will know when a junior lien holder acquires an interest in the security property.

State and federal usury laws limit the interest that lenders are entitled to receive on a mortgage loan. In determining whether a given transaction is usurious, courts may include charges in the form of points and fees as interest, but may exclude payments in the form of reimbursement of foreclosure expenses or other charges found to be distinct from interest. If, however, the amount charged for the use of the money loaned is found to exceed a statutorily established maximum rate, the form employed and the degree of overcharge are both immaterial. Statutes differ in their provision as to the consequences of a usurious loan. One group of statutes requires the lender to forfeit the interest above the applicable limit or imposes a specified penalty. Under this statutory scheme, the borrower may have the recorded mortgage or deed of trust cancelled upon paying its debt with lawful interest, or the lender may foreclose, but only for the debt plus lawful interest. Under a second, more severe type of statute, a violation of the usury law results in the invalidation of the transaction, thereby permitting the borrower to have the recorded mortgage or deed of trust cancelled without any payment and prohibiting the lender from foreclosing.

Nevada law does not apply limitations on interest that may be charged on the type of loans that we intend to invest in or purchase. In California, we will only invest in loans that were made through real estate brokers licensed by the California Department of Real Estate. Mortgage loans made or arranged by a licensed real estate broker are exempt from the California usury law provisions that restrict the maximum rate of interest on California loans. All underlying mortgage loans on California property that are invested in or purchased by us will be arranged for us by such a licensed California real estate broker.

Pursuant to applicable state guidelines and the undertakings we have made to the Securities and Exchange Commission in our filings, we are required to deliver certain reports to our members and make various filings with the Securities and Exchange Commission, particularly in the early stages of our operations. These reports and filings are described in this section.

Within 75 days after the close of our fiscal year, Vestin Mortgage will prepare and distribute to you all the information about us you need to prepare your federal income tax return.

Copies of the financial statements and reports referred to above, other than those delivered for purposes of your income tax return, shall be distributed to you within 90 days after the close of each taxable year. The materials delivered to you annually will include:


	•	audited financial statements: balance sheet, statements of income or loss, members’ equity, and cash flow;

	•	a statement as to any transactions between us and Vestin Mortgage or its affiliates, and of the fees, commissions, compensation and other benefits paid by us or accrued to Vestin Mortgage or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the respective services performed; and

	•	a report identifying distributions from:


	•	cash flow from operations during that year,

	•	cash flow from operations of prior years that had been held as reserves,

	•	proceeds from capital transactions, lease payments on net leases with builders and sellers, and

	•	reserves from the gross proceeds of the Offering originally obtained from our members.

We will also provide you with the information required by Form 10-Q within 45 days of the end of each fiscal quarter.

Because the Securities and Exchange Commission has declared effective the Registration Statement of which this prospectus is a part, we have become subject to the reporting requirements of the Securities Exchange Act of 1934. This means that we are required to file periodic reports, including quarterly reports within 45 days after the end of each fiscal quarter and annual reports within 90 days of the end of each fiscal year. In addition, we may become subject to recently enacted SEC accelerated filer rules which accelerates the filing deadline for our periodic reports over time. Under such rules, we may be required to file our quarterly reports within 35 days after the end of each quarter and annual reports within 60 days of the end of each fiscal year. Our periodic reports have been, and will continue to be, prepared by Vestin Mortgage at our expense. These reports contain financial information and an analysis of our business for that quarter or year, including comparisons with prior performance, as well as additional disclosure in the annual reports. The holders of over 5% of our units are required to file reports reflecting their levels of unit ownership. Furthermore, for so long as the proceeds of this Offering are not fully committed or returned to investors, Vestin Mortgage shall prepare a special report containing a statement of the amount of the mortgage loans in which we have invested, the material terms of these loans, the identity of the borrower and the real property securing the mortgage loans and the appraised values of that real property. This report may be included in the quarterly report described below. We will send you copies of the report within sixty (60) days after the end of each quarter. Vestin Mortgage will not prepare a special report during quarters when there are no mortgage loans or placement or evaluation fees.

Vestin Capital, our lead dealer, is using this prospectus to offer units to the public on our behalf. Vestin Capital, which is an NASD member, is an affiliate of Vestin Mortgage and wholly-owned subsidiary of Vestin Group, the Delaware corporation that owns Vestin Mortgage. In addition, employees of Vestin Mortgage, where they may legally do so, will sell units directly. They will not receive any compensation for such sales. Vestin Mortgage may pay Vestin Capital up to 1.0% of the gross proceeds of the sale of units it sells as a fee for selling the units and for managing any selected dealers. Vestin Capital may engage non-affiliated securities brokerage firms that are members of the NASD to act as selected dealers to sell units to the public. Vestin Mortgage will pay the selected dealers sales commissions of up to 2.5% of the gross proceeds of their respective sales of units. We will not reimburse Vestin Mortgage for such commissions or any expenses incurred by Vestin Capital and reimbursed by Vestin Mortgage in connection with this Offering. Vestin Mortgage’s capital account in the Fund has been credited in the amount of $1,100,000 for Offering expenses paid by Vestin Mortgage on our behalf to third parties that are not affiliated with Vestin Mortgage. As a result, Vestin Mortgage received 110,000 units of the total 50,000,000 units offered. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs. In no event will the maximum compensation to be paid to NASD members by Vestin Mortgage in connection with this Offering exceed 10% of the gross proceeds plus 0.5% for bona fide due diligence expenses.

We will be reviewing subscription applications as they are received. We will indicate our acceptance of your subscription agreement by countersigning it and indicating the number of units we will issue.

We will continue to sell units to the public through Vestin Capital, Vestin Mortgage where permitted, and selected dealers. We will seek to sell a total of 50,000,000 units for $500,000,000, which includes units to be issued under our distribution reinvestment plan. We may sell units through June 12, 2004, or we may decide to end the Offering. In certain states where the Offering will be made, we may not be allowed to extend the Offering beyond one year unless we have the permission of the appropriate state agency.

As there is no established public trading market and no comparable securities for reference purposes, our unit price was determined arbitrarily by Vestin Mortgage.

If you want to purchase units, you should complete the subscription agreement, which you can find at Exhibit B or Exhibit C (as applicable) to this prospectus and which will be provided by the person or the securities dealer that offered you the units. You should return the subscription agreement and full payment for the units being purchased to that dealer, and make your payment to “Vestin Fund II, LLC”. You may obtain additional copies of the subscription agreement from the Manager or Vestin Capital, whose address is 2901 El Camino Avenue, Las Vegas, Nevada 89102, telephone number (702) 876-1143.

By submitting the signed Subscription Agreement with payment for the purchase of units, you:


	•	agree to be bound by the Operating Agreement;

	•	grant a special and limited power of attorney to Vestin Mortgage; and

	•	represent and warrant that you meet the relevant standards specified in the Subscription Agreement and are eligible to purchase units.

Neither Vestin Capital nor any other securities brokerage firm will permit sales to discretionary accounts without prior specific written approval of the owner of the account.

For matters of Nevada law, Levine, Garfinkel & Katz, LLP, Vestin Mortgage’s attorneys, have reviewed the legality of our issuance of units. Ira Levine, Executive Vice President of Legal and Corporate Affairs and Secretary of Vestin Group is a partner in Levine, Garfinkel & Katz, LLP. Our tax counsel is Wendel, Rosen, Black & Dean, LLP, Oakland, California. Vestin Group and Vestin Mortgage are represented by Morris, Pickering & Sanner, Las Vegas, Nevada, in the Desert Land, L.L.C. litigation.

The financial statements and accompanying supplementary information of Vestin Fund II, LLC, for the year ended June 30, 2003, and for the six-month period ended June 30, 2002, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Vestin Group, Inc. at December 31, 2002, and for each of the two years in the period ended December 31, 2002, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

This prospectus does not contain all the information in the Registration Statement on Form S-11 (No. 333-52484) and accompanying exhibits which we have filed with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933. Additionally, we have become subject to the reporting requirements of the Securities Exchange Act of 1934 and, consequently, will file annual and quarterly reports and other information with the Commission. Copies of the Registration Statement on Form S-11 and all amendments thereto and other reports and information filed by us (including, without limitation, Forms 10-K filed with the Commission on April 1, 2002, September 27, 2002 and September 29, 2003, Forms 10-K/A filed with the Commission on April 17, 2002, September 30, 2002 and September 30, 2003, Forms 8-K filed on April 25, 2002, June 24, 2002 and October 1, 2003, Form 8-K/A filed with the Commission on April 29, 2002, and Forms 10-Q filed with the Commission on May 15, 2002, November 14, 2002, February 14, 2003 and May 15, 2003) can be inspected and copied at the public reference facilities (phone number (800) SEC-0330) maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of that material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements and other information for registrants that file electronically with the Commission. The address of this site is http://www.sec.gov.

As required by the Commission in connection with real estate related offerings on Form S-11, we have also undertaken to provide you directly with and to file with the Commission “sticker supplements” to this prospectus and, to the extent appropriate, further post-effective amendments during the distribution period.

You will also be able to review our filing on Form 8-K that we will file after the end of the distribution period. This report will contain additional financial statements and information required under the Securities Exchange Act of 1934 for purchases made after the end of the distribution period involving the use of 10 percent or more, on a cumulative basis, of the net proceeds of the Offering. We will also provide the information contained in this report to the members at least once each quarter after the distribution period of the Offering has ended.

We will be distributing sales literature in connection with this Offering. Such literature may include information presented through seminars, brochures and promotional literature disseminated through print and broadcast media. Such literature may be disseminated by us directly or through Vestin Mortgage or Vestin Capital.

We have audited the accompanying balance sheets of Vestin Fund II, LLC (the “Company”) as of June 30, 2003 and 2002, and the related statements of income, members’ equity, and cash flows for the year ended June 30, 2003, the six-month period ended June 30, 2002, and the year ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vestin Fund II, LLC as of June 30, 2003 and 2002, and the results of its operations and its cash flows for the year ended June 30, 2003, the six-month period ended June 30, 2002, and the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The Mortgage Loan Rollforward, Mortgage Loans by Type of Property, Mortgage Loans by Lien Position, and Mortgage Loans That Exceed Three Percent of the Portfolio are presented for purposes of additional analysis and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

Vestin Fund II, LLC, a Nevada Limited Liability Company, (the “Company”) is primarily engaged in the business of mortgage lending. The Company invests in loans secured by real estate through deeds of trust and mortgages. The Company was organized on December 7, 2000 and will continue until December 31, 2020 unless dissolved prior or extended thereto under the provisions of its operating agreement.

On June 13, 2001, the Company’s Form S-11/ A filed with the Securities and Exchange Commission became effective for the initial public offering of 50,000,000 units at $10 per unit. Consequently, the Company commenced operations on June 14, 2001. As of June 30, 2003, the Company had sold approximately 39,783,000 units of the total 50,000,000 units offered. Additionally, the Company issued 110,000 units to its Manager for offering costs paid by them to unrelated third parties on the Company’s behalf. The Company may continue to offer its remaining unsold units to the public until the earlier of such time as the Company has raised $500 million or June 2004.

The Manager of the Company is Vestin Mortgage, Inc. (the “Manager”), a Nevada corporation engaged in the business of brokerage, placement and servicing of commercial loans secured by real property. The Manager is a wholly-owned subsidiary of Vestin Group, Inc., a Delaware Corporation, whose common stock is publicly held and traded on the Nasdaq National Market under the symbol “VSTN.” Through its subsidiaries, Vestin Group, Inc. is engaged in asset management, real estate lending and other financial services and has managed over $1 billion in real estate loans. The operating agreement provides that the Manager controls the daily operations of the Company; including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, security agreements, mortgage investments and contracts, and to assume direction of the business operations. The operating agreement also provides that the members have certain rights, including the right to terminate the Manager subject to a majority vote of the members.

Vestin Mortgage, Inc. is also the Manager of Vestin Fund I, LLC, (“Fund I”) and inVestin Nevada, Inc., entities in the same business as the Company.

In June 2002, the Company changed its fiscal year end from December 31 to June 30. The transition period ended June 30, 2002 reflects six months of operational activities as a result of the change in fiscal year end. Unaudited financial statements for the 12 months ended June 30, 2002 are shown for comparative purposes. Certain amounts of prior periods have been classified to conform to the current year presentation.

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

Income tax effects resulting from the Company’s operations pass through to the members individually and, accordingly, no provision for income taxes is included in the financial statements.

Cash and cash equivalents include interest-bearing and noninterest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and

Investment in mortgage loans secured by trust deeds and mortgages are originated by the Manager in accordance with terms contained in the Company’s Operating Agreement. Currently, all of the mortgage loans are fixed rate loans with maturities ranging from two months to 30 months, secured by first or second deeds of trust on properties securing commercial, land, construction, residential, bridge, and acquisition and development loans. Bridge loans provide interim financing (12 to 24 months) to enable commercial borrowers to attempt to qualify for permanent financing. Currently, substantially all of the Company’s mortgage loans require interest only payments with a balloon payment of the principal at maturity. The Company has both the intent and ability to hold mortgage loans until maturity and, therefore, mortgage loans are classified and accounted for as held for investment and are carried at cost. Interest income on loans is accrued by the effective interest method.

The Company also invests in mortgage loans that have interest reserves. Loans with interest reserves require the borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At June 30, 2003 and June 30, 2002, the Company had outstanding principal on mortgage loans that had interest reserves of approximately $63,306,000 and $73,473,000, respectively, and interest reserves in the amount of approximately $3,716,000 and $10,922,000, respectively.

The Company also sells full or partial interests in loans to related and third parties at the discretion of the Manager. During the fiscal years ended June 30, 2003 and 2002, the Company sold loans to third parties in the amount of $85,027,000 and $25,700,000, respectively. During the fiscal years ended June 30, 2003 and 2002, the Company sold loans to related parties in the amount of $22,926,000 and $0, respectively. During the fiscal years ended June 30, 2003 and 2002, the Company purchased loans from third parties in the amount of $44,533,000 and $0, respectively. During the fiscal years ended June 30, 2003 and 2002, the Company purchased loans from related parties in the amount of $45,254,000 and $10,665,000, respectively. The sale of all loans resulted in no gain or loss in the accompanying financial statements.

The Company maintains an allowance for loan losses on its investment in mortgage loans for estimated and expected credit impairment which is considered inherent to the Company’s investment in mortgage loans. The Manager’s estimate of expected losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may effect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the reserve are provided through a charge to earnings and are based on an assessment of certain factors including, but not limited to, estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses reserve. Subsequent recoveries of amounts previously charged off are added back to the reserve.

Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell.

The Financial Accounting Standards Board’s Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires the determination of fair value of the Company’s financial assets. The following methods and assumptions were used to estimate the fair value of financial statements included in the following categories:



	(a) Certificate of Deposits and Short Term Investments: The carrying amount of these instruments are at amortized cost which approximates fair value.



	(b) Investment in Mortgage Loans: The carrying value of these instruments, net of the allowance for loan losses, approximates the fair value due to their short-term maturities. Fair values for loans, which are delinquent and/or in foreclosure are indeterminable at this time as no ready market exists for these loans, but fair value may be significantly below the current carrying value.



	(c) Assets under secured borrowing: The carrying amount of these instruments approximate fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made.

Net income allocated to members is computed by dividing income available to members by the weighted average number of membership units outstanding for the year.

Financial instruments with concentration of credit and market risk include cash and loans secured by trust deeds.

The Company maintains cash deposit accounts and certificates of deposit which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. As of June 30, 2003 and 2002, the Company had $15,616,000 and $7,414,000, respectively, in excess of the federally insured limits.

As of June 30, 2003, 31% of the Company’s mortgage loans were in Nevada compared to 29% at June 30, 2002 and 27% of the Company’s mortgage loans were in Texas compared to 24% at June 30, 2002. As a result of this geographical concentration of the Company’s mortgage loans, a downturn in the local real estate markets in Nevada and/or Texas could have a material adverse effect on the Company.

At June 30, 2003, the aggregate amount of loans to the Company’s three largest borrowers represented 17% of the Company’s total investment in mortgage loans. These mortgage loans consisted of construction and commercial loans, located in Arizona, Nevada and California, with a first lien position, earning between 12% and 13.5%, outstanding balances of approximately $69,334,000 and maturing from August 2003 through November 2003. At June 30, 2002, the aggregate amount of loans to the Company’s three largest borrowers represented 25% of the Company’s total mortgage loans. These mortgage loans consisted of land and commercial loans, located in Arizona and California, with a first lien position, earning between 11% and 14%, outstanding balances of approximately $55,752,000 and maturing from June 2003 through November 2003. Because the Company has a significant concentration of credit risk

Substantially all of the Company’s mortgage loans will require the borrower to make a balloon payment of the principal at maturity. The success of a borrower’s ability to repay its mortgage loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash. An increase in interest rates over the mortgage rate applicable at origination of the loan may have an adverse effect on the borrower’s ability to refinance.

The following is a schedule of maturities of investments in mortgage loans as of June 30, 2003:

The following is a schedule by geographic location of investments in mortgage loans as of:

At June 30, 2003, six of our loans were non-performing (more than 90 days past due on principal or interest payments) totaling $34.9 million. Our Manager evaluated the loans and concluded that the underlying collateral was sufficient to protect us against a loss of principal or interest with the exception of the loan described below. Our Manager will continue to evaluate these loans to determine if an allowance for loan losses should be recorded.

As of June 30, 2003, all loans, except for the six loans mentioned above, were current and performing according to their terms.

At June 30, 2002, the Company had one loan totaling $42,000 that was both past due on principal and more than 90 days past due on interest payments. Foreclosure proceedings were completed in March 2003. At June 30, 2002, the Company also had three loans totaling $6,471,000 that were past due on principal and interest. The borrowers on these loans are companies which are affiliated with one another. The Company completed foreclosure on these three loans as of November, 2002. With the exception of a small parcel, the underlying collateral for these loans was sold on August 24, 2003.

In addition, the Company’s Manager granted extensions on 18 loans and 14 loans as of June 30, 2003 and June 30, 2002, respectively, pursuant to the terms of the original loan agreements which permit extensions by mutual consent. Such extensions are generally provided on loans where the original term was twelve months or less and where a borrower requires additional time to complete a construction project or negotiate take out financing. However, the Company’s Manager only grants extensions when a borrower is in full compliance with the terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. The aggregate amount due to the Company from borrowers whose loans have been extended as of June 30, 2003 and 2002, was approximately $87,967,000 and $41,410,000, respectively.

The Company’s Manager has evaluated the collectibility of the loans in light of the types and dollar amounts of loans in the portfolio, adverse situations that may effect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. The Company’s Manager believes that the allowance for loan losses totaling $9.2 million and $500,000 included in the accompanying balance sheet as of June 30, 2003 and 2002, respectively, is adequate to address estimated and expected credit impairment which is considered inherent in the Company’s investment in mortgage loans as of that date.

The Company has six mortgage loan products consisting of land, construction, commercial building, bridge, residential, and acquisition and development loans. Mortgage loans have effective interest rates ranging from 5.5% to 15% and 8% to 16% at June 30, 2003 and 2002, respectively. Revenue by product will fluctuate based upon relative balances during the period.

On June 25, 2003, the Company refinanced a $15.2 million note due on August 19, 2003 as a new note with the interest rate reduced from 11.0% to 5.5%. No specific reserve has been provided for this loan based on the underlying collateral value. The new loan has a term of 24 months.

On July 22, 2003, the Company entered into a stipulation with a borrower which among other things reduced the interest rate to 7.0% from 12.5% on the principal balance of $5.0 million (which represents a 25% pari passu interest in a first trust deed of $20.0 million), deferred interest payments through October 31, 2003, and extended the maturity date from June 14, 2003 to June 14, 2005. The borrower filed Chapter 11 Bankruptcy on June 26, 2003. The United States Bankruptcy Court approved the stipulation. In the event of default of the stipulation by the borrower, the automatic bankruptcy stay will be lifted and the Company will be allowed to complete a foreclosure sale of the collateral. As approved by the United States Bankruptcy Court, the Company and a third-party participant have advanced an additional $2.2 million of post-petition financing. No specific reserve has been provided for this loan based on the underlying collateral value.

As of June 30, 2003, the Company had seven properties with a total carrying value of $15.9 million, which were acquired through foreclosure and recorded as investments in real estate held for sale. The Company may share ownership of such properties with Fund I, the Manager, or other unrelated parties. The summary below includes the Company’s percentage ownership in each property. These investments in real estate held for sale are accounted for at the lower of cost or fair value, less selling costs, based on appraisals and knowledge of local market conditions. It is not the Company’s intent to invest in or own real estate as a long-term investment. The Company seeks to sell properties acquired through foreclosure as quickly as circumstances permit. The following is a summary of real estate held for sale as of June 30, 2003:

Based on management’s estimate of fair value of these assets, adjustments to carrying value of $2.1 million were recorded as of June 30, 2003, including the adjustments described below.

The Company entered into an agreement for the sale of a portion of the Company’s interest in 40 acres of land containing 354 residential lots in Henderson, Nevada. The agreement required the buyer to purchase 138 lots for cash and gives the buyer an option to purchase the remaining 216 lots over the next three years at a predetermined price, which may be adjusted for potential value increases. The buyer completed the purchase of the 138 lots on July 14, 2003. The company recorded a valuation adjustment as of June 30, 2003 in the amount of approximately $886,000 to adjust the carrying value of the Company’s interest in the parcel to the amount corresponding to the negotiated sale and option price.

The Company entered into an agreement to sell the uncompleted golf course, 65 acres of raw land and an additional parcel of raw land in Mesquite Nevada. The Company closed this sale on August 24, 2003. The Company recorded a valuation adjustment as of June 30, 2003 in the amount of approximately $973,000 to adjust the carrying value of the Company’s interest in these properties to the amount corresponding to the sales agreement. After the sale, the Company will have remaining a 42% interest in 28 acres of commercial land in Mesquite, Nevada valued at approximately $1.7 million.

Through foreclosure, the Company assumed an approximate 98% ownership of a 200-unit apartment complex as described above. The other 2% is owned by Fund I. The operations of the facility were also assumed which is being managed by an outside management company. The Company’s share of income from operations for the six months ended June 30, 2003 totaled $28,000 which is included in other income on the accompanying statements of income.

As of June 30, 2003 and 2002, the Company had approximately $26,700,000 and $0, respectively, in secured borrowings pursuant to an intercreditor agreement with the related amounts included in assets under secured borrowing. For the years ended June 30, 2003 and 2002, the Company recorded interest expense of $3,266,000 and $0, respectively, related to the secured borrowing.

The Company received a note receivable from an unaffiliated borrower in the amount of $2,333,333 in connection with the sale of real estate. The note requires monthly interest payments at a rate of 8.5% per annum and is payable in full on June 13, 2005. The note is personally guaranteed by the owner of the borrower and is secured by a second deed of trust on 756 acres purchased by the borrower. The note resulted from the Company’s financing of a mortgage note due June 13, 2004 from the borrower for the sale of real estate located in the City of Mesquite, Nevada. The Company is using the cost recovery method of accounting for the financing. Accordingly, the Company will not recognize any income or the note receivable related to this transaction until the principal balance of the underlying notes in the amount of $11,659,000 are paid in full. Payments received by the Company in excess of the principal balance will be recorded as income when, and if, received.

As of June 30, 2003, the Company expensed previously deferred bond offering costs in the amount of $1,094,000. The Company’s Manager determined that, due to the current interest rate environment, it is not feasible to proceed with the securitization of the Company’s mortgage loans through the sale of bonds secured by those mortgages, and accordingly, has expensed the costs incurred to date. As of June 30, 2002, deferred bond offering costs totaled $256,000.

The Company has a revolving line of credit with a financial institution, which provides for borrowing up to $2,000,000. The balances at June 30, 2003 and 2002 were $2.0 million and $0, respectively. The line of credit, which is secured by the Company’s certificates of deposit with First Hawaiian Bank, is payable in monthly installments of interest only at 1.50% over the weighted average interest rate paid on the First Hawaiian Bank certificates of deposit (3.76% and 2.51% at June 30, 2003 and 2002, respectively), maturing October 31, 2003. The interest rate will be reset upon the occurrence of either a new drawing on the revolving line of credit or at the maturity of the certificate of deposit. The agreement contains covenants which the Company was in compliance with as of June 30, 2003.

As of June 30, 2002, the Manager contributed $1,100,000 to the Company in connection with offering costs incurred on behalf of the Company in return for 110,000 units. Members contribute to the capital of the Company an amount equal to $10.00 for each unit subscribed for by each member, with a minimum subscription of 200 units per member. The total Capital contribution of the members will not exceed $500,000,000 not including reinvested distributions.

In accordance with the operating agreement, the Company’s profits, gains and losses are to be credited to and charged against each member in proportion to their respective capital accounts as of the close of business on the last day of each calendar month.

Interest received on mortgage loans is distributed monthly to members, members may elect to reinvest their distributions.

Distributions of proceeds from the repayment of principal on a mortgage loan will be made to the members pro rata based on their capital accounts.

The Company is required by the operating agreement to maintain working capital reserves of at least 3% of the aggregate capital accounts of the members. This reserve is available to pay any future expenses in excess of revenues, satisfy obligations of underlying security properties, expend money to satisfy the Company’s unforeseen obligations and for other permitted uses of its working capital. Working capital reserves of up to 3% in cash or cash equivalents, short-term investments and certificates of deposit are excluded from the funds committed to mortgage investments in determining what proportion of the offering proceeds and reinvested distributions have been invested in mortgage loans. As of June 30, 2003 and 2002, the Company had approximately $16,816,000 and $8,624,000, respectively, for its working capital reserves of which $2.0 million is restricted and used as collateral for the line of credit.

a. The Company’s Manager is entitled to receive from the Company a monthly management fee of up to 0.25% of the aggregate capital contributions, paid monthly in arrears. As of June 30, 2003 and 2002, management fees to the Manager approximated $793,000 and $237,000, respectively.

b. The Manager may receive fees for reselling foreclosed properties. These fees may not be greater than 3.0% of the proceeds where substantial service has been performed by the Manager. As of June 30, 2003 and 2002, no payments were required to be paid to the Manager.

During the fiscal years ended June 30, 2003 and 2002, the Company purchased approximately $17,725,000 and $11,763,000, respectively, in mortgage loans from Vestin Fund I, LLC, a Company managed by the Manager.

Due to Manager at June 30, 2003 consisted of approximately $1,632,000 in advances and unpaid management fees and distributions payable totaling $669,000 on units owned by the Manager. Due to the Manager at June 30, 2002 consisted of $298,000 advances by the Manager and of distributions payable to the Manager in the amount of $353,000. These advances do not accrue interest and are due on demand.

During the transition period ended June 30, 2002, the Company and Vestin Fund I, LLC made a mortgage loan in the amount of $130,500 and $3,000,000, respectively, for a total of $3,130,500 to an independent borrower who used the proceeds of the loan to purchase a property from the Company’s Manager which the Company’s Manager had previously acquired through foreclosure proceedings. The loan from the Company to such independent borrower is interest only, payable monthly at an annual rate of 10% with the principal due in June 2003 and extended to September 2003. The terms of the loan to such third party borrower were negotiated by the Company’s Manager; such terms were not reviewed by any independent parties.

During the fiscal years ended June 30, 2003 and 2002, the Company purchased $817,000 and $10,000,000, respectively, in mortgage loans from the Company’s Manager at their historical cost pursuant to Section 4.4.1 of the Company’s Operating Agreement. During the fiscal years ended June 30, 2003 and 2002, the Company sold $501,000 and $1,120,000, respectively to the Company’s Manager.

The Manager may purchase from the Company the interest receivable or principal on delinquent loans held by the Company. The Company shall not sell a foreclosed property to the Manager or to another program in which the Manager or its affiliates has an interest. As of June 30, 2003 and 2002, no such transaction occurred.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (“VIEs”). The accounting provisions and expanded disclosure requirements for VIEs are effective at inception for VIEs created after January 31, 2003, and are effective for reporting periods beginning after June 15, 2003 for VIEs created prior to February 1, 2003. An entity is subject to consolidation according to the provisions of FIN 46, if, by design, either (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) as a group, the holders of the equity investment at risk lack: (a) direct or indirect ability to make decisions about an entity’s activities’ (b) the obligation to absorb the expected losses of the entity if they occur; or (c) the right to receive the expected residual returns of the entity if they occur. In general, FIN 46 will require a VIE to be consolidated when an enterprise has a variable interest that will absorb a majority of the VIE’s expected losses or receive a majority of the VIE’s expected residual return. The FASB has recently proposed to defer the adoption date for certain variable interest entities until interim and annual periods ending after December 15, 2003. The Company continues to evaluate its relationships and interest in entities that may be considered VIEs. The impact of adopting FIN 46 on the Financial Statements is still being reviewed.

The Company is involved with certain legal proceedings incidental to its business activities. The Manager believes that the outcome of these proceedings will not have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Vestin Mortgage, Inc., Vestin Group, Inc., and Del Mar Mortgage, Inc., a company wholly owned by Michael Shustek, the largest shareholder and CEO of Vestin Group, Inc., are defendants in a civil action entitled Desert Land, L.L.C. et al. v. Owens Financial Group, Inc. (the “Action”). The Action was initiated by Desert Land, L.L.C. (“Desert Land”) on various loans arranged by Del Mar Mortgage, Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District Court for the District of Nevada (the “Court”) entered judgment jointly and severally in favor of Desert Land against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. Judgment was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee from the plaintiffs.

Defendants subsequently filed a motion for reconsideration. The court denied the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc. are jointly and severally liable for the judgment in the amount of $5,683,312.19 (which amount includes prejudgment interest and attorney’s fees). On August 27, 2003, the Court stayed execution of the judgment against Vestin Group and Vestin Mortgage based upon the posting of a bond in the amount of $5,830,000. The bond was arranged by Michael Shustek and was posted without any cost or obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the Action, and Mr. Shustek has guaranteed the indemnification. All of the defendants held liable to Desert Land are planning to appeal the judgment. The Company is not a party to the Action.

In order to comply with the Company’s operating agreement and Federal statutes, the Company may redeem no more than 10% of the members’ capital in any calendar year. Beginning capital as of January 1, 2003 was $315.0 million, which would limit redemptions to $31.5 million for calendar 2003. On September 12, 2003, the Company discontinued accepting requests for the redemption of units for the 2003 calendar year. As of September 12, 2003, the total of redemptions made and redemptions requested and awaiting payment was $30.9 million. All redemptions requests received after that date have been

The following schedule is selected quarterly financial data for fiscal year ended June 30, 2003:

The following schedule is selected quarterly financial data for six-month transition period ended June 30, 2002:

We have audited the accompanying consolidated balance sheet of Vestin Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vestin Group, Inc. and Subsidiaries at December 31, 2002, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

Vestin Group, Inc. (“Vestin Group” or the “Company”) was incorporated in the State of Delaware on June 2, 1998. The Company conducts its operations primarily through Vestin Mortgage, Inc., a wholly owned subsidiary (“Vestin Mortgage”). Vestin Mortgage operates as a mortgage broker licensed in the state of Nevada. Vestin Mortgage is engaged in the brokerage and placement of commercial loans secured by real property. Vestin Mortgage’s primary operations consist of the brokerage and placement of commercial, construction, acquisition and development, land, and residential mortgage loans secured by real property as well as managing two publicly held funds, Vestin Fund I, LLC (“Fund I”) and Vestin Fund II, LLC (“Fund II”), which invest in mortgage loans. Vestin Mortgage as manager of Fund I and Fund II will be referred to as “Managing Member”.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

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

The Company recognizes revenue primarily from loan placement fees, loan servicing fees and extension fees. Loan placement fees are recorded as revenue at the close of escrow and reduced by direct loan placement costs on loans which the Company has not recorded as investments in mortgage loans on its financial statements. Typically, deeds of trust related to loans placed are initially in the Company’s name to facilitate the loan placement process. Upon arranging a funding source for such loans, the deeds of trust are assigned to the respective investor (i.e., individual investors, Fund I, and Fund II). Loan servicing fees are recorded as revenue when such services are rendered. Servicing fees represent the interest spread between what is paid to the investor and what the borrower pays for the use of the money, which can vary from loan to loan. Servicing costs approximate servicing fees and therefore, the Company has not recognized a servicing asset or liability. Extension fees are generally recorded as revenue at the extension grant date. Significantly, all loans originated by the Company are transferred to Fund I and Fund II within two weeks since the Company’s source of funding for such loans came directly from these Funds. Additionally, loans transferred to Fund I and Fund II do not contain any contracts, agreements or commitments for “right of refusal” associated with the ownership of loans transferred to these Funds. Accordingly, sale or transfer of mortgage loans to affiliate parties is based on the carrying basis, which approximates fair value of such loans at the sale or transfer date.

Interest income on investments in mortgage loans on real estate is accrued by the effective interest method. The Company does not recognize interest income from loans once they are determined to be impaired. A loan is impaired when, based on current information and events, it is probable that the

Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.

Investments in real estate held for sale include real estate acquired through foreclosure and are carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell.

Investments in mortgage loans are secured by trust deeds and mortgages. Generally, all of the Company’s mortgage loans require interest only payments with a balloon payment of the principal at maturity. The Company has both the intent and ability to hold mortgage loans until maturity and therefore, mortgage loans are classified and accounted for as held for investment and are carried at cost. Loans originated and transferred to Fund I and Fund II which were originally held by the Company are accounted for at the acquisition cost and no gain or loss is recognized since the Company is acting as an agent for these Funds. Loan to value ratios are based on appraisals obtained at the time of loan origination and may not reflect subsequent changes in value estimates. Such appraisals are generally dated within 12 months of the date of loan origination. The appraisals may be for the current estimate of the “as-if developed” value of the property, and which approximates the post-construction value of the collateralized property assuming that such property is developed. As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, selection by a purchaser against multiple alternatives, and successful development by the purchaser; upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an as-if developed basis, if a loan goes into default prior to any development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, the Company may not recover the full amount of the loan.

The Company maintains an allowance for loan losses on its investment in mortgage loans for estimated credit impairment in the Company’s investment in mortgage loans portfolio. The Company’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors including, but not limited to, estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the allowance.

Property and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets ranging from three to seven years. The cost of repairs and maintenance is charged to expense as incurred.

Advertising costs are expensed as incurred and were approximately $3,015,000 and $4,220,000 for the years ended December 31, 2002 and 2001, respectively.

The Company accounts for its income taxes using the liability method, which requires recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

The Company applies Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations, in accounting for stock options issued to employees. Under APB No. 25, employee compensation cost is recognized when estimated fair value of the underlying stock on date of the grant exceeds exercise price of the stock option. For stock options and warrants issued to non-employees, the Company applies SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value of stock options at the grant date using the Black-Scholes option pricing model.

The following table represents the effect on net loss and loss per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (“SFAS No. 123”), Accounting for Stock-Based Compensation, to stock-based employee compensation:

As required, the pro forma disclosures above include options granted since February 26, 1998 (Inception). Consequently, the effects of applying SFAS No. 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future years until all options outstanding are included in the pro forma disclosures.

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, (“SFAS No. 148”) was issued. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The adoption of the provisions of SFAS No. 148 did not have a material impact on the Company’s results of operations, financial position or cash flows.

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN No. 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and rescission of FASB Interpretation No. 34, was issued. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The adoption of the provisions of FIN No. 45 did not have a material impact on the Company’s results of operations, financial position or cash flows.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (“VIEs”). The accounting provisions and expanded disclosure requirements for VIEs are effective at inception for VIEs created after January 31, 2003, and are effective for reporting periods beginning after June 15, 2003 for VIEs created prior to February 1, 2003. An entity is subject to consolidation according to the provisions of FIN 46 if, by design, either (i) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) as a group, the holders of the equity investment at risk lack: (a) direct or indirect ability to make decisions about an entity’s activities’ (b) the obligation to absorb the expected losses of the entity if they occur; or (c) the right to receive the expected residual returns of the entity if they occur. In general, FIN 46 will require a VIE to be consolidated when an enterprise has a variable interest that will absorb a majority of the VIE’s expected losses or receive a majority of the VIE’s expected residual return. Implementation had no effect on results of operations for the first quarter of 2003. The Company continues to evaluate its relationships and interest in entities that may be considered VIEs. The impact of adopting FIN 46 on the Consolidated Financial Statements is still being reviewed.

The Company services loans which have been arranged for the investor parties through a servicing agreement. Accounts receivable represent extension, interest and loan placement fees earned but not yet received. As of December 31, 2002, accounts receivable totaling $5,234,469 is net of allowance for doubtful accounts of $160,995.

Promissory note totaling $400,000 related to proceeds from properties sold by the Company. This note matures in December, 2006, bears interest at 8%, and is secured by real estate. Promissory note totaling $300,000 related to proceeds from properties sold by the Company. This note matures in October, 2003, bears interest at 10.5%, and is secured by real estate.

At December 31, 2002, the Company’s investments in mortgage loans had maturity dates ranging from January 1999 through June 2006. The Company had approximately $712,000 in loans that were greater than 90 days past due on interest or past maturity at December 31, 2002. As of December 31, 2002, all other mortgage loans payments were current and performing according to their terms. Management has evaluated the collectibility of the loans in light of the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan and, therefore, believes that the allowance for loan losses of $80,000 as of December 31, 2002 is sufficient.

At December 31, 2002, the Company had ten properties totaling $5,980,509, which were acquired through foreclosure and recorded as investments in real estate held for sale and secure specific payables as discussed in Note H. Such investments in real estate held for sale are recorded at the lower of cost or fair value less costs to sell. It is not the Company’s intent to invest in or own real estate.

Notes payable totaling $151,003 as of December 31, 2002, consists of promissory notes to various parties related to foreclosed real estate properties (developed parcels of land) during 2002. The notes are collateralized by the foreclosed real estate property. Since the Company acquired the properties through foreclosure, it is not required and does not intend to accrue or pay interest on these notes.

Notes payable — related party totaling $1,901,428 as of December 31, 2002, consists of the following:

Note payable to a company solely owned by the Company’s Chief Executive Officer totaling $158,000 related to developed parcels of land. The note is collateralized by the real estate property. Since the Company acquired the properties through foreclosure, it is not required and does not intend to accrue or pay interest on this note.

Note payable to an entity controlled by a company owned by the Company’s Chief Executive Officer totaling $569,061 related to vacant land. The note is collateralized by the real estate property. Since the Company acquired the property through foreclosure, it is not required and does not intend to accrue or pay interest on this note.

Note payable to an entity controlled by a company owned by the Company’s Chief Executive Officer totaling $1,174,367 related to vacant land. The note is collateralized by the real estate property. Since the Company acquired the property through foreclosure, it is not required and does not intend to accrue or pay interest on this note.

The Company maintains a total of $7,000,000 in revolving lines of credit with two financial institutions specifically for interim funding of mortgage loans placed. As of December 31, 2002, the balance on these lines of credit totaled $7,000,000, which are payable in monthly installments of interest only at the prime lending rate plus an additional rate ranging from 1.0% to 2.0% (prime lending rate of 4.25% at December 31, 2002). However, one of these lines of credit totaling $2,000,000 has an interest rate floor of 7.5%. These lines of credit are guaranteed by the Company’s Chief Executive Officer and are secured by the deeds of trust on the property being advanced against. Both lines of credit expire in June 2003. The Company intends to renew only the $2,000,000 line of credit after its expiration. The Company is in compliance with all the covenants on these lines of credit as of December 31, 2002.

The Company has entered into a credit agreement with a financial institution that maintains non-interest bearing trust funds held on behalf of the investors and other funds of the Company. The credit agreement allows the Company to borrow funds up to the amount held in the trust accounts and other funds held at the institution at a rate of 1% and invest those funds in commercial paper (securities), which are generally one-day sweep accounts. The Company has provided the financial institution with a security interest in the securities and, at all times, the securities remain in the financial institution’s custody and control. The balance drawn down upon the credit agreement was $-0- at December 31, 2002.

The Company manages certain trust assets including cash and receivables on behalf of the investors. The cash is held at a financial institution, and the Company records and reconciles the receivables from borrowers. At December 31, 2002, the cash held in trust approximated $7,605,662 and the trust receivable was $1,277,044. The related trust liability was $8,882,706 at December 31, 2002. The trust assets and liabilities are not recorded on the balance sheet of the Company at December 31, 2002.

The Company services loans for others that were originated by the Company, which are not shown on the balance sheet. The face amount of these loans at December 31, 2002 approximated $678,439,707.

Notes receivable — related party consists of a note receivable of approximately $118,000 from Donovan Jacobs, an employee of the Company, dated April 19, 2000. The note is unsecured, matures on April 19, 2004 and bears interest at 10%. Interest only payments are made on a semi-annual basis with the principal and any accrued interest due as a lump sum at maturity. As of December 31, 2002, the balance on this note was approximately $118,000.

Due from related parties totaling $1,803,112 are comprised of the following as of December 31, 2002:

Amounts due from Fund I totaling $530,873 relate to management fees, earnings on units invested in Fund I, and reimbursable expenses. Amounts due from Fund I bear no interest and are due on demand.

Amounts due from Fund II totaling $1,247,156 relate to management fees, earnings on units invested in Fund II, and reimbursable expenses. Amounts due from Fund II bear no interest and are due on demand.

Amounts due from inVestin Nevada, Inc. totaling $25,083 relate to advances made for start-up costs. Amounts due from inVestin Nevada, Inc. bear no interest and are due on demand. In October 2002, Vestin Mortgage entered into an agreement to provide management services to inVestin Nevada, Inc., a corporation wholly-owned by the Chief Executive Officer of the Company that will seek to raise $100,000,000 through the sale of subordinated notes to Nevada residents. During February 2003, this balance was paid off in full.

On July 2, 2001, Vestin Mortgage brokered a loan to Arroyo Heights Golf Club (“Arroyo”) for $10,000,000. The loan was funded by Fund I and Fund II (together, the “Funds”) and was guaranteed by three guarantors. Subsequently, Arroyo defaulted on the loan, and the Funds foreclosed and took title to the collateral. Based on an appraisal at the conclusion of the foreclosure, the Funds determined that there was a $4.8 million shortfall between the carrying amount of the loan and the value of the collateral. The Funds filed litigation to recover the shortfall from the individuals who had guaranteed the payment of the loan. Vestin Mortgage purchased the rights to collect the proceeds of the guarantee from the Funds on December 31, 2002 in exchange for investments in mortgage loans on real estate valued at $4.8 million. Vestin Mortgage did not recognize any gain or loss on the sale to the Funds.

Vestin Mortgage assumed control of the litigation and filed a motion for summary judgment against the loan guarantors, which was denied by the Nevada State District Court on May 2, 2003. Trial on this matter is scheduled for January of 2004. Vestin Mortgage believes that it will prevail in the litigation against the guarantors and that at least one of the three guarantors has sufficient assets to satisfy a judgment of $4.8 million plus interest. In evaluating the litigation, however, the Company’s management and its legal counsel cannot provide any assurances that the Company would obtain a favorable judgment and would succeed in enforcing and collecting on any such judgment. Therefore, the Company had provided a valuation allowance for the entire amount paid for the rights to receive the proceeds of the judgment and recorded the allowance as an expense in 2002. This provision for allowance is reflected in General and Administrative expenses on the Consolidated Statement of Income for the year ended December 31, 2002.

Other investments — related parties consists of the Company’s investments in units of Fund I and Fund II totaling $1.0 million and $1.1 million, respectively, as of December 31, 2002.

During the years ended December 31, 2002 and 2001, the Company paid $509,283 and $54,200, respectively, for legal fees to Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP (“Berkley Gordon”), a law firm in which the Executive Vice President of Legal and Corporate Affairs of the Company has an equity ownership interest.

The Company’s President and Tax Manager are equity owners in L.L. Bradford & Company, LLC, a Certified Public Accounting firm (“L.L. Bradford”). During 2002, $150,000 was paid to the certain personnel of L.L. Bradford for services provided to the Company. Also, During 2002, L.L. Bradford’s staff assisted in the preparation of the Company’s financial reports and provided bookkeeping services at no charge to the Company.

The Company recognizes an annual management fee up to 0.25% of the aggregate capital contributions to the Funds. The Company may, in its sole discretion, waive its management fee. For the year ended December 31, 2002, the Company recorded management fees of approximately $249,000 from Fund I and $586,000 from Fund II as compared to $131,000 from Fund I and $87,000 from Fund II for the same period in 2001. In connection with the organization of the Funds, the Company received approximately 100,000 Units in Fund I for expenses paid by the Company to unaffiliated third parties in

connection with the offering of units in Fund I, and 110,000 units from Fund II for such offering expenses which is the maximum amount allowed for such expenses under the Operating Agreement of Fund II.

During the year ended December 31, 2002, the Company sold $24.2 million in loans to the Funds pursuant to the terms of the Operating Agreements of the Funds which permit the Funds to acquire loans from the Company if the loans were acquired to facilitate their acquisition by the Funds and provided that the price paid is no greater than the Company’s cost. During the year ended December 31, 2002, the Company also purchased $23.3 million in loans from the Funds.

In September 2002, the Company entered into a one year Aircraft Usage Agreement with C5, LLC, a company wholly-owned by the Company’s Chief Executive Officer. The agreement is to allow the Company to use an airplane on a preferred basis over any other proposed user. The Company is required to pay a monthly fee based on an hourly rate of $3,000 per hour for the first 10 hours and $2,500 per hour for each hour thereafter. The Company is required to make a minimum monthly payment equivalent to 16 hours of usage ($45,000). The agreement automatically renews for successive periods of one year each unless terminated by either party no less than thirty days prior to the end of the term.

During 2002, the Company paid approximately $232,000 to a Company owned jointly by Michael Shustek, the Company’s Chief Executive Officer, and William Si Redd, a stockholder of the Company, related to the use of an airplane for company travel.

The Company had an investment in the amount of $153,810 in a mortgage loan to an entity which is 100% owned by the Company’s Chief Executive Officer (“CEO”). During December 2002, a sale of the property securing the investment was consummated. As of December 31, 2002, the Company recorded a receivable for the proceeds of the loan payoff which was fully collected in January 2003.

The components of the provision (benefit) for income taxes are as follows at December 31:

Deferred taxes result from temporary differences in the recognition of certain revenue and expense items for income tax and financial reporting purposes. The significant components of the Company’s deferred taxes as of December 31 are as follows:

Deferred tax assets are included in other assets in the accompanying Consolidated Balance Sheet.

The reconciliation of the statutory federal rate to the Company’s effective income tax rate is as follows:

Basic earnings per common share is calculated by dividing net income by the weighted average number of common share outstanding during the period. Diluted earnings per common share is calculated by dividing net income by the sum of the weighted average number of common shares outstanding, plus all additional common shares that would have been outstanding if potentially dilutive securities or common stock equivalents had been issued. The following table reconciles the weighted average number of shares used in the earnings per share calculations as of December 31, 2002 and 2001:

There were no securities considered antidilutive in the computation of diluted earnings per share.

The Company maintains a 401(k) Savings Plan which covers substantially all full-time employees. Participants may make tax-deferred contributions of up to 15% of annual compensation (subject to other limitations specified by the Internal Revenue Code). The Company matches employee contributions dollar for dollar up to 7% of compensation. The Company contributed approximately $161,000 and $110,000 to the plan for the years ended December 31, 2002 and 2001, respectively.

During fiscal year 2001, the Company issued 937,800 shares of Series A Convertible Preferred Stock (“Preferred Stock”) at $10.00 per share for a total of $9,378,000. This consisted of $4,378,000 in cash and $5,000,000 in exchange of a note payable. The holder of the Preferred Stock is entitled to receive, when, as and if declared by the Board of Directors of the Company, out of any funds legally available therefore, dividends equal to ten percent (10%) of the original issue price prior and in preference to any declaration or payment of any dividends on the Company’s common stock; and convertible into the Company’s common stock, at the option of the holder thereof, at anytime after the date of issuance at a conversion price of $6.08 per share of common stock. The Preferred Stock is redeemable at the option of the Company at a redemption price of eleven dollars ($11.00) per share. On March 29, 2002, the Company amended the Preferred Stock agreement to allow the holders of the Preferred Stock to be entitled to receive, when, as and if declared by the Board of Directors, dividends in an amount to be determined by the Board of Directors, but not less than 0.83% of the original issue price per annum and not more than 10% of the original issued price per annum, prior and in preference to any declaration or payment of any dividends on the Common Stock. Dividends on the Series A Preferred may be paid in cash or in Common Stock and shall not be cumulative.

During fiscal year 2002, the Company declared and paid cash dividends approximating $1,943,000 to common stockholders.

During fiscal year 2002, the Company granted stock options and warrants for 1,140,000 shares of common stock to the chief executive officer and other eligible employees. The stock options granted to eligible employees totaling 640,000 have a term of 10 years from the date of grant and vest equally over a three year period beginning one year after the date of grant. The stock warrants granted to the chief executive officer totaling 500,000 have a term of 10 years from the date of grant and vest entirely on the date of grant.

As of December 31, 2002, outstanding stock options and warrants totaled 2,714,000.

The following table summarizes the Company’s employee and directors stock options and warrants activity:

The following table summarizes information about options and warrants outstanding and exercisable for employees and directors at December 31, 2002 and 2001:

Pro forma information regarding net income and net income per share, as disclosed in Note A, has been determined as if the Company had accounted for its Employee stock-based compensation plans and other stock options under the fair value method of SFAS No. 123. The fair value of each option and warrant grant are estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option and warrant plans:

The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company’s Employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the

fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. During 2002 and 2001, there were no options granted with an exercise price below the fair value of the underlying stock at the grant date.

The weighted average fair value of options and warrants granted with exercise prices at the current fair value of the underlying stock during 2002 and 2001 was approximately $3.51 and $2.76 per option, respectively.

Spokesperson Stock Warrants — In January 2001, the Company consummated a Consulting Agreement with Joe Namath, a National Football League Hall of Fame inductee, to act as a spokesperson on behalf of the Company for five years. In consideration, Mr. Namath will be compensated in the amount of $1,000,000 cash annually and received warrants to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.01 and warrants to purchase 400,000 shares of the Company’s common stock at an exercise price of $4.60. The 800,000 warrants vest immediately, and the 400,000 warrants vest within one year. The outstanding warrants granted have a term of ten years from the date of grant. The fair value of the warrants was estimated as of the measurement date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0.0%, expected volatility of 54.51%, risk-free interest rate of 5.77% and an expected holding period of five years. Based on these assumptions, total compensation expense of the warrants granted was approximately $4,650,000 and will be recognized over five years, the length of the consulting agreement. Accordingly, the Company recorded consulting expenses of approximately $930,000 for the year ended December 31, 2002. The following tables summarize information about the Spokesperson Stock Warrants activity during the year ended December 31, 2002:

The Company estimates the fair value of stock warrants granted to the Company’s national spokesperson by using the Black-Scholes option pricing-model with the following assumptions used for grants in 2001 using specific grant dates; no dividend yield; expected volatility of 54.51%; risk free interest rates of 5.77%; and expected lives of 6 years for all non-employee stock warrants. Total consulting expenses under SFAS No. 123 relating to non-statutory stock options to be recognize over the consulting contract period of five years will approximate $4,650,000. Accordingly, the Company recorded consulting expenses of approximately $930,000 for the year ended December 31, 2001.

Consultant Warrants — During 2002, the Company issued warrants to purchase 8,333 shares of common stock to consultants, and as a result, the Company recorded $37,807 in consulting expenses during 2002. The warrants have an exercise price $7.25 per share, weighted average fair value of $4.54 per share, vest immediately and have a term of 5 years. The fair value was estimated as of the measurement date using Black-Scholes option pricing model with the following assumptions: dividend yield of 0.25%, expected volatility of 89.52%, risk-free interest rate of 2.89% and expected holding period of one year.

During fiscal year 2001, the Company acquired 1,448,672 shares of treasury stock, which includes 800,000 shares related to the spin-off of L.L. Bradford & Company, for a total value of approximately $4,191,887. During October 2001, the Company awarded 30,000 shares of its treasury stock to two employees of the Company. Expenses related to this bonus totaled $94,200. 1,421,072 shares of treasury stock were retired as of December 31, 2001.

During fiscal year 2002, the Company acquired 296,200 shares of treasury stock for a total value of $2,518,714 of which 1,000 shares were awarded to an employee as bonus totaling $6,120. The remaining 295,200 shares of treasury stock were retired as of December 31, 2002, which the excess of purchase price over the par value has been allocated to retained earnings.

The Company has employment agreements and arrangements with certain officers and key employees. The agreements generally continue for a period of three years or until terminated by the executive or the Company with cause. The agreements and arrangements provide the employees with a base salary and benefits, which approximates $1,591,000 annually. The agreements contain covenants against competition with the Company, which extend for a period of time after termination.

The carrying amounts of cash, accounts receivable, accounts payable, dividends payable, and notes payable approximate fair value because of the short-term maturity of these instruments.

The carrying value of mortgage loans and notes receivable approximates the fair value at December 31, 2002. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made.

Financial instruments, which potentially subject the Company to credit risk, include cash in bank, accounts receivable and loans secured by trust deeds.

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Concentration of credit risk with respect to accounts receivable is limited because of the large number of diverse customers. The Company controls credit risk through real estate securing mortgage loans and monitoring procedures. The Company believes it is not exposed to any significant credit risk on accounts receivable.

Concentrations of mortgage loans serviced exist in California, Hawaii, Nevada, and Texas with approximately 14%, 10%, 38% and 22% of mortgage loan balances as of December 31, 2002, respectively. As such, the Company has a significant geographic concentration of credit risk that may be adversely affected by periods of economic decline in these states.

Concentrations of mortgage loans exist at December 31, 2002 in commercial, construction, and acquisition and development loans. Concentrations of mortgage loans also exist with one borrower which represents approximately 77% of the total investments in mortgage loans at December 31, 2002. As such, the Company has a significant product concentration and concentration of credit risk with one borrower that may be adversely affected by periods of economic decline.

The Company’s investments in mortgage loans on real estate will require the borrower to make a balloon payment of the principal at maturity. To the extent that a borrower has an obligation to pay a mortgage loan in a lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to refinance or raise a substantial amount of cash. An increase in interest rates over the mortgage rate applicable at origination of the loan may have an adverse effect on the borrower’s ability to refinance.

The Company operates from leased office facilities under a noncancellable operating lease. The lease requires the Company to pay certain escalation clauses for real estate taxes, operating expense, usage and common area charges. The Company also leases equipment and a vehicle under noncancellable operating leases. Rent expense for leased office facilities, equipment, and the vehicle charged to operations for the year ended December 31, 2002 and 2001 was $568,772 and $404,849, respectively.

Future minimum rental payments required under the operating leases as of December 31, 2002, are as follows:

In September 2002, the Company entered into a one year Aircraft Usage Agreement with C5, LLC, a company wholly owned by the Company’s Chief Executive Officer. The agreement is to allow the Company to use an airplane on a preferred basis over any other proposed user. The Company is required to pay a monthly fee based on an hourly rate of $3,000 per hour for the first 10 hours and $2,500 per hour for each hour thereafter. The Company is required to make a minimum monthly payment equivalent to 16 hours of usage ($45,000). The agreement automatically renews for successive periods of one year each unless terminated by either party no less than thirty days prior to the end of the term. Future minimum payments required under this agreement for 2003 total $360,000.

In addition to the Desert Land litigation as described under Note V, the Company is involved with certain other legal proceedings incidental to its business activities. Management believes that the outcome of these proceedings will not have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Note V — Events (Unaudited) Subsequent to the Date of the Independent Auditor’s Report

The Company, Vestin Mortgage and Del Mar Mortgage, Inc., a company wholly owned by Mike Shustek, the largest shareholder and CEO of the Company, and various affiliates of the Company are defendants in a civil action (the “Action”). The Action was initiated by Desert Land, L.L.C. (“Desert Land”) on various loans arranged by Del Mar Mortgage, Inc. and/or Vestin Mortgage. On April 10, 2003, the United States District Court for the District of Nevada (the “Court”) entered judgment jointly and severally in favor of Desert Land against the Company, Vestin Mortgage and Del Mar Mortgage, Inc. Judgment was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee from plaintiffs. Vestin Group and Vestin Mortgage, which did not receive any portion of the penalty fee, were found by the Court to be “successors” to Del Mar Mortgage. Vestin Group and Vestin Mortgage are appealing this finding.

Defendants subsequently filed a motion for reconsideration. The Court denied the motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage, and Del Mar Mortgage, Inc. are jointly and severally liable for the judgment in the amount of $5,683,312.19 (which amount includes prejudgment interest and attorneys’ fees). On August 27, 2003, the Court stayed execution of the judgment against Vestin Group and Vestin Mortgage based upon the posting of a bond in the amount of $5,830,000. The bond was arranged by Michael Shustek and was posted without any cost or obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the Action, and Mr. Shustek has guaranteed the indemnification. All of the defendants held liable to Desert Land are planning to appeal the judgment.

The Company elected to contribute capital of $1.6 million to Fund I in the form of an interest-bearing amortizing note of $723,763 and the forgiveness of an obligation due from Fund I in the amount of $876,237, which resulted in a charge to current earnings totaling $1.6 million for the three months ended March 31, 2003. The Company made this capital contribution to restore member capital accounts in Fund I. The Company will not receive any additional units in Fund I in consideration of the capital contribution. The capital contribution will increase the existing members’ capital accounts in Fund I. Fund I is an important funding source for mortgage loans placed by the Company; accordingly, management believes the capital contribution is in the Company’s best long-term interest.

In order to comply with the operating agreements of Fund I and Fund II and Federal statutes, both Funds may redeem no more than 10% of the members’ capital in any calendar year. Beginning capital as of January 1, 2003 for Fund I and Fund II were $97.5 million and $315.0 million, respectively, which would limit redemptions for Fund I and Fund II to $9.75 million and $31.5 million for calendar 2003, respectively. On June 17, 2003, Fund I discontinued accepting requests for the redemption of units for the 2003 calendar year. As of September 19, 2003, the total of redemptions made and redemptions requested and awaiting payment was $9.1 million for Fund I. All redemptions requests received after that date have been logged for redemption beginning in January 2004. As of September 30, 2003, requests to redeem 831,000 units in 2004 and 120,526 units in 2005 had been logged. On September 12, 2003, Fund II discontinued accepting requests for the redemption of units for the 2003 calendar year. As of September 12, 2003, the total of redemptions made and redemptions requested and awaiting payment was $30.9 million for Fund II. All redemptions requests received after that date have been logged for redemption beginning in January 2004. As of September 30, 2003, requests to redeem 579,480 units had been logged.

Effective April 18, 2002, the Board of Directors of Vestin Group approved the engagement of Ernst & Young LLP as its independent accountants for 2002 to replace the firm of Grant Thornton LLP, which was dismissed as the independent accountants of Vestin Group effective April 18, 2002. The Audit Committee of the Board of Directors of Vestin Group had recommended the change of the independent accountants to the Board of Directors. The reports of Grant Thornton on Vestin Group’s financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or application of accounting principles. In connection with the audits of Vestin Group’s financial statements for each of the two fiscal years ended December 31, 2001 and 2000, and during the period from January 1, 2002 through April 18, 2002, there were no disagreements with Grant Thornton on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Grant Thornton would have caused Grant Thornton to make reference to the matter in their report. Except for the matters specified in the following paragraph, during the two fiscal years ended December 31, 2001 and 2000, and during the period from January 1, 2002 through April 18, 2002, there have been no reportable events as defined in Regulation S-K Rule 304(a)(1)(v).

Grant Thornton has informed Vestin Group of certain matters which Grant Thornton considers to be reportable conditions as follows: (a) Vestin Group’s internal controls failed to ensure (i) that certain related party transactions were appropriately and timely documented and approved by the Board of Directors of Vestin Group prior to being executed and recorded in the financial records of Vestin Group and that such transactions were not properly identified as related party transactions when initially recorded in the financial records of the Company, and (ii) that certain transactions outside the normal course of business were correctly recorded when initially entered into the financial records of the Company; (b) lack of periodic reconciliation of accounts resulted in a significant number of adjustments after the books were closed at year end; (c) checks were being written with verbal approval only, and written documentation of approval was not always retained for such checks; and (d) the amount being paid to one of the officers of Vestin Group exceeded by approximately $35,000 the compensation specified in that officer’s employment contract. Items (a) and (b) above were raised in a Reportable Condition and Advisory Comments letter issued by Grant Thornton to Vestin Group for the fiscal year ended December 31, 2001 (the “2001 Management Letter”), and items (c) and (d) above were raised in a management letter issued by Grant Thornton to Vestin Group for the fiscal year ended December 31, 2000. Although a draft of the 2001 Management Letter was circulated by Grant Thornton to Vestin Group on April 11, 2002 and a letter discussing audit adjustments was delivered to the Company’s Audit Committee on April 5, 2002, the final 2001 Management Letter was not received by Vestin Group until May 8, 2002. Grant Thornton had previously discussed the substance of items (a) and (b) above with the Company’s Board of Directors and the chairman of the Company’s Audit Committee. Items (c) and (d) above were also discussed with the Company’s Audit Committee and the Board of Directors. All of the foregoing correspondence has been delivered to Ernst & Young and the Company’s Audit Committee has discussed such matters with Ernst & Young. Also, Vestin Group has authorized Grant Thornton to respond fully to the inquiries of Ernst & Young concerning such matters.

Vestin Group believes that the foregoing internal control matters did not result in any material inaccuracies in its published financial statements and that, through the implementation of improved internal control procedures, has adequately addressed the matters raised by Grant Thornton.

The foregoing should be read in conjunction with Vestin Group’s current report on Form 8-K/ A filed with the Securities and Exchange Commission on June 4, 2002.

THIS OPERATING AGREEMENT (this “Agreement”) was made and entered into as of the 7th day of December, 2000, and amended and restated as of May 6, 2002, by and among Vestin Mortgage, Inc., a Nevada corporation (the “Manager” and, in its capacity as a member of the Company, the “Initial Member” and collectively with all Persons who may become members of the Company from time to time in accordance herewith, the “Members”), and Vestin Fund II, LLC, a Nevada limited liability company (the “Company”).

WHEREAS, the Initial Member and the Company desire to enter into an Operating Agreement to govern the Company’s operations;

NOW, WHEREFORE, in consideration for the mutual agreements, covenants and premises set forth herein, the Operating Agreement is hereby adopted:

1.1 Formation. The Initial Member caused the formation of the Company on December 7, 2000 under the provisions of Title 7, Chapter 86, of the Nevada Statutes.

1.3 Place of Business. The principal place of business of the Company is and will be located at 2901 El Camino Avenue, Las Vegas, Nevada 89102, until the Manager changes it after giving the Members notice. In addition, the Company may maintain such other offices and places of business in the United States as the Manager may deem advisable. The Manager will file all necessary or desirable documents to permit the Company to conduct its business lawfully in any state or territory of the United States.

1.4 Purpose. The primary purpose of this Company is to generate cash flow and to distribute to the Members the Profits of the Company from its operations. The Company will invest in and purchase first, second, wraparound, participating and construction Mortgage Investments, and do all things reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through foreclosure, either directly or through general partnerships or other joint ventures, all as further provided for in this Agreement.

1.5 Articles of Organization. The Company’s Articles of Organization, as amended, and Certificate of Acceptance of Appointment of Resident Agent have been duly executed, acknowledged and filed with the Office of the Secretary of State of the State of Nevada under the provisions of the Nevada Statutes. The Initial Member hereby approves, ratifies and confirms all of these actions. The Manager is authorized to execute and cause to be filed additional Certificates of Amendment of the Articles of Organization whenever required by the Nevada Statutes or this Agreement.

1.6 Term of Existence. The Company’s existence began on December 7, 2000 and, notwithstanding anything to the contrary in the Articles of Organization, will continue until December 31, 2020, unless earlier terminated under the provisions of this Agreement or by operation of law. A Majority may extend the Company’s term, provided that the Company remains in compliance with the NASAA Guidelines.

1.7 Power of Attorney. Each of the Members irrevocably constitutes and appoints the Manager as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file:


	1.7.1	This Agreement, the Articles of Organization, as well as any and all amendments thereto required under the laws of the State of Nevada or of any other state, or which the Manager deems advisable to prepare, execute and file;

	1.7.2	Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required to be filed by the Company by any governmental agency or by the laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

	1.7.3	Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, or the dissolution and termination of the Company, provided that the continuation, admission, substitution or dissolution or termination, as applicable, is in accordance with the terms of this Agreement.


	1.8.1	Is a Special Power of Attorney coupled with an interest, is irrevocable, survives the death of the Member and shall not be affected by the subsequent incapacity of the Member;

	1.8.2	May be exercised by the Manager for each member by a facsimile signature of or on behalf of the Manager or by listing all of the members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

	1.8.3	Shall survive the delivery of an assignment by a Member of the whole or any portion of his Interest; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, the Special Power of Attorney shall survive the delivery of the assignment for the sole purpose of enabling the person to execute, acknowledge, and file any instrument necessary to effect the substitution.

Unless stated otherwise, the terms set forth in this Article 2 shall, for all purposes of this Agreement, have the following meanings:

2.1 Acquisition and Investment Evaluation Expenses means expenses including but not limited to legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, title insurance funded by the Company, and miscellaneous expenses related to the evaluation, selection and acquisition of Mortgage Investments, whether or not acquired.

2.2 Acquisition and Investment Evaluation Fees means the total of all fees and commissions paid by any Person when purchasing or investing in Mortgage Investments. Included in the computation of these fees or commissions shall be any selection fee, mortgage placement fee, nonrecurring management fee, and any evaluation fee, loan fee, or points paid by borrowers to the Manager, or any fee of a similar nature, however designated.

2.3 Administrator means the agency or official administering the securities law of a state in which units are registered or qualified for offer and sale.

2.4 Affiliate means, (a) any person directly or indirectly controlling, controlled by or under common control with the Person, (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person, (c) any officer, director or Member of the Person, or (d) if the

2.6 Capital Account means, for any Member, the Capital Account maintained for the Member in accordance with the following provisions:


	2.6.1	The Manager shall credit to each Member’s Capital Account the Member’s Capital Contribution, the Member’s distributive share of Profits, any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member, and the amount of any Company liabilities that are assumed by the Member or that are secured by any Company property distributed to the Member.

	2.6.2	The Manager shall debit from each Member’s Capital Account the amount of cash and the fair market value of any Company property distributed to the Member under any provision of this Agreement, the Member’s distributive share of Losses, and any items in the nature of expenses or losses that are specially allocated to a Member and the amount of any liabilities of the Member that are assumed by the Company or that are secured by any property contributed by the Member to the Company.

If the Gross Asset Value of a Company asset is adjusted as a result of a Writedown, the Manager shall concurrently adjust the Capital Accounts of all Members in order to reflect the aggregate net adjustment that would have occurred if the Company had recognized Losses equal to the Writedown Amount and the Losses were allocated under Article 7.

If any interest in the Company is transferred in accordance with Section 10.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with the Regulation. If the Manager determines that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the Manager may make the modification, provided that it is not likely to have a material effect on the amounts distributable to any Member under Articles 7 and 12 of this Agreement upon the dissolution of the Company. The Manager shall adjust the amounts debited or credited to Capital Accounts for (a) any property contributed to the Company or distributed to the Manager, and (b) any liabilities that are secured by the contributed or distributed property or that are assumed by the Company or the Manager, if the Manager determines the adjustments are necessary or appropriate under Treasury Regulation Section 1.704-1(b)(2)(iv). The Manager shall make any appropriate modification if unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-1(b) as provided for in Sections 7.7 and 15.4.

2.7 Capital Contribution means the total investment and contribution to the capital of the Company made by a Member (i) in cash, (ii) by advancing expenses to non-affiliated third parties on behalf of the Company and with the Company’s authorization or (iii) by way of automatic reinvestment of Company distributions (or deemed distributions) of capital and/or net income. “Initial Capital Contribution” means the amount paid in cash by each Member with his original subscription for an acquisition of units of the Company under the prospectus plus, in the case of the Manager, the amount advanced to non-affiliated third parties on behalf of the Company in connection with the Offering.

2.8 Capital Transaction means (i) the repayment of principal or prepayment of a Mortgage Investment, including deemed repayments of Mortgage Investments or other dispositions thereof, to the extent classified as a return of capital under the Code, (ii) the foreclosure, sale, exchange, condemnation, eminent domain taking or other disposition under the Code of a Mortgage Investment or Real Property

2.9 Cash Flow means cash funds provided from operations (other than repayments of mortgage loan principal) including without limitation, interest, points, revenue participations, participations in property appreciation, and interest or dividends from interim investments paid to the Company after deducting cash funds used to pay general Company expenses and debt payments.

2.10 Code means the Internal Revenue Code of 1986, as amended from time to time, and corresponding provisions of subsequent revenue laws.

2.11 Company means Vestin Fund II, LLC, the Nevada limited liability company to which this Agreement pertains.

2.12 Deed(s) of Trust means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Mortgage Investments, whether in the form of a deed of trust, mortgage or otherwise.

2.13 Financing means all indebtedness incurred by the Company, the principal amount of which is scheduled to be paid over a period of not less than 48 months, where not more than 50% of the principal amount of which is scheduled to be paid during the first 24 months.

2.14 Fiscal Year means, subject to the provisions of Section 706 of the Code and Section 9.6.1, (i) the period commencing on the date of formation of the Company and ending on December 31, 2000 (ii) any subsequent 12 month period on January 1 and ending on December 31 and (iii) the period commencing January 1 and ending on the date on which all Company assets are distributed to the Members under Article 12.

2.15 Front-End Fees means any fees and expenses paid by any party for any services rendered to organize the Company and to acquire assets for the Company, including Organization and Offering Expenses, Acquisition and Investment Evaluation Expenses and Acquisition and Investment Evaluation Fees, interest on deferred fees and expenses, and any other similar fees, however designated by the Company.


	2.16.1	The initial Gross Asset Value of any Company asset at the time that it is contributed by a Member to the capital of the Company shall be an amount equal to the fair market value of the Company asset (without regard to the provisions of Code Section 7701(g)), as determined by the contributing Member and the Manager;

	2.16.2	The Gross Asset Values of all Company assets shall be adjusted, as determined by the distributed Member and the Manager, to equal their respective fair market values upon the distribution to a Member by the Company of more than a de minimis amount of Company assets (other than money), unless all Members simultaneously receive distributions of undivided interests in the distributed Company assets in proportion to their respective Capital Accounts;

	2.16.3	The Gross Asset Values of all Company assets shall be adjusted to equal their respective fair market values (as determined by the Manager, in its reasonable discretion) upon the termination of the Company for Federal income tax purposes under Code Section 708(b)(1)(B); and

	2.16.4	The Gross Asset Value of a Company asset shall be adjusted in the case of a Writedown of the Company asset in accordance with Sections 2.41, 2.42 and 7.8.

2.17 Independent Expert means a Person with no material current or prior business or personal relationship with the Manager, who is engaged to a substantial extent in the business of rendering opinions

2.18 Interest means the Capital Accounts of Members, which are divided into “units.”

2.19 Investment in Mortgage Loans means the amount of Capital Contributions used to make or invest in Mortgage Investments or the amount actually paid or allocated to the purchase of Mortgage Investments, working capital reserves allocable thereto (except that working capital reserves in excess of 3.0% shall not be included), and other cash payments such as interest and taxes but excluding Front-End Fees.

2.20 Majority means any group of Members who together hold a majority of the total outstanding Interests of the Company as of a particular date (or if no date is specified, the first day of the then current calendar month).

2.21 Manager means Vestin Mortgage, Inc., a Nevada corporation, in that capacity, or any Person replacing Vestin Mortgage under this Agreement. For greater certainty, Vestin Mortgage, in its capacity as the Initial Member, is a distinct entity from the Manager for purposes of this Agreement unless the context should indicate to the contrary.

2.22 Member means an owner of units in the Company, unless the instruments through which the units were transferred to the owner did not also convey the transferor’s status as a Member.

2.23 Mortgage Investment(s) means the Mortgage Loan(s) or an interest in the Mortgage Loans that are held by the Company.

2.24 Mortgage Loans means investments of the Company that are notes, debentures, bonds and other evidences of indebtedness or obligations that are negotiable or non-negotiable and secured or collateralized by Deeds of Trust on Real Property.

2.25 NASAA Guidelines means the Mortgage Program Guidelines of the North American Securities Administrators Association, Inc. adopted on September 10, 1996, as amended from time to time unless indicated to the contrary by the context.

2.26 Net Income Available for Distribution means Cash Flow less amount set aside for creation or restoration of reserves during the month; provided that:


	2.26.1	The operating expenses shall not include any general overhead expenses of the Manager; and

	2.26.2	Net Income Available for Distribution shall not exceed the amount of cash on hand.

2.27 Net Proceeds means the net cash proceeds (or deemed net proceeds) from any Capital Transaction.

2.28 Net Worth means the excess of total assets over total liabilities as determined by generally accepted accounting principles consistently applied, except that if any of the assets have been depreciated, then the amount of the depreciation relative to any particular asset may be added to the depreciated cost of the asset to compute total assets, provided that the amount of depreciation may be added only to the extent that the amount resulting after adding the depreciation does not exceed the fair market value of the asset.

2.29 Nevada Statutes means Nevada Revised Statutes, as amended from time to time, unless indicated to the contrary by the context.

2.30 Offering means the offer and sale of units of the Company made under the Prospectus.

2.31 Organization and Offering Expenses means those expenses incurred in connection with the Offering of units in the Company pursuant to this Prospectus and paid or owed to a nonrelated third party. Such Organization and Offering Expenses include fees paid to attorneys, brokers, accountants, and any other charges incurred in connection with the Offering pursuant to the Company’s Prospectus.

2.32 Person means any natural person, partnership, corporation, unincorporated association or other legal entity.

2.33 Profits and Losses mean, for each Fiscal Year or any other period, an amount equal to the Company’s taxable income or loss for the Fiscal Year or other given period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately under Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication):


	2.33.1	Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses under this Section 2.30 shall be added to the taxable income or loss;

	2.33.2	Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures under Treasury Regulation Section 1.704- 1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses under this Section 2.30, shall be subtracted from the taxable income or loss.

If any Company asset has a Gross Asset Value which differs from its adjusted cost basis, gain or loss resulting from the disposition of the Company asset shall be computed using the Gross Asset Value (rather than adjusted cost basis) of the Company asset.

Notwithstanding any other provision of this Section, any items in the nature of income, gain, expenses or losses, which are specially allocated under Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or Losses.

2.34 Program means a limited or general partnership, limited liability company, limited liability partnership, trust, joint venture, unincorporated association or similar organization other than a corporation formed and operated for the primary purpose of investing in mortgage loans.

2.35 Prospectus means the prospectus that forms a part of the Registration Statement on Form S-11 to be filed under the Securities Act of 1933 with the Securities and Exchange Commission and any supplement or amended prospectus or new prospectus that forms a part of a supplement to the Registration Statement filed by the Company, unless the context should indicate to the contrary.

2.36 Purchase Price means the price paid upon or in connection with the purchase of a mortgage, but excludes points and prepaid interest.

2.37 Real Property means and includes (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that is located on or used as part of land. Real Property does not include Deeds of Trust, mortgage loans or interests therein.

2.38 Regulations means, except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the U.S. Department of the Treasury under the Code, as the regulations may be lawfully changed from time to time.

2.39 Reinvested Distributions means units purchased under the Company’s Plan (as defined in Article 8 of this Agreement).

2.40 Roll-Up means a transaction involving the acquisition, merger, conversion, or consolidation, either directly or indirectly, of the Company and the issuance of securities of a Roll-Up Entity. “Roll-Up” does not include a transaction involving (i) securities of the Company, if any, listed on a national securities exchange or quoted on the Nasdaq National Market for 12 months or (ii) conversion to corporate, trust, limited liability company, or association form of only the Company if, as a consequence of the transaction, there will be no significant adverse change in any of the following: (a) Members’ voting rights; (b) the term of existence of the Company; (c) Manager compensation; (d) the Company’s investment objectives.

2.41 Roll-Up Entity means a company, real estate investment trust, corporation, limited liability company, limited or general partnership or other entity that would be created or would survive after the successful completion of a proposed Roll-Up.

2.42 Sponsor means any Person (a) directly or indirectly instrumental in organizing, wholly or in part, a Program, or a Person who will manage or participate in the management of a Program, and any Affiliate of any Person, but does not include a Person whose only relation with a Program is that of an independent property manager or other provider of services (such as attorneys, accountants or underwriters), whose only compensation is received in that capacity, or (b) is a “Sponsor” as otherwise defined in the NASAA Guidelines. Vestin Group, Inc., the Manager’s parent company, is the initial Sponsor of the Company.

2.43 Subscription Agreement means the document that is an exhibit to and part of the prospectus that every Person who buys units of the Company must execute and deliver with full payment for the units and which, among other provisions, contains the written consent of each Member to the adoption of this Agreement.

2.44 Units mean the units of equity in the Company evidencing the Company’s Interests that are (a) issued to Members upon their admission to the Company under the Subscription Agreement and the prospectus or (b) transferred to those who become substituted Members under Section 10.2 hereof. The Manager may purchase units on the same basis as other Members. Units purchased at different times do not necessarily represent the same underlying amount of Interests.

2.45 Writedown means a determination by the Manager for a particular Mortgage Investment or other Company investment (which determination has been verified by the Company’s accountants as being in conformity with generally accepted accounting principles) that the fair market value of the investment at the time the determination is made is less than the amount actually paid or allocated to the purchase of the investment, which determination shall be made by the Company and its accountants within thirty (30) days of the end of each calendar quarter and any Writedown shall be effective on the last day of the relevant calendar quarter during the term of this Agreement.

2.46 Writedown Amount means, for any Mortgage Investment or other Company investment, the amount by which, at the time that a Writedown is determined for the Investment, the amount actually paid or allocated to the purchase of the investment exceeds its fair market value.

3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as otherwise expressly stated elsewhere in this Agreement, the Manager has exclusive control over the business of the Company (with all acts and decisions being in its sole discretion except as specifically set forth in this Agreement), including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, security agreements, Mortgage Investments and contracts, and to assume direction of the business operations. As Manager of the Company and its business, the Manager has all duties generally associated with that position, including dealing with Members, being responsible for all accounting, tax and legal matters, performing internal reviews of the Company’s investments and loans, determining how and when to invest the Company’s capital, and determining the course of action to take for Company loans that are in default. The Manager also has all of these powers for ancillary matters. Without limiting the generality of the foregoing, the powers include the right (except as specifically set forth in this Agreement, including under Section 3.2):


	3.1.1	To evaluate potential Company investments and to expend the capital of the Company in furtherance of the Company’s business;


	3.1.2	To acquire, hold, lease, sell, trade, exchange, or otherwise dispose of all or any portion of Company property or any interest therein at a price and upon the terms and conditions as the Manager may deem proper;

	3.1.3	To cause the Company to become a joint venturer, general or limited partner or member of an entity formed to own, develop, operate and dispose of properties owned or co-owned by the Company acquired through foreclosure of a Mortgage Loan;

	3.1.4	To manage, operate and develop Company property, or to employ and supervise a property manager who may, or may not, be an Affiliate of the Manager;

	3.1.5	To borrow money from banks and other lending institutions for any Company purpose, and as security therefor, to encumber Company property;

	3.1.6	To repay in whole or in part, refinance, increase, modify, or extend, any obligation, affecting Company property;

	3.1.7	To employ from time to time, at the expense of the Company, persons, including the Manager or its Affiliates, required for the operation of the Company’s business, including employees, agents, independent contractors, brokers, accountants, attorneys, and others; to enter into agreements and contracts with persons on terms and for compensation that the Manager determines to be reasonable; and to give receipts, releases, and discharges for all of the foregoing and any matters incident thereto as the Manager may deem advisable or appropriate; provided, however, that any agreement or contract between the Company and the Manager or between the Company and an Affiliate of the Manager shall contain a provision that the agreement or contract may be terminated by the Company without penalty on sixty (60) days’ written notice and without advance notice if the Manager or Affiliate who is a party to the contract or agreement resigns or is removed under the terms of this Agreement;

	3.1.8	To maintain, at the expense of the Company, adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of account as of the end of each calendar year, together with all necessary tax-reporting information;

	3.1.9	To purchase, at the expense of the Company, liability and other insurance to protect the property of the Company and its business;


	3.1.10	To refinance, recast, modify, consolidate, extend or permit the assumption of any Mortgage Loan or other investment owned by the Company;

	3.1.11	To pay all expenses incurred in the operation of the Company;

	3.1.12	To file tax returns on behalf of the Company and to make any and all elections available under the Code;

	3.1.13	To modify, delete, add to or correct from time to time any provision of this Agreement as permitted under Section 15.4 hereof.


	3.2.1	Do any act in contravention of this Agreement;

	3.2.2	Do any act which would make it impossible to carry on the ordinary business of the Company;

	3.2.3	Confess a judgment against the Company;

	3.2.4	Possess Company property or assign the rights of the Company in property for other than a Company purpose;


	3.2.5	Admit a person as a Manager without the prior affirmative vote or consent of a Majority, or any higher vote as may be required by applicable law;

	3.2.6	Voluntarily withdraw as Manager without the prior affirmative vote or consent of a Majority unless its withdrawal would neither affect the tax status of the Company nor materially adversely affect the Members (subject to any delay in effectiveness of the withdrawal as set forth elsewhere herein);

	3.2.7	Sell all or substantially all of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of a Majority;

	3.2.8	Amend this Agreement without the prior affirmative vote or consent of a Majority, except as permitted by Section 15.4 of this Agreement;

	3.2.9	Dissolve or terminate the Company without the prior affirmative vote or consent of a Majority;


	3.2.10	Cause the merger or other reorganization of the Company without the prior affirmative vote or consent of a Majority;

	3.2.11	Grant to the Manager or any of its Affiliates an exclusive right to sell any Company assets;

	3.2.12	Receive or permit the Manager or any Affiliate of the Manager to receive any insurance brokerage fee or write any insurance policy covering the Company or any Company property;

	3.2.13	Receive from the Company rebates or give-ups or participate in any reciprocal business arrangement which would enable the Manager or any of its Affiliates to do so;

	3.2.14	Commingle the Company’s assets with those of any other Person;

	3.2.15	Use or permit another Person to use the Company’s assets in any manner, except for the exclusive benefit of the Company;

	3.2.16	Pay or award, directly or indirectly, any commissions or other compensation to any Person engaged by a potential investor for investment advice as an inducement to the advisor to advise the purchase of units; provided, however, that this clause shall not prohibit the payment of Sales Commissions;

	3.2.17	Make loans to the Manager or an Affiliate of the Manager; or

	3.2.18	Pay, directly or indirectly, a commission or fee (except as otherwise set forth in Article 14 hereof) to the Manager or any Affiliate of the Manager in connection with the reinvestment or distribution of the proceeds of a Capital Transaction.

3.3 Right to Purchase Receivables and Loans. As long as the requirements of Article 4 are met and the Company adheres to the investment policy described in the prospectus, the Manager, in its sole discretion, may at any time, but is not obligated to:


	3.3.1	Purchase from the Company the interest receivable or principal on delinquent Mortgage Loans held by the Company;

	3.3.2	Purchase from a senior lien holder the interest receivable or principal on mortgage loans senior to Mortgage Loans held by the Company; and/or

	3.3.3	Use its own monies to cover any other costs associated with Mortgage Loans held by the Company such as property taxes, insurance and legal expenses.

3.4 Extent of Manager’s Obligation and Fiduciary Duty. The Manager shall devote the portion of its time to the business of the Company as it determines, in good faith, to be reasonably necessary to conduct

the Company’s business. The Manager shall not be bound to devote all of its business time to the affairs of the Company, and the Manager and its Affiliates may engage for their own account and for the account of others in any other business ventures and employments, including ventures and employments having a business similar or identical or competitive with the business of the Company. The Manager has fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Manager’s possession or control, and the Manager will not employ, or permit another to employ the Company’s funds or assets in any manner except for the exclusive benefit of the Company. The Manager will not allow the assets of the Company to be commingled with the assets of the Manager or any other Person. The Company shall not permit a Member to contract away the fiduciary duty owed to any Member by the Manager under common law. The Manager, for so long as it owns any units as a Member, hereby waives its right to vote its units and to have them considered as outstanding in any vote for removal of the Manager or for amendment of this Agreement (except as provided in Sections 3.1.13 and 15.4) or otherwise.

3.5 Liability and Indemnification of Manager. Any right to indemnification hereunder shall be subject to the following:


	1.	The Company shall not indemnify the Manager for any liability or loss suffered by the Manager, nor shall the Manager be held harmless for any loss or liability suffered by the Company, unless all of the following conditions are met:


	a.	the Manager has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Company;


	c.	such liability or loss was not the result of the negligence or misconduct by the Manager; and


	d.	such indemnification or agreement to hold harmless is recoverable only out of the assets of the Company and not from the Members.


	2.	Notwithstanding anything to the contrary contained in subsection 1 above, the Manager (which shall include Affiliates only if such Affiliates are performing services on behalf of the Company) and any Person acting as a broker-dealer shall not be indemnified for any losses, liabilities or expenses arising from an alleged violation of federal or state securities laws unless the following conditions are met:


	a.	there has been a successful adjudication on the merits of each count involving alleged securities law violation as to the particular indemnitee; or


	b.	such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or


	c.	a court of competent jurisdiction has approved a settlement of the claims against a particular indemnitee and has determined that indemnification of the settlement and related costs should be made; and


	d.	in the case of subparagraph c of this paragraph, the court of law considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and the position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws; provided that the court need only be advised of and consider the positions of the securities regulatory authorities of those states:


	(1)	which are specifically set forth in the Company agreement; and

	(2)	in which plaintiffs claim they were offered or sold Company interests.


	3.	The Company may not incur the cost of that portion of liability insurance which insures the Manager for any liability as to which the Manager is prohibited from being indemnified under this subsection.

	4.	The provision of advancement from Company funds to the Manager or its Affiliates for legal expenses and other costs incurred as a result of any legal action is permissible if the following conditions are satisfied:


	a.	the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Company;


	b.	the legal action is initiated by a third party who is not a Member, or the legal action is initiated by a Member and a court of competent jurisdiction specifically approves such advancement; and


	c.	the Manager or its Affiliates undertake to repay the advanced funds to the Company in cases in which such Person is not entitled to indemnification under paragraph 1 of this section 3.5.

3.6 Assignment by the Manager. The Manager’s Interest in the Company may be assigned at the discretion of the Manager, subject to Section 10.1.

3.7 Removal of Manager. The Manager may be removed upon the following conditions:


	3.7.1	The Members may remove the Manager by written consent or vote of a Majority (excluding any Interest of the Manager being removed). This removal of the Manager, if there is no other Manager, shall not become effective for at least 120 days following the consent or vote of the Majority.

	3.7.2	During the 120 day period described in Section 3.8.1, the Majority (excluding any Interest of the removed Manager) shall have the right to agree in writing to continue the business of the Company and, within six months following the termination date of the last remaining Manager, elect and admit a new Manager(s) who agree(s) to continue the existence of the Company.

	3.7.3	Substitution of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. Upon effective substitution of a new Manager, this Agreement shall remain in full force and effect, except for the change in the Manager, and business of the Company shall be continued by the new Manager. The new Manager shall thereupon execute, acknowledge and file a certificate of amendment to the Articles of Organization of the Company in the manner required by Section 26.221 of the Nevada Law.

	3.7.4	Failure of a Majority to designate and admit a new Manager within the time specified herein shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement.

3.8 Right to Rely on Manager. Any person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by the Manager as to:


	3.8.1	The identity of the Manager or any Member;

	3.8.2	The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by the Manager or which are in any further manner germane to the affairs of the Company;

	3.8.3	The persons who are authorized to execute and deliver any instrument or document of the Company; and


	3.8.4	Any act or failure to act by the Company or any other matter whatsoever involving the Company or any Member.

3.9 Transfer of the Control of the Manager. A sale or transfer of a controlling interest in the Manager will not terminate the Company or be considered the withdrawal or resignation of the Manager. By majority vote, the Company may terminate the then Manager’s interest in the Company by paying an amount equal to the then-present fair market value of such Manager’s interest in the Company. In the event the Company and the Manager disagree as to the then-present fair market value, then the dispute shall be settled by arbitration in accordance with the then current rules of the American Arbitration Association.

3.10 Amendment to the Manager’s Duties. Any amendment to this Operating Agreement modifying the rights and/or duties of the Manager shall require the Manager’s consent.

4.1 Commitment of Capital Contributions. The Manager shall take all reasonable steps to commit ninety-seven percent (97%) of Capital Contributions to Investments in Mortgage Loans, provided that under no circumstances may such commitment decrease below the applicable percentage in the NASAA Guidelines. The Company may invest in or purchase Mortgage Loans of such duration and on such real property and with such additional security as the Manager in its sole discretion shall determine, subject to Section 4.2. These Mortgage Loans may be senior to other mortgage loans on the real property, or junior to other mortgage loans on the real property, all in the sole discretion of the Manager.

4.2 Investment Policy. In making investments, the Manager shall follow the investment policy described in the prospectus and as set forth in this Agreement.


	4.3.1	The Company shall be permitted to invest in general partnerships or joint ventures (including entities in limited liability company and limited liability partnership form) with non-affiliates that own and operate one or more particular mortgages if the Company, alone or together with any publicly registered Affiliate of the Company meeting the requirements of paragraph 2 of this Section acquires a controlling interest in such a general partnership or joint venture, but in no event shall duplicate fees be permitted. For purposes of this paragraph, “controlling interest” means an equity interest possessing the power to direct or cause the direction of the management and policies of the general partnership or joint venture, include the authority to:


	(a)	Review all contracts entered into by the general partnership or joint venture that will have a material effect on its business or assets;

	(b)	Cause a sale of the mortgage or its interest therein subject in certain cases where required by the partnership or joint venture agreement, to limits as to time, minimum amounts, and/or a right of first refusal by the joint venture partner or consent of the joint venture partner;

	(c)	Approve budgets and major capital expenditures, subject to a stated minimum amount;

	(d)	Veto any sale of the mortgage, or, alternatively, to receive a specified preference on sale or proceeds; and

	(e)	Exercise a right of first refusal on any desired sale by the joint venture partner of its interest in the mortgage except for transfer to an Affiliate of the joint venture partner.


	4.3.2	The Company shall be permitted to invest in general partnership or joint ventures with other publicly registered Affiliates of the Company if all the following conditions are met:


	(a)	The Company and the Affiliate have substantially identical investment objectives.

	(b)	There are no duplicate fees.

	(c)	The compensation to the managers is substantially identical in each entity.

	(d)	Each company must have a right of first refusal to buy if the other company wishes to sell assets held in the joint venture.

	(e)	The investment of each company is on substantially the same terms and conditions.


	(f)	It is disclosed in the prospectus that there is a potential risk of impasse on joint venture decisions since no company controls and the potential risk that while a company may have the right to buy the asset from the partnership or joint venture, it may not have the resources to do so.


	4.3.3	The Company shall be permitted to invest in general partnerships or joint ventures with Affiliates other than publicly registered Affiliates of the Company only under the following conditions:


	(a)	The investment is necessary to relieve the Manager from any commitment to purchase a mortgage entered into in compliance with paragraph 1 of Section 4.4 prior to the closing of the offering period of the Company;

	(b)	There are no duplicate fees;

	(c)	The investment of each entity is on substantially the same terms and conditions;

	(d)	The Company provides for a right of first refusal to buy if the Company wishes to sell a mortgage held in the joint venture;

	(e)	The prospectus discloses the potential risk of impasse on joint venture decisions.


	4.3.4	Other than as specifically permitted in paragraphs 2 and 3 of Section 4.3, the Company shall not be permitted to invest in general partnerships or joint ventures with Affiliates.

	4.3.5	The Company shall be permitted to invest in general partnership interests of limited partnerships only if the Company, alone or together with any publicly registered Affiliate of the Company meeting the requirements of Section 4.3.2 above, acquires a “controlling interest” as defined in Section 4.3.1 above, no duplicate fees are permitted, no additional compensation beyond that permitted in Article 14 of this Agreement, shall be paid to the Manager , and the Company agreement shall comply with this section.

	4.3.6	A company that is an “upper-tier company” shall be permitted to invest in interests of other companies (the “lower-tier companies”) only if all of the following conditions are met.


	(a)	If the manager of the lower-tier company is a manager of the upper-tier company, the company agreement of the upper-tier company shall:


	(i)	prohibit the company from investing in such lower-tier company unless the company agreement of the lower-tier company contains provisions complying with NASAA Guidelines and provisions acknowledging privity between the lower-tier company and the members, and

	(ii)	provide that compensation payable in the aggregate from both tiers shall not exceed the amounts permitted under Article 14.


	(b)	If the manager of the lower-tier company is not a manager of the upper-tier company, the company agreement of the upper-tier company shall prohibit that company from investing in the lower-tier company unless the company agreement of the lower-tier company contains provisions complying with NASAA Guidelines; and shall provide that the compensation payable at both tiers shall not exceed the amounts permitted in Article 14.

	(c)	Each lower-tier company shall have as its members only publicly registered upper-tier companies, provided, however, that special limited partners (or members holding comparable interests) not affiliated with the manager shall be permitted if the interest taken result in no diminution in the control exercisable by the other members.

	(d)	No company may be structure with more than two tiers.

	(e)	The company agreement of the upper-tier company must contain a prohibition against duplicate fees.


	(f)	The company agreement of the upper-tier company must provide that the members in the upper-tier company can, upon the vote of the majority in interest and without the concurrence of the manager, direct the manager of the upper-tier company (acting on behalf of the upper-tier company) to take any action permitted to a member (e.g. the upper-tier company) in the lower-tier company.


	(g)	The prospectus must fully and prominently disclose the two-tiered arrangement and any risks related thereto.


	4.3.7	Notwithstanding the above-stated sections, if the manager of the lower-tier company is not a manager of the upper-tier company, an upper-tier company may invest in a lower-tier company that holds a particular mortgage to be qualified pursuant to the Internal Revenue Code of 1986, Section 42(g) as amended, if members in both tiers are provided all of the rights and obligations required by Section VII. of the NASAA Guidelines and the company agreement of the upper-tier company agreement contains a prohibition against payment of duplicate fees.

4.4 Sales of Mortgages to the Company. The Company shall not acquire a mortgage in which the Manager has an interest except as set forth below:


	4.4.1	The Manager may acquire a mortgage in its own name and temporarily hold title thereto for the purpose of facilitating the acquisition of such mortgage, provided that such mortgage is purchased by the Company for a price no greater than the cost of such mortgage to the Manager, except compensation payable in accordance with Article 14 of this Agreement, and provided there is no other benefit arising out of such transaction to the Manager apart from compensation otherwise permitted by the NASAA Guidelines. Accordingly, all income generated and expenses associated with a mortgage so acquired shall be treated as belonging to the Company. The Manager shall not sell a mortgage to the Company pursuant to this section if the cost of the mortgage exceeds the funds reasonably anticipated to be available to the Company to purchase the mortgage.

	4.4.2	The purchase is made from a publicly registered affiliate pursuant to the rights of first refusal as set forth in the prospectus under “Acquisition and Investment Policies— Participation.” In such a case the purchase price should be no more than fair market value as determined by an independent appraisal.

4.5 Sales of Mortgages to the Manager. The Company shall not sell a mortgage to the Manager unless all of the following criteria are met:


	4.5.1	The Company does not have sufficient offering proceeds available to retain the mortgage (or contract rights related thereto);


	4.5.2	The Manager will purchase all mortgages (or contract rights) that the Company does not have sufficient proceeds to retain, as set forth in the prospectus;

	4.5.3	The Manager will pay the Company an amount in cash equal to the cost of the mortgage (or contract rights) to the Company (including all cash payments and carrying costs related thereto);

	4.5.4	The Manager assumes all of the Company’s obligations and liabilities incurred in connection with the holding of the mortgage (or contract rights) by the Company;

	4.5.5	The sale to the Manager occurs not later than 90 days following the termination date of the offering;

	4.5.6	The Manager will use the methodology as set forth in the prospectus in determining which mortgage it will purchase in the event that the Company’s offering proceeds are insufficient to retain all mortgages.

4.6 Dealing with Related Companies. The Company shall not acquire a mortgage from, or sell a mortgage to a company in which the Manager has an interest..

4.7 Sales of Foreclosed Properties. The Company shall not sell a foreclosed property to the Manager or to a company in which the Manager has an interest.


	4.8.1	No loans may be made by the Company to the Manager of an Affiliate, except as provided in paragraph 2 of Section 4.8, as set forth below.

	4.8.2	The Company may provide mortgage loans to lenders formed by or affiliated with the Manager in those circumstances in which such activities have been fully justified to the state regulatory body. These Affiliated transactions must at the minimum meet the following conditions:


	(a)	The circumstances under which the loans will be made and the actual terms of the loans must be fully disclosed in the prospectus; or

	(b)	An independent and qualified adviser must issue a letter of opinion to the effect that any proposed loan to an Affiliate of the Company is fair and at least as favorable to the Company as a loan to an unaffiliated borrower in similar circumstances. In addition, the Manager will be required to obtain a letter of opinion from the independent adviser in connection with any disposition, renegotiation, or other subsequent transaction involving loans made to the Manager or Affiliate of the Manager. The independent adviser must be identified in the initial prospectus. The independent adviser’s compensation must be paid by the Manager and not be reimbursable by the Company;

	(c)	Loans made to third parties, the proceeds of which are used to purchase or refinance a property or other asset in which the Manager of an Affiliate has an equity or security interest, must meet the requirements of subparagraph (a) and (b) as set forth above.

5.1 Capital Contribution by Manager. The Manager (in its capacity as the Initial Member) shall contribute to the capital of the Company such amount as it deems appropriate; provided that the Manager shall be deemed to have contributed to the capital of the Company an amount equal to expenses of the Company incurred in connection with the Offering up to 2% of the aggregate capital contributions to the Company, provided that, in no event shall such amount exceed $1,100,000, to the extent such expenses are paid by the Manager to non-affiliated parties.

5.2 Contributions of Other Members. Members other than the Manager shall acquire units in accordance with the terms of the Subscription Agreement or any future subscription materials approved by the Manager. The names, addresses, date of admissions and Capital Contributions of the Members shall be set forth in a schedule maintained by the Manager. The Manager shall update the schedule to reflect the then-current ownership of units (and Interests) without any further need to obtain the consent of any Member, and the schedule, as revised from time to time by the Manager, shall be presumed correct absent manifest error. Any member shall have a right to inspect such schedule upon written request to the Manager.

5.3 Interest. No interest shall be paid on, or in respect of, any contribution to Company Capital by any Member, nor shall any Member have the right to demand or receive cash or other property in return for the Member’s Capital Contribution, subject to Article 11 hereof.

5.4 Loans from Members and Affiliates of Members. Any Member or Affiliate of a Member may, with the written consent of the Manager, lend or advance money to the Company. If the Manager or, with the written consent of the Manager, any Member shall make any loans to the Company or advance money on its behalf, the amount of any loan or advance shall not be treated as a contribution to the capital of the Company, but shall be a debt due from the Company. The amount of any loan or advance by a lending Member or an Affiliate of a Member shall be repayable out of the Company’s cash and shall bear interest at a rate of not in excess of the lesser of (i) the prime rate established, from time to time, by any major bank selected by the Manager for loans to the bank’s most creditworthy commercial borrowers, plus five percent (5%) per annum, or (ii) the maximum rate permitted by applicable law. The inability of the Company to obtain more favorable loan terms shall be a condition to obtaining such loans from a Member or affiliate of a Member. None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company. This section shall be subject to the Company’s Investment Policy as it relates to transactions with the Manager or its Affiliates.

5.5 Loans from the Manager. On any loans made available to the Company by the Manager, the Manager may not receive any interest or similar charges or fees in excess of the amount which would be charged by unrelated lending institutions on comparable loans for the same purpose, in the same locality of the property if the loan is made in connection with a particular property. No prepayment charge or penalty shall be required by the Manager on a loan to the Company secured by either a first or junior or all- inclusive trust deed, mortgage, or encumbrance on the property, except to the extent that such prepayment charge or penalty is attributable to the underlying encumbrance.

6.1 No Participation in Management. Except as expressly provided in this Agreement, no Member shall take part in the conduct or control of the Company’s business or have any right or authority to act for or bind the Company.

6.2 Rights and Powers of Members. In addition to the rights of the Members to remove and replace the Manager and as otherwise provided for in Section 3.2, the Members shall have the right to vote upon and take any of the following actions upon the approval of a Majority, without the concurrence of the Manager, and an affirmative vote of a Majority shall be required to allow or direct the Manager to:


	6.2.1	Dissolve and windup the Company before the expiration of the term of the Company;

	6.2.2	Amend this Agreement, subject to the rights to the Manager granted in Section 15.4 of this Agreement and subject also to the prior consent of the Manager if either the distributions due to the Manager or the duties of the Manager are affected;

	6.2.3	Merge the Company or sell all or substantially all of the assets of the Company, otherwise than in the ordinary course of its business.

	6.2.4	Change the nature of the Company’s business; and


	6.2.5	Elect to continue the business of the Company other than in the circumstances described in Section 3.8 of this Agreement.


	6.3.1	The Members may hold meetings of Members within or outside the State of Nevada at any place selected by the Person or Persons calling the meeting. If no other place is stated, meetings shall be held at the Company’s principal place of business as established in accordance with Section 1.3 of this Agreement. The Members may approve by written consent of a Majority any matter upon which the Members are entitled to vote at a duly convened meeting of the Members, which consents will have the same effect as a vote held at a duly convened meeting of the Members.

	6.3.2	The Manager, or Members representing more than ten percent (10%) of the outstanding Interests for any matters on which the Members may vote, may call a meeting of the Company. If Members representing the requisite Interests present to the Manager a statement requesting a Company meeting, or the Manager calls the meeting, the Manager shall fix a date for a meeting and shall (within ten (10) days after receipt of a statement, if applicable) give personal or mailed notice or notice by any other means of written communication, addressed to each Member at the respective address of the Member appearing on the books of the Company or given to the Company for the purpose of notice, not less than fifteen (15) or more than sixty (60) days before the date of the meeting, to all Members of the date, place and time of the meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Company shall be held at 2:00 p.m. local time at the principal office of the Company.

	6.3.3	Members may vote in person or by proxy. A Majority, whether present in person or by proxy, shall constitute a quorum at any meeting of Members. Any question relating to the Company which may be considered and acted upon by the Members may be considered and acted upon by vote at a Company meeting, and any vote required to be in writing shall be deemed given if approved by a vote by written ballot.

6.4 Limited Liability of Members. Units are non-assessable. No Member shall be personally liable for any of the expenses, liabilities, or obligations of the Company or for any Losses beyond the amount of the Member’s Capital Contribution to the Company and the Member’s share of any undistributed net income and gains of the Company.

6.5 Access to Books and Records. The Members and their designated representatives shall have access to books and records of the Company during the Company’s normal business hours. An alphabetical list of the names, addresses and business telephone numbers, to the extent such are available, of all Members together with the number of units held by each of them will be maintained as a part of the books and records of the Company. The Company shall make the list available on request to any Member or his representative for a stated purpose including, without limitation, matters relating to Members’ voting rights, tender offers, and the exercise of Members’ rights under federal proxy law. A copy of the Members list shall be mailed to any Member requesting it within ten business days of the request, although the Company may charge a reasonable amount for the copy work. The Member list shall be updated at least quarterly to reflect changes in the information contained therein.

If the Manager neglects or refuses to exhibit, produce or mail a copy of the Member list as requested, the Manager shall be liable to any Member requesting the list for the costs, including attorney fees, incurred by that Member for compelling the production of the list, and for actual damages suffered by the Member by reason of the refusal or neglect. However, the Company need not exhibit, produce or mail a copy of the Member list if the actual purpose and reason for the request therefor is to secure the list or other information for the purpose of selling the list or copies thereof, or of using it for a commercial purpose other than in the interest of the Person as a Member in the Company. The Manager may require the Person requesting the list to represent that the list is not requested for any commercial purpose. The

6.6 Representation of Company. Each of the Members hereby acknowledges and agrees that the attorneys representing the Company and the Manager and its Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Members in any respect at any time. Each of the Members further acknowledges and agrees that the attorneys shall have no obligation to furnish the Members with any information or documents obtained, received or created in connection with the representation of the Company, the Manager and its Affiliates.

7.1 Allocation of Profits and Losses. The Manager shall credit all Company Profits to and charge all Company Losses against the Members in proportion to their respective Interests. The Manager shall allocate to the Members all Profits and Losses realized by the Company during any month as of the close of business on the last day of each calendar month, in accordance with their respective Interests and in proportion to the number of days during the month that they owned the Interests (i.e., a weighted average Capital Account), without regard to Profits and Losses realized for time periods within the month.

7.2 Net Income Available For Distribution. The Company shall distribute Net Income Available for Distribution to Members according to the allocations provided for in Section 7.1, in cash to those Members who have on file with the Company their written election to receive cash distributions, as a pro rata share of the total Net Income Available for Distribution. The Company shall make these distributions monthly in proportion to the weighted average Capital Account of each Member during the preceding calendar month.

7.3 Net Proceeds. Net Proceeds may also be distributed to Members in cash or retained by the Company for other uses as set forth herein. Net Proceeds will be deemed to be distributed to the Members upon receipt by the Company thereof, regardless of whether any actual cash distributions of the Net Proceeds occur. Immediately thereafter, there shall be a deemed recontribution by each Member to the extent of the deemed distribution of Net Proceeds. The Company may use Net Proceeds to make new loans, improve or maintain properties acquired by the Company through foreclosure or to pay operating expenses. Distributions of Net Proceeds shall be in accordance with the allocations provided for in Section 7.1 above.

7.4 Cash Distributions Upon Dissolution. Upon dissolution and winding up of the Company, the Company shall thereafter distribute Net Income Available for Distribution and Net Proceeds available for distribution, if any, to the Members in accordance with the provisions of Section 12.3 of this Agreement.


	7.5.1	For purposes of this Agreement, a loss or allocation (or item thereof) is attributable to non-recourse debt which is secured by Company property to the extent of the excess of the outstanding principal balance of the debt (excluding any portion of the principal balance which would not be treated as an amount realized under Section 1001 of the Code and Treasury Regulation Section 1.1001-2 if the debt were foreclosed upon) over the adjusted basis of the property. This excess is called “Minimum Gain” (whether taxable as capital gain or as ordinary income) as more explicitly set forth in Treasury Regulation Sections 1.704-2(b)(2) and 1.704-2(d). Notwithstanding any other provision of Article 7, the allocation of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property will be allowed only to the extent that the allocation does not cause the sum of the deficit Capital Account balances of the Members receiving the allocations to exceed the Minimum Gain determined at the end of the Company’s taxable year to which the allocations relate. The balance of the losses shall be allocated to


		the Manager. Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the Minimum Gain at a time no later than the time at which the Minimum Gain is reduced below the sum of the deficit Capital Account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-2(f).

	7.5.2	If any Member receives any adjustments, allocations or distributions, not covered by Subsection 7.5.1, so as to result in a deficit Capital Account, items of Company income and gain shall be specially allocated to the Members in an amount and manner sufficient to eliminate the deficit balances in his Capital Account created by the adjustments, allocations or distributions as quickly as possible. This Section shall constitute a qualified income offset under Treasury Regulation Section 1.704-1(b)(2)(ii).

	7.5.3	For purposes of determining the Profits, Losses, Net Income Available for Distribution or any other items allocable to any period, these other items shall be determined on a daily, monthly, or other basis, as determined by the Manager using any permissible method under Section 706 of the Code and the Treasury Regulations thereunder.

	7.5.4	Notwithstanding Sections 7.1 and 7.2 hereof, (i) Net Losses, if any, allocable to the period before the admission of any additional Members under Section 5.2 hereof shall be allocated ninety-nine (99.0%) to the Manager and one percent (1.0%) to the Initial Member, and Net Income during that same period, if any, shall be allocated to the Manager, and (ii) Profits or Losses allocable to the period commencing with the admission of any additional Members and all subsequent periods shall be allocated under Section 7.1.

	7.5.5	Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Net Income or Net Losses, as the case may be, for the year.


	7.6.1	Income, gains, losses and deductions, as determined for Federal income tax purposes, for any Company asset which has a Gross Asset Value that differs from its adjusted basis for Federal income tax purposes shall, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the Company asset to the Company for Federal income tax purposes and its initial Gross Asset Value in accordance with Code Section 704(c) and the Treasury Regulations thereunder. In furtherance of the foregoing, it is understood and agreed that any income, gain, loss, or deduction attributable to Code Section 704(c) property shall be allocated to the Members in accordance with the traditional method of making Code Section 704(c) allocations, in accordance with Treasury Regulation ss.1.704-3(b).

	7.6.2	If the Gross Asset Value of any Company asset is adjusted under and under Section 2.17, subsequent allocations of income, gain, losses and deductions, as determined for Federal income tax purposes, for the Company asset shall, solely for Federal income tax purposes, take account of any variation between the adjusted basis of the Company asset for Federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder.

	7.6.3	Allocations under this Section 7.6 are solely for purposes of Federal, state and local income taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account.


	7.6.4	Except as otherwise set forth in this Agreement, any elections or other decisions relating to allocations under this Section 7.6 shall be made by the Manager, with the review and concurrence of the Company’s accountants, in a manner that reasonably reflects the purpose and intention of this Agreement.

7.7 Intent of Allocations. It is the intent of the Company that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those Sections, including the qualified income offset and minimum gain charge-back, which are hereby incorporated by reference. If, for whatever reasons, the Company is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the Manager is granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of Allocations and Distributions provided in this Agreement. The Manager shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate for the admission of Members to reflect Members’ interests in the Company at the close of the years.

7.8 Quarterly Valuation of Assets. For each of the Company’s Mortgage Investments and other investments, the Manager shall review the investments at the end of each calendar quarter and determine if a Writedown is required with respect thereto. The Manager shall cause the Company’s accountants, within thirty (30) days of the end of each calendar quarter, to verify that the Manager’s determination was made in compliance with generally accepted accounting principles. Any Writedown of an asset resulting from the valuation shall be effective on the last day of the respective calendar quarter during the term of this Agreement.

8.1 Members’ Reinvested Distributions. A Member may elect to participate in the Company’s Distribution Reinvestment Plan (the “Plan”) at the time of his purchase of units, by electing to do so in the Subscription Agreement executed by the Member. The Member’s participation in the Plan commences after the Company has accepted the Member’s Subscription Agreement. Subsequently, a Member may revoke any previous election or make a new election to participate in the Plan by sending written notice to the Company. The notice shall be effective for the month in which the notice is received, if received at least ten (10) days before the end of the calendar month. Otherwise the notice is effective the following month. The Company will not reinvest proceeds from a capital transaction unless the Company has sufficient funds to pay any state or federal income tax due to the disposition or refinancing of mortgages.

8.2 Purchase of Additional Units. Under the Plan, participating Members use distributions to purchase additional units at ten dollars ($10.00) per Unit. The Manager will credit units purchased under the Plan to the Member’s Capital Account as of the first day of the month following the month in which the Reinvested Distribution is made. If a Member revokes a previous election to participate in the Plan, subsequent to the month in which the Company receives the revocation notice, the Company shall make distributions in cash to the Member instead of reinvesting the distributions in additional in units.

8.3 Statement of Account. Within 30 days after the Reinvested Distributions have been credited to Members participating in the Plan, the Manager will mail to participating Members a statement of account describing the Reinvested Distributions received, the number of incremental units purchased, the purchase price per Unit (if other than ten dollars ($10.00) per Unit), and the total number of units held by the Member. Before the Members’ reinvestment of distributions in the Company, the Manager will also mail an updated prospectus or other updated disclosure document to each Member that fully describes the Plan, including the minimum investment amount, the type or source of proceeds which may be reinvested and the tax consequences of the reinvestment to the Members.

8.4 Continued Suitability Requirements. Each Member who is a participant in the Plan must continue to meet the investor suitability standards described in the Subscription Agreement and prospectus

(subject to minimum requirements of applicable securities laws) to continue to participate in reinvestments. It is the responsibility of each Member to notify the Manager promptly if he no longer meets the suitability standards set forth in the prospectus for a purchase of units in the offering. The Members acknowledge that the Company is relying on this notice in issuing the units, and each Member shall indemnify the Company if he fails to so notify the Company and the Company suffers any damages, losses or expenses, or any action or proceeding is brought against the Company due to the issuance of units to the Member.

8.5 Changes or Termination of the Plan. The terms and conditions of the Plan may be amended, supplemented, suspended or terminated for any reason by the Manager at any time by mailing notice thereof at least thirty (30) days before the effective date of the action to each participating Member at his last address of record.

9.1 Books and Records. The Manager shall cause the Company to keep the following:


	9.1.1	Complete books and records of account in which shall be entered fully and accurately all transactions and other matters relating to the Company;

	9.1.2	A current list setting forth the full name and last known business or residence address of the Manager and each Member which shall be listed in alphabetical order and stating his respective Capital Contribution to the Company and share in Profits and Losses;

	9.1.3	A copy of the filed Articles of Organization, and all amendments thereto;

	9.1.4	Copies of the Company’s federal, state and local income tax returns and reports, if any, for the six (6) most recent years;

	9.1.5	Copies of this Agreement, including all amendments thereto; and

	9.1.6	The financial statements of the Company for the three (3) most recent years.

All books and records shall be maintained at the Company’s principal place of business and shall be available for inspection and copying by, and at the sole expense of, any Member, or any Member’s duly authorized representatives, during the Company’s normal business hours.


	9.2.1	The Manager shall cause to be prepared at least annually, at the Company’s expense, audited financial statements prepared in accordance with generally accepted accounting principles and accompanied by a report thereon containing an opinion of an independent certified public accountant. The financial statements will include: an audited balance sheet, statements of income or loss, Members’ equity, and a statement of cash flows.

	9.2.2	The Company’s accounts will itemize the costs of any verification performed by them and may be reimbursed to the Manager by the Company only to the extent that the reimbursement when added to the costs for administrative services rendered does not exceed the competitive rate for the services as determined under Article 9.2.1.

	9.2.3	Notwithstanding the 120-day period specified in Section 9.2.3(b) below, the Manager shall cause to be prepared and distributed to the Members not later than 75 days after the close of each fiscal year of the Company all Company information necessary in the preparation of the Members’ federal income tax returns. Such information will include:


	(a)	a statement as to any transactions with the Manager or its Affiliates, and of fees, commissions, compensation and other benefits paid or accrued to the Manager or its


		Affiliates from the Company for the fiscal year completed, showing the amount paid or accrued to each recipient and the respective services performed; and

	(b)	a report identifying distributions from (i) Cash Flow during that year, (ii) Cash Flow for prior years that had been held as reserves, (iii) Net Proceeds, (iv) lease payments on net leases with builders and sellers, and (v) reserves from the gross proceeds of the Offering originally obtained from the Members. Copies of the aforementioned financial statements and reports shall be distributed to each Member within 120 days after the close of each taxable year of the Company.


	9.3.1	For each quarter in which the Company bought or invested in a Mortgage Loan or it or a borrower incurred placement or evaluation fees, and for so long as the proceeds of the Offering are not fully committed and/or returned to investors, at the Company’s expense, the Manager shall cause to be prepared a special report (which may be included in the quarterly report described below) which shall contain a statement listing:


	(a)	the amount of the Mortgage Loans purchased or invested in;

	(b)	the material terms of the loans;

	(c)	the identity of the borrower; and

	(d)	the real property securing the Mortgage Loan and the appraised value of that real property.

Copies of the statements shall be distributed to each Member within sixty (60) days after the end of the quarterly period.


	9.3.2	The Manager will supply to each Member the information required by Form 10-Q (if Form 10-Q is required to be filed with the Securities and Exchange Commission) within 45 days of the end of each quarterly period.

	9.3.3	If the Company is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, the Manager shall cause to be prepared, at Company expense, a quarterly report for each of the first three quarters in each fiscal year containing unaudited financial statements (consisting of a balance sheet, a statement of income or loss and a statement of cash flow) and a statement of other pertinent information regarding the Company and its activities during the period covered by the report. Copies of the statements and other pertinent information shall be distributed to each Member within 60 days after the close of each quarter. This report may be combined with the delivery of information described in the immediately preceding Section 9.3.2, subject to the 45-day period described therein.

9.4 Filings. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall also cause to be prepared and timely filed with and/or delivered to appropriate federal and state regulatory and administrative bodies and/or the Members applicable, all reports required to be filed with or delivered to those entities or Members under applicable law, including those described in the Company’s undertakings in any securities filing. The reports shall be prepared using the accounting or reporting basis required by the relevant regulatory bodies. The Company will provide a copy of the reports to each Member who requests one, without expense to the Member. The Manager, at Company expense, shall file, with the Administrators for the states in which this Company is registered, as required by these states, a copy of each report referred to under this Article 9.

9.5 Suitability Requirements. The Manager, at Company expense, shall maintain for a period of at least six years a record of the documentation indicating that a Member complies with the suitability standards set forth in the prospectus.


	9.6.1	Fiscal Year. The Company has previously adopted the Fiscal Year for tax and accounting purposes. Subject to the provisions of Section 706 of the Code and approval by the Internal Revenue Service and the applicable state taxing authorities, in the Manager’s sole discretion and without the approval of a Majority, from time to time the Manager may change the Company’s fiscal year to a period to be determined by the Manager.

	9.6.2	Method of Accounting. The Company shall continue to use the accrual method of accounting for both income tax purposes and financial reporting purposes.

	9.6.3	Adjustment of Tax Basis. Upon the transfer of an interest in the Company, the Company may, at the sole discretion of the Manager, elect under Code Section 754, to adjust the basis of the Company property as allowed by Sections 734(b) and 743(b) thereof.

	9.6.4	Tax Matters Partner. The Manager shall act as the “Tax Matters Partner” (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6234 of the Code and the Treasury Regulations thereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations thereunder to designate the Manager as the TMP.

10.1 Interest of Manager. A successor or additional Manager may be admitted to the Company as follows:


	10.1.1	With the consent of all Managers (should there be any manager other than the Manager) and a Majority, a manager may at any time designate one or more Persons to be a successor to it or to be an additional manager, in each case with the participation in the Manager’s Interest as they may agree upon, so long as the Company and the Members shall not be adversely affected thereby.

	10.1.2	Upon any sale or transfer of a manager’s Interest, if there is an additional or successor manager of the Company, the successor manager shall succeed to all the powers, rights, duties and obligations of the assigning Manager hereunder, and the assigning Manager shall thereupon be irrevocably released and discharged from any further liabilities or obligations of or to the Company or the Members accruing after the date of the transfer. The sale, assignment or transfer of all or any portion of the outstanding stock of the Manager, or of any interest therein, or an assignment of the Manager’s Interests for security purposes only, shall not be deemed to be a sale or transfer of the Manager’s Interests subject to the provisions of this Section 10.1.

10.2 Transfer of Member’s Interest. To the extent any of the following restrictions is not necessary to the Company, in the discretion of the Manager reasonably exercised, the Manager may eliminate or modify any restriction. Subject to the immediately preceding sentence, no assignee of the whole or any portion of a Member’s Interest in the Company shall have the right to become a substituted Member in place of his assignor, unless the following conditions are first met:


	10.2.1	No Member may transfer a fractional Unit, and no Member may transfer units where, as a result of the transfer, the Member would thereafter, own fewer than two hundred (200) units, except where the transfer occurs by operation of law;

	10.2.2	The assignor shall designate its intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the Manager;

	10.2.3	The transferring Member shall first obtain written consent of the Manager to the substitution. The Manager shall not unreasonably withhold its consent, but the Manager


		will withhold its consent to the extent necessary to prohibit transfers that could cause us to be classified as a publicly traded partnership. The Manager will also withhold consent if it determines that the sale or transfer will otherwise jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that the sale or transfer may violate any applicable securities laws (including any investment suitability standards);

	10.2.4	The assignor and assignee named therein shall execute and acknowledge any other instruments as the Manager may deem necessary or desirable to effect the substitution, including, but not limited to, a power of attorney;

	10.2.5	The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

	10.2.6	The assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses connected with the substitution, including but not limited to reasonable attorneys’ fees associated therewith; and

	10.2.7	The Company has received, if required by the Manager, a legal opinion satisfactory to the Manager that the transfer will not violate the registration provisions of the Securities Act of 1933, as amended, or any applicable state securities laws, which opinion shall be furnished at the Member’s expense.

Assignments complying with the above shall be recognized by the Company not later than the last day of the calendar month in which the written notice of assignment is received by the Company.

10.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained in this Agreement, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of Interests, and any proposed sale, assignment or transfer in violation of same shall be void and of no effect:


	10.3.1	No Member shall make any transfer or assignment of all or any part of his Interest if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Company for federal or Nevada state income tax (if any) purposes;

	10.3.2	Notice to California residents:


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


	10.3.3	Appropriate legends (including the legend above) under applicable securities laws shall be affixed to certificates evidencing the units and issued or transferred to purchasers in other states.

	10.3.4	No Member shall make any transfer or assignment of all or any of his Interest if the Manager determines that the transfer or assignment would result in the Company being classified as a “publicly traded partnership” with the meaning of Section 7704(b) of the Code or Regulations. To prevent that:


	(a)	The Manager will not permit trading of units on an established securities market within the meaning of Section 7704(b);

	(b)	The Manager will prohibit any transfer of units which would cause the sum of percentage interest in Company capital or profits represented by Interests that are


		sold or otherwise disposed of during any taxable year of the Company to exceed two percent (2%) of the total Interests in Company capital or profits; and

	(c)	The Manager will not permit any withdrawal of units except in compliance with the provisions of this Agreement.

11.1 Effect of Death or Legal Incompetency of a Member on the Company. The death or legal incompetency of a Member shall not cause a dissolution of the Company or entitle the Member or his estate to a return of his Capital Account.

11.2 Rights of Personal Representative. On the death or legal incompetency of a Member, his personal representative shall have all the rights of that Member for the purpose of settling his estate or managing his property, including the rights of assignment and withdrawal.

11.3 Withdrawal of Members Other than Manager. With the sole discretion of the Manager reasonably exercised, the Manager may modify, eliminate or waive any such limitation on the withdrawal rights of a member as set forth below, on a case by case basis or by class so long as the modifying, waiving, or elimination of the limitation does not: (a) adversely effect rights of the other members as a whole; or (b) result in the Company being classified as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code of Regulations. To withdraw, or partially withdraw from the Company, a Member must give written notice thereof to the Manager and may thereafter obtain the return, in cash, of his Capital Account, or the portion thereof as to which he requests withdrawal, within sixty-one (61) to ninety-one (91) days after written notice of withdrawal is delivered to the Manager, subject to the following limitations:


	11.3.1	Except with regard to the right of the personal representative of a deceased Member under Section 11.2 above, no notice of withdrawal shall be honored and no withdrawal made of or for any units until the expiration of at least one year from the date of purchase of those units in the offering, other than purchases by way of automatic reinvestment of Company distributions described in Article 8 of this Agreement;

	11.3.2	To assure that the payments to a Member or his representative do not impair the capital or the operation of the Company, any cash payments in return of an outstanding Capital Account shall be made by the Company only from Net Proceeds and Capital Contributions;

	11.3.3	The Member shall have the right to receive distributions of cash from their Capital Accounts only to the extent that funds described in Subsection 11.3.2 are available; the Manager shall not be required to establish a reserve fund for the purpose of funding the payments; the Manager shall not be required to use any other sources of Company funds other than those set forth in Section 11.3.2; the Manager shall not be required to sell or otherwise liquidate any portion of the Company’s Mortgage Investments or any other asset in order to make a cash distribution of any Capital Account under this Section 11.3;

	11.3.4	Subject to Section 7.3, during the ninety (90) days following receipt of written notice of withdrawal from a Member, the Manager shall not refinance any loans of the Company or reinvest any Net Proceeds or Capital Contributions in new loans or other non-liquid investment unless and until the Company has sufficient funds available in cash to distribute to the withdrawing Member the amount that he is withdrawing from his Capital Account;

	11.3.5	Subject to the restrictions on withdrawal contained in this Agreement, the amount to be distributed to any withdrawing Member shall be an amount equal to the amount of the


		Member’s Capital Account as of the date of the distribution, as to which the Member has given a notice of withdrawal under this Section 11.3, notwithstanding that the amount may be greater or lesser than the Member’s proportionate share of the current fair market value of the Company’s net assets;

	11.3.6	In no event shall the Manager permit the withdrawal during any calendar year of total amounts from the Capital Accounts of members that exceeds ten percent (10%) of the aggregate Interests, except upon the vote of the Members to dissolve the Company under this Agreement;

	11.3.7	Requests by Members for withdrawal will be honored in the order in which they are received by the Manager. If any request may not be honored, due to any limitations imposed by this Section 11.3 (except the one year holding limitation set forth in Subsection 11.3.1), the Manager will so notify the requesting Member in writing, whose request, if not withdrawn by the Member, will be honored if and when the limitation no longer is imposed; and

	11.3.8	If a Member’s Capital Account would have a balance of less than two thousand dollars ($2,000) following a requested withdrawal, the Manager, at its discretion, may distribute to the Member the entire balance in the account.

11.4 Withdrawal by Manager. The Manager may withdraw from the Company upon not less than 120 days written notice of the same to all Members, but only with the affirmative vote or consent of a Majority, as noted in Section 3.2. The withdrawing Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the withdrawal.

11.5 Payment to Terminated Manager. If the business of the Company is continued as provided elsewhere in this Agreement upon the withdrawal, removal, dissolution, or bankruptcy of the Manager, then the Company shall pay to the Manager a sum equal to all amounts then accrued and owing to the Manager. The Company may terminate the Manager’s interest in the Company by paying an amount equal to the then-present fair market value of the Manager’s interest in the Company, which the Company and Manager acknowledge is the outstanding Capital Account as of the date of the removal, withdrawal, dissolution or bankruptcy. If the business of the Company is not so continued, then the Manager shall receive from the Company the sums it would have received in the course of dissolving the Company and winding up its affairs, as provided in Section 12.2 below.

The method of payment to any terminated Manager must be fair and must protect the solvency and liquidity of the program. Where the termination is voluntary, the method of payment will be deemed presumptively fair where it provides for a non-interest bearing unsecured promissory note with principal payable, if at all, from distributions which the terminated Manager otherwise would have received under this Agreement had the Manager not terminated. Where the termination is involuntary, the method of payment will be deemed presumptively fair where it provides for an interest bearing promissory note coming due in no less than five years with equal installments each year.

12.1 Events Causing Dissolution. The Company shall dissolve upon occurrence of the earlier of the following events:


	12.1.1	The expiration of the term of the Company as stated in Section 1.6 of this Agreement;

	12.1.2	Upon the written consent of the Manager and any other Person who is then a manager, and the affirmative vote or consent of a Majority;


	12.1.3	The withdrawal, removal, dissolution or bankruptcy of the Manager, unless, if there is no remaining manager, a Majority agree in writing to continue the business of the Company and, within six months after the last remaining manager has ceased to be a manager, admit one or more managers who agree to such election and join the Company as managers.

12.2 Winding Up. Upon the occurrence of an event of dissolution, the Company shall immediately be dissolved, but shall continue until its affairs have been wound up according to the provisions of the Nevada Statutes. Upon dissolution of the Company, unless the business of the Company is continued as provided above, the Manager will wind up the Company’s affairs as follows:


	12.2.1	No new Mortgage Investments shall be invested in or purchased;

	12.2.2	The Manager(s) shall liquidate the assets of the Company as promptly as is consistent with recovering the fair market value thereof, either by sale to third parties or by servicing the Company’s outstanding Mortgage Investments in accordance with their terms;

	12.2.3	All sums of cash held by the Company as of the date of dissolution, together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be distributed in accordance with Section 12.3 below.

12.3 Order of Distribution of Assets. If the Company is dissolved under Section 12.1 above, the assets of the Company shall be distributed in accordance with Nevada Statutes Section 86.521.

12.4 No Recourse to Manager. Upon dissolution and winding up under the Nevada Statutes, each Member shall look solely to the assets of the Company for the return of his Capital Account, and if the Company assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return the amounts of the Capital Account of Members, Members shall have no recourse against the Manager or any other Member. The winding-up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Manager. The Manager is hereby authorized to do any and all acts and things authorized by law for these purposes. If the Manager becomes insolvent or bankrupt, dissolves, withdraws or is removed by the Members, the winding-up of the affairs of the Company and the distribution of its assets shall be conducted by the person or entity selected by a vote of a Majority, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes.

12.5 Compliance With Timing Requirements of Regulations. If the Company is “liquidated” within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g):


	12.5.1	Distributions shall be made under this Article 12 (if such liquidation constitutes a dissolution of the Company) or Article 7 hereof (if it does not) to the Manager and Members who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2); and

	12.5.2	if the Manager’s Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all taxable years, including the year during which such liquidation occurs), the Manager shall contribute to the capital of the Company the amount necessary to restore such deficit balance to zero in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3).

13.1 Roll-Up Transactions: Appraisal. If the Company proposes to enter into a Roll-Up transaction, an appraisal of all Company assets shall be obtained from a competent, Independent Expert. If the appraisal will be included in a prospectus to offer the securities of a Roll-Up entity to the Members, the appraisal shall be filed with the Securities and Exchange Commission and the states as an exhibit to the

Registration Statement for that offering. The Independent Expert will appraise the assets of the Company on a consistent basis, and conduct the appraisal based on an evaluation of the Company’s assets as of a date immediately before the announcement of the proposed Roll-Up. In performing the appraisal, the Independent Expert shall assume an orderly liquidation of the Company’s assets over a 12-month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Company and its Members. The Company shall include a summary of the Independent Expert’s appraisal, indicating all material assumptions underlying the appraisal, in a report to the Members regarding the proposed Roll-Up.

13.2 Members’ Rights in a Roll-Up. If a Roll-Up is effected as to the Company, the Roll-Up Entity making the offer to the Company shall offer to each Member who votes against the Roll-Up the choice of


	13.2.1	accepting the securities of the Roll-Up Entity that were offered in the proposed Roll-Up, or

	13.2.2	either (a) remaining as a Member of the Company and preserving its interests therein unchanged; or (b) receiving cash in an amount equal to the Member’s pro-rata share of the appraised Net Asset Value of the Company.

13.3 Limitations on Roll-Ups. The Company’s ability to participate in a Roll-Up is also subject to the following:


	13.3.1	The Company shall not participate in any proposed Roll-Up which would result in Members having voting rights in the Roll-Up Entity which are less than those provided in Section 6.2 of this Agreement.

	13.3.2	If the Roll-Up Entity is a corporation, the voting rights of the Members shall correspond to the voting rights provided in this Agreement to the extent reasonably possible.

	13.3.3	The Company will not participate in any proposed Roll-Up which includes provisions which would operate to materially impede or frustrate the accumulation of shares, units or other equity interests, however denominated, by any purchaser of the securities of the Roll-Up Entity (except to the minimum necessary to preserve the tax status of the Roll-Up Entity).

	13.3.4	The Company will not participate in any proposed Roll-Up which would limit the ability of a Member to exercise the voting rights of the securities of the Roll-Up Entity on the basis of the value of the Interest held by the Member.

	13.3.5	The Company will not participate in any proposed Roll-Up in which the Members’ rights as securities holders to access the records of the Roll-Up Entity will be less than those provided for in this Agreement or in which any of the costs of the Roll-Up transaction would be borne by the Company if the Roll-Up is not approved by necessary vote of the Members.

14.1 Compensation of the Manager and its Affiliates. The Company shall pay the Manager the compensation and permit the Manager to charge and collect the fees and other amounts from borrowers as set forth in the prospectus. The total amount of fees received by the Manager from borrowers in connection with making loans will not exceed the combined amount of Front-End Fees and other fees which would be permitted under the NASAA Guidelines if paid directly by the Company to the Manager. In addition to the foregoing, under no circumstances may the Manager receive any compensation not permitted under the NASAA Guidelines. The Company shall pay the Manager an annual management fee up to 0.25% of the aggregate Capital Contributions received pursuant to the Prospectus. Any amendment to this Operating Agreement modifying the Manager’s compensation or distribution to which the Manager


	14.2.1	All expenses of the Company shall be billed directly to and paid by the Company. The Manager may be reimbursed for the actual cost of goods and materials used for or by the Company and obtained from entities unaffiliated with the Manager. The Manager may be reimbursed for the administrative services necessary to the prudent operation of the Company provided that the reimbursement shall be at the lower of the Manager’s actual cost or the amount the Company would be required to pay to independent parties for comparable administrative services in the same geographic location. No reimbursement shall be permitted for services for which the Manager is entitled to compensation by way of a separate fee. Excluded from the allowable reimbursement (except those as set forth in the prospectus and in this Agreement) shall be:


	(a)	Rent of depreciation, utilities, capital equipment, other administrative items; and

	(b)	Salaries, fringe benefits, travel expenses, and other administrative items incurred or allocated to any Controlling Persons (as defined below) of the Manager or its Affiliates.


	14.2.2	The term “Controlling Person,” for the purpose of this section, includes by is not limited to, any Person, whatever their title, who performs functions for the Manager similar to those of:


	(a)	Chairman or member of the board of directors;

	(b)	Executive management, such as the president, vice-president or senior vice-president, corporate secretary, or treasurer;

	(c)	Senior management, such as the vice-president of an operating division who reports directly to executive management;

	(d)	Those holding 5.0% or more equity interest in the Manager of a Person having the power to direct of cause the direction of the Manager, whether through the ownership of voting securities, by contract, or otherwise.


	14.2.3	The annual Company report must contain a breakdown of the costs reimbursed to the Manager. Within the scope of the annual audit of the Manager’s financial statement, the independent certified public accountants must verify the allocation of such costs to the Company. The method of versification shall at minimum provide:


	(a)	A review of the time records of individual employees, the costs of whose services were reimbursed; and

	(b)	A review of the specific nature of the work performed by each such employee.


	14.2.4	The methods of verification shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the Manager’s independent certified public accountants consider appropriate in the circumstance. The additional costs of such verification will be itemized by said accountants on a company by company basis and may be reimbursed to the Manager by the Company in accordance with this paragraph only to the extent that such reimbursement when added to the cost for administrative services rendered does not exceed the competitive rate for such services as determined in this paragraph. The prospectus sets forth an estimate of such proposed expenses for the next fiscal year


		together with a breakdown by year of such expenses reimbursed to other similar funds formed by the Manager.

15.1 Covenant to Sign Documents. Each Member covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Company and to achieve its purposes, including, without limitation, any amendments to the Articles of Organization and any filings, records or publications necessary or appropriate under the laws of any jurisdiction in which the Company shall conduct its business.

15.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Members shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Members shall be addressed to the Members at the last address shown on the Company records. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 1.3 above or as hereafter changed as provided herein.

15.3 Right to Engage in Competing Business. Nothing contained in this Agreement shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for using for its own benefit information received as a consequence of the Manager’s management of the affairs of the Company. This Section 15.3 shall be subject in its entirety to the fiduciary duty of the Manager set forth in Section 3.4.

15.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority in accordance with Section 6.2; provided, however, that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Member or materially adversely affect any Member’s interest in Profits, Losses, Company assets, distributions, management rights or voting rights, except as agreed by that Member. In addition, and notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, if, in the reasonable judgment of the Manager, such amendment does not adversely affect the rights of the Members, including, without limitation, an amendment:


	15.4.1	to grant to Members (and not solely the Manager in its capacity as a Member) additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon them;

	15.4.2	to cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions for matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

	15.4.3	to conform this Agreement to applicable laws and regulations, including without limitation, federal and state securities and tax laws and regulations, and the NASAA Guidelines;

	15.4.4	in the form of a revision to or updating of Schedule A in accordance with Section 5.2 hereof; and

	15.4.5	to elect for the Company to be governed by any successor Nevada statute governing limited liability companies.

The Manager shall notify the Members within a reasonable time of the adoption of any amendment.

15.5 Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto regarding the subject matter contained herein.

15.6 Waiver. No waiver by any party hereto or any breach of, or default under, any provision of this Agreement by any party shall be construed or deemed a waiver of any breach of or default under any other provision of this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement for any future breach or default of the same provision of this Agreement.

15.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

15.8 Application of Nevada law. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of Nevada.

15.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement.

15.10 Number and Gender. Whenever the singular form is used in this Agreement it includes the plural when required by the context, and the masculine gender shall include the feminine and neuter genders.

15.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by Manager on behalf of the Members as their attorney-in-fact.

15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Company any right that it may have to maintain any action for partition for any property of the Company.

15.13 Defined Terms. All terms used in this Agreement which are defined in the prospectus shall have the meanings assigned to them in said prospectus, unless this Agreement shall provide for a specific definition in Article 2.

15.14 Binding on Assignees. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the provisions of Section 10.2, which control the assignment or other transfer of Company Interests.


	(1)	Subscription and related undertakings, representations and warranties: Please read carefully pages B-1 to B-5.


	•	Initial each representation contained in Section 3 on page B-2.

	•	Indicate in section 10 on page B-4 whether you want to reinvest distributions by purchasing additional units.

	•	Indicate in section 11 on page B-5 how you will own the units.


	•	Individual Subscribers. Complete page B-6.

	•	Entities other than Employee Benefit Plans. Complete page B-7.

	•	Employee Benefit Plans. Complete pages B-8 and B-9.


	(3)	Registration Information. Complete all information on page B-10.

	(4)	Signature Page. Complete and sign page B-11.

	(5)	Existing Members Only (for use after initial acquisition of units). After acquiring units, you only have to complete the one page form entitled “Additional Subscription Request” at page B-12.

B. Payment. All subscriptions should be for at least $2,000, corresponding to a minimum of 200 units (some states may have higher minimum requirements).

C. Questions. If you have any questions in completing this Subscription Agreement, please call Vestin Capital Inc. at (702) 876-1143.

D. Return of Documents. The Subscription Agreement should be returned to the following address:

1. SUBSCRIPTION. The undersigned investor (“Investor”) hereby applies to become a member in Vestin Fund II, LLC, a Nevada limited liability Company (the “Company”). The Investor subscribes $ for the purchase of units of limited liability interest in the Company (the “Units”), the price being $10.00 per Unit (with a 200 Unit minimum purchase). The undersigned agrees to purchase the number of Units stated above in accordance with the terms and conditions of the Amended and Restated Operating Agreement (the “Operating Agreement”), a copy of which is found at Exhibit A of the prospectus of the Company to which this agreement forms Exhibit B (the “Prospectus”). The Units which the Investor offers to purchase shall not be deemed issued to, or owned by, the Investor until: (a) the Investor has fully paid by certified or bank check or by wire transfer for such units, and (b) the Manager has in its sole discretion accepted all or any portion of Investor’s offer of purchase.

2. PAYMENT OF SUBSCRIPTION. The amount of the Investor’s subscription set forth above either (a) has already been delivered by wire transfer, to the account set forth below, or (b) is enclosed in the form of a certified or bank check.

The Investor acknowledges that the Manager can accept or reject all or any part of this subscription in its sole discretion, and that this offering may be terminated at any time by the Manager. If the Investor’s subscription is rejected in part, the funds delivered herewith, to the extent the application is so rejected, will be returned to Investor as soon as practicable without interest or deduction, except to the extent of any interest actually earned.

The offering by the Company will continue to seek to distribute a total of 50,000,000 units for $500,000,000.

3. REPRESENTATIONS BY THE INVESTOR. The Units as an investment involve a high degree of risk. Please read the “Risk Factors” beginning on page 10 of the Prospectus. In connection with the Investor’s investment described in Section 1 of this Subscription Agreement, the Investor represents and warrants to the Company and any relevant broker-dealers that the Investor:

PLEASE CONFIRM THE REPRESENTATIONS SET FORTH IN SECTIONS 3(a), 3(b) AND 3(c) BELOW BY PLACING YOUR INITIALS IN THE BLANKS FOLLOWING EACH REPRESENTATION.


	(a) has received the Prospectus five (5) days prior to the date of this Subscription Agreement;


	(b) acknowledges that no federal or state agency has made any finding or determination as to the fairness for public investment in, nor any recommendation nor endorsement of, the Units;


	(c) ILLIQUID INVESTMENT: acknowledges that it may not be possible readily to liquidate this investment;


	(i)	if financial suitability standards (i.e., based on net worth or income levels) are provided in Appendix A to this Subscription Agreement for the state in which the Investor is domiciled, the undersigned meets those financial suitability standards; or


	(ii)	IF NO FINANCIAL SUITABILITY STANDARDS ARE INCLUDED IN APPENDIX A FOR THE STATE IN WHICH THE INVESTOR IS DOMICILED, ONE OF THE FOLLOWING IS TRUE:


	(A)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $45,000, and an annual gross income of at least $45,000; or

	(B)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $150,000; or

	(C)	the undersigned is purchasing in a fiduciary capacity for a person meeting the requirements of either (i) or (ii) above; and


	(e) is under no disability with respect to entering into a contractual relationship with the Company, and, if the Investor is an individual, has attained the age of majority (as established in the state in which domiciled);

	(f) if a trustee, is the trustee for the trust on behalf of which it is purchasing the units, and has due authority to purchase Units on behalf of the trust;

	(g) fully indemnifies and holds harmless the Company, the Manager, and its affiliates from any and all claims, actions, causes of action, damages, and expenses (including legal fees and expenses) whatsoever which may result from a breach of any of the representations by Investor contained herein;

	(h) acknowledges that they have been advised to read the risk factors set forth in the Prospectus and to determine whether the investment corresponds to those stated in the Prospectus;

	(i) understands that the Company intends to be taxed as an association (partnership) and not as a corporation, and that, among other things, this may result in taxes being payable by the Investor even though the Company may not have distributed cash to the Investor.

	(j) understands that an investment in the Company will not, in itself, create a retirement plan (as defined in the Internal Revenue Code of 1986, as amended) for any investor and that, in order to create a retirement plan, an investor must comply with all applicable provisions of the Code.

4. PURCHASE BY FIDUCIARY. If the Investor is purchasing the Units subscribed for hereby in a fiduciary capacity, the above representations and warranties are to be deemed to have been made on behalf of the person(s) for whom the Investor is so purchasing except that such person(s) need not be over 18 years of age.

5. ADOPTION OF OPERATING AGREEMENT. The Investor hereby adopts, accepts, and agrees to be bound by all terms and provisions of the Operating Agreement (Exhibit A to the Prospectus) and to perform all obligations therein imposed upon a member with respect to Units to be purchased. By signing and completing the signature page of this Subscription Agreement, the undersigned agrees to become a Member in the Company upon acceptance of this Subscription Agreement by the Manager on behalf of the Company, and to pay the subscription price in full.

6. LIMITATION ON ASSIGNMENT. The Investor acknowledges that the Units may be assigned only as provided in the Operating Agreement and further acknowledges the restrictions on the Company’s repurchase or the Investor’s resale, transfer, or assignment of the Units set forth in the Operating Agreement and as described in the Prospectus.

7. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes, and appoints the Manager of the Company to be such person’s true and lawful attorney-in-fact with full power and


	(a) the Operating Agreement and the Articles of Organization, as well as any and all amendments thereto required under the laws of the State of Nevada or of any other state or which the Manager deems advisable to prepare, execute and file;

	(b) any other certificate, instrument or document, including Fictitious Business Name Statements, which may be required to be filed by the Company by any governmental agency or by the laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

	(c) any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted member, or the dissolution and termination of the Company, provided such continuation, admission, or dissolution and termination are in accordance with the terms of the Operating Agreement.


	(i) is a Special Power of Attorney coupled with an interest, is irrevocable, survives the death of the Investor and shall not be affected by the subsequent incapacity of the Investor;

	(ii) may be exercised by the Manager for each member by a facsimile signature of or on behalf of the Manager or by listing all of the members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

	(iii) shall survive the delivery of an assignment by a member of the whole or any portion of his interest; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted member, the Special Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling such person to execute, acknowledge, and file any instrument necessary to effect such substitution.

8. NOTIFICATION OF MANAGER. The Investor agrees to notify the Manager immediately if any of the foregoing statements made herein shall become untrue.

9. OPERATING AGREEMENT GOVERNS. In the event of any conflict between the provisions of the Operating Agreement and any instrument or document executed, acknowledged, filed or recorded by the Manager pursuant to this special power of attorney, the Operating Agreement will govern.

10. REINVESTMENT OF DISTRIBUTIONS. The Company maintains a Distribution Reinvestment Plan (the “Plan”) under which distributions of income of the Company may be reinvested for the purchase of additional Units, rather than being received in cash. See Prospectus, under “Summary of Operating Agreement, Rights of Members and Description of Units-Distribution Reinvestment Plan.” So long as Investor meets the suitability standards established by the Company and by the securities law administrator of the state in which Investor is domiciled, and subject to possible suspension or termination of the Plan by the Manager, as set forth in the Operating Agreement, the Investor will continue to participate in the Plan. The Investor may change his election at any time by written notice to the Company. Please choose one or the other of the two options by a check mark in the appropriate blank. If you check neither blank, you will be considered to have elected to receive your distributions in cash (Option B).


A.	Investor elects to participate in the Plan and receive additional Units rather than cash as distributions of Net Income from the Company.

B.	Investor elects not to participate in the Plan and to receive distributions of Net Income in cash.

11. OWNERSHIP OF UNITS. The Investor’s Units will be owned and should be shown on the Company’s records as follows:


	Check one:	o Individual Ownership o Joint Tenants with Right of Survivorship (all parties must sign) o Tenants in Common (all parties must sign) o Community Property (one signature required) o Custodian o Trust o Corporation o Partnership/ Limited Liability Company o Nonprofit Organization o IRA o Employee Benefit/ Profit Sharing Plans

If you have any questions in completing this Subscription Agreement, please call

Investor’s Net Worth, exclusive of home, furnishings, and automobiles (check appropriate range):

Are you subject to any regulatory or other constraints that may preclude or limit your participation in any potential Company investment?

Describe the Investor’s investments in the last five years and discuss who made the relevant investment decisions (director, officer, financial adviser, broker, accountant or attorney):

Please provide any other information that would help the Manager determine whether the Investor has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of an investment in the Units.

Is the Investor subject to any regulatory or other constraints that may preclude or limit the Investor’s participation in any potential Company investment?

Is the Plan an “employee benefit plan” within the meaning of Title I of ERISA (an “ERISA Plan”) with a fiduciary as defined in Section 3(21) of ERISA which is a bank, insurance company or registered investment adviser (other than an affiliate of the Manager), which fiduciary will decide whether to purchase Units?

If yes, provide details as to the nature of the Plan and the person making investment decisions on behalf of the Plan

Does the Plan permit participants to direct the investment of the contributions made to the Plan on their behalf?

The undersigned authorized signatory of the Plan hereby represents and warrants on behalf of the Plan that the answers to the following questions are true:


	Does the Manager or any of its employees or affiliates manage any part of the Plan’s investment portfolio on a discretionary basis?

Does the Manager or any of its employees or affiliates regularly give investment advice to the Plan?

Does the Manager or any of its employees or affiliates have an agreement or understanding, written or unwritten, with the investment director of the Plan under which the latter receives information, recommendations and advice concerning investments which are used as a primary basis for the Plan’s investment decisions?

Does the Manager or any of its employees or affiliates have an agreement or understanding, written or unwritten, with the investment director of the Plan under which the latter receives individualized investment advice concerning the Plan’s assets?

IF THE ANSWER TO ANY OF THESE IS “YES,” INDICATE WHETHER ALL OF THE REPRESENTATIONS AND WARRANTIES BELOW ARE TRUE BY INITIALING BELOW.


	The investment director of the Plan has studied the Prospectus and has made an independent decision to purchase Units solely on the basis thereof and without reliance on any other information or statements as to the appropriateness of this investment for the Plan.

	All the obligations and requirements of ERISA, including prudence and diversification, with respect to the investment of “plan assets” in the Company have been considered by the investment director of the Plan. The investment director and, if different, authorized signatory of the Plan understand that neither the Manager nor any of its affiliates: (a) has exercised any investment discretion or control with respect to the Plan’s purchase of any Units, (b) have authority, responsibility to give, or have given individualized investment advice with respect to the Plan’s purchase of any Units, or (c) are employers maintaining or contributing to such Plan.

	An investment in the Company conforms in all respects to the governing documents of the Plan.

	The person executing this Subscription Agreement on behalf of the Plan is a “fiduciary” of such Plan and trust and/or custodial account (within the meaning of Section 3(21)(A) of ERISA); the execution and delivery of this Subscription Agreement with respect to the Plan and trust and/or custodial account have been duly authorized; and investment in the Company conforms in all respect to laws applicable to the Plan and to the Plan documents; and in making this investment, the Plan, its fiduciaries and its investment director are aware of, and have taken into consideration, among other things, risk return factors and the anticipated effect of an investment in the Company on the diversification, liquidity and cash flow needs of the Plan and the projected effect of the investment in meeting the Plan’s funding objectives and have concluded that this investment is a prudent one.

	The Plan’s governing documents do not prohibit the Company from investing in specific securities or issues, including, but not limited to, securities which would be deemed to be “employer securities” with respect to the Plan as defined in Section 407 of ERISA.

	The Plan’s proxy voting guidelines do not apply to securities held by the Company.

	The Plan, its investment director and, if different, the person executing this Subscription Agreement fully understand the tax considerations and risks of this investment.

The full address to which any communications, distribution checks, and redemption checks, if applicable, should be sent (if different from registered address furnished in response to the preceding requirement) is:

If the proceeds of distributions or redemptions, if any, are to be electronically transferred rather than sent by check, the account to which such proceeds should be electronically transferred is:

BEFORE SIGNING THIS PAGE, HAVE YOU: (a) initialed the representations contained in Section 3 on page B-2, (b) indicated in Section 10 on page B-4 whether you want to reinvest distributions by purchasing additional Units, and (c) indicated in Section 11 on page B-5 how you will own the Units? If not, please do so.

The undersigned hereby subscribes for the additional amount set forth above upon the terms and conditions described in the Confidential Private Offering Memorandum. The undersigned restates all of the covenants, representations and warranties made in the undersigned’s original Subscription Agreement as if they were made on the date hereof and certifies that all of the financial information set forth in the undersigned’s original Subscription Agreement remains accurate and complete on the date hereof.

Various states have established suitability standards for individual investors and subsequent transferees different from and/or in addition to those set by the Company. These requirements are set forth below:


(a)	The issuer of any security upon which a restriction on transfer has been imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security.

(b)	It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except:


	(1)	to the issuer;

	(2)	pursuant to the order or process of any court;

	(3)	to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules;

	(4)	to the transferors ancestors, descendants or spouse or any custodian or trustee for the account of the transferor or the transferors ancestors, descendants or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferees ancestors, descendants or spouse;

	(5)	to the holders of securities of the same class of the same issuer;

	(6)	by way of gift or donation inter vivos or on death;

	(7)	by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned;

	(8)	to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or group;

	(9)	if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner’s written consent is obtained or under this rule is not required;


	(10)	by way of a sale qualified under Sections 25111, 25112, or 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;

	(11)	by a corporation to a wholly-owned subsidiary of such corporation, or by a wholly-owned subsidiary of a corporation to such corporation;

	(12)	by way of an exchange qualified under Section 25111, 25112, or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25148 is in effect with respect to such qualification;

	(13)	between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state;

	(14)	to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or

	(15)	by the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state, if, in either such case, such person (i) discloses to


		potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser;

	(16)	by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities, provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.


(c)	The certificate representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows:

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


	(1)	Subscription and related undertakings, representations and warranties: Please read carefully pages C-1 to C-4.


	•	Initial each representation contained in Section 3 on pages C-2 and C-3.

	•	Indicate in section 9 on page C-4 whether you want to reinvest distributions by purchasing additional units.

	•	Indicate in section 10 on page C-4 how you will own the units.


	•	Individual Subscribers. Complete page C-5.

	•	Entities other than Employee Benefit Plans. Complete page C-6.

	•	Employee Benefit Plans. Complete pages C-7 and C-8.


	(3)	Registration Information. Complete all information on page C-9.

	(4)	Signature Page. Complete and sign page C-10.

	(5)	Existing Members Only (for use after initial acquisition of units). After acquiring units, you only have to complete the one page form entitled “Additional Subscription Request” at page C-11.

B. Payment. All subscriptions should be for at least $2,000, corresponding to a minimum of 200 units (some states may have higher minimum requirements).

C. Questions. If you have any questions in completing this Subscription Agreement, please call Vestin Capital Inc. at (702) 876-1143.

D. Return of Documents. The Subscription Agreement should be returned to the following address:

1. SUBSCRIPTION. The undersigned investor (“Investor”) hereby applies to become a member in Vestin Fund II, LLC, a Nevada limited liability Company (the “Company”). The Investor subscribes $ for the purchase of units of limited liability interest in the Company (the “Units”), the price being $10.00 per Unit (with a 200 Unit minimum purchase). The undersigned agrees to purchase the number of Units stated above in accordance with the terms and conditions of the Amended and Restated Operating Agreement (the “Operating Agreement”), a copy of which is found at Exhibit A of the prospectus of the Company to which this agreement forms Exhibit C (the “Prospectus”). The Units which the Investor offers to purchase shall not be deemed issued to, or owned by, the Investor until: (a) the Investor has fully paid by certified or bank check or by wire transfer for such units, and (b) the Manager has in its sole discretion accepted all or any portion of Investor’s offer of purchase. No federal or state agency has made any finding or determination as to the fairness for public investment in, nor any recommendation nor endorsement of, the Units.

The offering by the Company will continue to seek to distribute a total of 50,000,000 units for $500,000,000.

PLEASE CONFIRM THE REPRESENTATION SET FORTH IN EACH OF THE SECTIONS BELOW BY PLACING YOUR INITIALS IN THE BLANKS FOLLOWING EACH REPRESENTATION.


	(a) has received the Prospectus;

	(b) ILLIQUID INVESTMENT: acknowledges that it may not be possible readily to liquidate this investment;

	(c) meets the following criteria:


	(i)	if financial suitability standards (i.e., based on net worth or income levels) are provided in Appendix A to this Subscription Agreement for the state in which the Investor is domiciled, the undersigned meets those financial suitability standards; or


	(ii)	IF NO FINANCIAL SUITABILITY STANDARDS ARE INCLUDED IN APPENDIX A FOR THE STATE IN WHICH THE INVESTOR IS DOMICILED, ONE OF THE FOLLOWING IS TRUE:



	(1)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $45,000, and an annual gross income of at least $45,000; or



	(2)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $150,000; or



	(3)	the undersigned is purchasing in a fiduciary capacity for a person meeting the requirements of either (1) or (2) above; and



	(1)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $60,000, and an annual gross income of at least $60,000; or



	(2)	the undersigned has a minimum net worth (exclusive of home, furnishings, and automobiles) of $225,000; or



	(3)	the undersigned is purchasing in a fiduciary capacity for a person meeting the requirements of either (1) or (2) above; and


	(d) if a trustee, is the trustee for the trust on behalf of which it is purchasing the units, and has due authority to purchase Units on behalf of the trust;

	(e) fully indemnifies and holds harmless the Company, the Manager, and its affiliates from any and all claims, actions, causes of action, damages, and expenses (including legal fees and expenses) whatsoever which may result from a breach of any of the representations by Investor contained herein;

6. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes, and appoints the Manager of the Company to be such person’s true and lawful attorney-in-fact with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file, as necessary or appropriate:


	(a) the Operating Agreement and the Articles of Organization, as well as any and all amendments thereto required under the laws of the State of Nevada or of any other state or which the Manager deems advisable to prepare, execute and file;

	(b) any other certificate, instrument or document, including Fictitious Business Name Statements, which may be required to be filed by the Company by any governmental agency or by the


	laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

	(c) any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted member, or the dissolution and termination of the Company, provided such continuation, admission, or dissolution and termination are in accordance with the terms of the Operating Agreement.


	(i) is a Special Power of Attorney coupled with an interest, is irrevocable, survives the death of the Investor and shall not be affected by the subsequent incapacity of the Investor;

	(ii) may be exercised by the Manager for each member by a facsimile signature of or on behalf of the Manager or by listing all of the members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

	(iii) shall survive the delivery of an assignment by a member of the whole or any portion of his interest; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted member, the Special Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling such person to execute, acknowledge, and file any instrument necessary to effect such substitution.

7. NOTIFICATION OF MANAGER. The Investor agrees to notify the Manager immediately if any of the foregoing statements made herein shall become untrue.

8. OPERATING AGREEMENT GOVERNS. In the event of any conflict between the provisions of the Operating Agreement and any instrument or document executed, acknowledged, filed or recorded by the Manager pursuant to this special power of attorney, the Operating Agreement will govern.

9. REINVESTMENT OF DISTRIBUTIONS. The Company maintains a Distribution Reinvestment Plan (the “Plan”) under which distributions of income of the Company may be reinvested for the purchase of additional Units, rather than being received in cash. See Prospectus, under “Summary of Operating Agreement, Rights of Members and Description of Units-Distribution Reinvestment Plan.” So long as Investor meets the suitability standards established by the Company and by the securities law administrator of the state in which Investor is domiciled, and subject to possible suspension or termination of the Plan by the Manager, as set forth in the Operating Agreement, the Investor will continue to participate in the Plan. The Investor may change his election at any time by written notice to the Company. Please choose one or the other of the two options by a check mark in the appropriate blank. If you check neither blank, you will be considered to have elected to receive your distributions in cash (Option B).


A.	Investor elects to participate in the Plan and receive additional Units rather than cash as distributions of Net Income from the Company.

B.	Investor elects not to participate in the Plan and to receive distributions of Net Income in cash.

10. OWNERSHIP OF UNITS. The Investor’s Units will be owned and should be shown on the Company’s records as follows:

If you have any questions in completing this Subscription Agreement, please call

Investor’s Net Worth, exclusive of home, furnishings, and automobiles (check appropriate range):

Describe your investments in the last five years and discuss who made the relevant investment decisions (you, your financial adviser, broker, accountant or attorney): &n bsp;

Are you subject to any regulatory or other constraints that may preclude or limit your participation in any potential Company investment?

Is the Investor subject to any regulatory or other constraints that may preclude or limit the Investor’s participation in any potential Company investment?

If yes, provide details as to the nature of the Plan and the person making investment decisions on behalf of the Plan


	Does the Plan permit participants to direct the investment of the contributions made to the Plan on their behalf?

The undersigned authorized signatory of the Plan hereby represents and warrants on behalf of the Plan that the answers to the following questions are true:


	Does the Manager or any of its employees or affiliates manage any part of the Plan’s investment portfolio on a discretionary basis?

Does the Manager or any of its employees or affiliates regularly give investment advice to the Plan?

Does the Manager or any of its employees or affiliates have an agreement or understanding, written or unwritten, with the investment director of the Plan under which the latter receives individualized investment advice concerning the Plan’s assets?

IF THE ANSWER TO ANY OF THESE IS “YES,” INDICATE WHETHER ALL OF THE REPRESENTATIONS AND WARRANTIES BELOW ARE TRUE BY INITIALING BELOW.


	The investment director of the Plan has studied the Prospectus and has made an independent decision to purchase Units solely on the basis thereof and without reliance on any other information or statements as to the appropriateness of this investment for the Plan.

	All the obligations and requirements of ERISA, including prudence and diversification, with respect to the investment of “plan assets” in the Company have been considered by the investment director of the Plan. The investment director and, if different, authorized signatory of the Plan understand that neither the Manager nor any of its affiliates: (a) has exercised any investment discretion or control with respect to the Plan’s purchase of any Units, (b) have authority, responsibility to give, or have given individualized investment advice with respect to the Plan’s purchase of any Units, or (c) are employers maintaining or contributing to such Plan.

	An investment in the Company conforms in all respects to the governing documents of the Plan.

	The person executing this Subscription Agreement on behalf of the Plan is a “fiduciary” of such Plan and trust and/or custodial account (within the meaning of Section 3(21)(A) of ERISA); the execution and delivery of this Subscription Agreement with respect to the Plan and trust and/or custodial account have been duly authorized; and investment in the Company conforms in all respect to laws applicable to the Plan and to the Plan documents; and in making this investment, the Plan, its fiduciaries and its investment director are aware of, and have taken into consideration, among other things, risk return factors and the anticipated effect of an investment in the Company on the diversification, liquidity and cash flow needs of the Plan and the projected effect of the investment in meeting the Plan’s funding objectives and have concluded that this investment is a prudent one.

	The Plan’s governing documents do not prohibit the Company from investing in specific securities or issues, including, but not limited to, securities which would be deemed to be “employer securities” with respect to the Plan as defined in Section 407 of ERISA.

	The Plan’s proxy voting guidelines do not apply to securities held by the Company.

	The Plan, its investment director and, if different, the person executing this Subscription Agreement fully understand the tax considerations and risks of this investment.

If the proceeds of distributions or redemptions, if any, are to be electronically transferred rather than sent by check, the account to which such proceeds should be electronically transferred is:

BEFORE SIGNING THIS PAGE, HAVE YOU: (a) initialed the representations contained in Section 3 on pages C-2 and C-3, (b) indicated in Section 9 on page C-4 whether you want to reinvest distributions by purchasing additional Units, and (c) indicated in Section 10 on page C-4 how you will own the Units? If not, please do so.


(a)	The issuer of any security upon which a restriction on transfer has been imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security.

(b)	It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except:


	(1)	to the issuer;

	(2)	pursuant to the order or process of any court;

	(3)	to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules;

	(4)	to the transferors ancestors, descendants or spouse or any custodian or trustee for the account of the transferor or the transferors ancestors, descendants or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferees ancestors, descendants or spouse;

	(5)	to the holders of securities of the same class of the same issuer;

	(6)	by way of gift or donation inter vivos or on death;

	(7)	by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned;

	(8)	to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or group;

	(9)	if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner’s written consent is obtained or under this rule is not required;


	(10)	by way of a sale qualified under Sections 25111, 25112, or 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification;

	(11)	by a corporation to a wholly-owned subsidiary of such corporation, or by a wholly-owned subsidiary of a corporation to such corporation;

	(12)	by way of an exchange qualified under Section 25111, 25112, or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25148 is in effect with respect to such qualification;

	(13)	between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state;

	(14)	to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or

	(15)	by the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state, if, in either such case, such person (i) discloses to


		potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser;

	(16)	by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities, provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.


(c)	The certificate representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows:

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

The approximate expenses to be incurred in connection with this offering are as follows:

Indemnification of the Manager and its affiliates is provided for in Section 3.5 of the Operating Agreement, which is included as Exhibit A to the prospectus.

(a) Financial Statements: See “Index to Financial Statements” and the financial statements appearing thereafter in Part I of this registration statement.


	(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:


	(i) to include therein any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

	(ii) to reflect in any such prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase of decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

	(iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information.


	(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

	(3) That all post-effective amendments will comply with the applicable forms, rules and regulations of the Securities and Exchange Commission in effect at the time such post-effective amendments are filed.

	(4) To remove from registration by means of post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

	(5) To send to each limited partner at least on an annual basis a detailed statement of any transactions with the Manager or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to the Manager or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.

	(6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing


	provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

	(7) To provide to the Members the financial statements required by Form 10-K for the first full year of operations of the Company.

	(8) To file a sticker supplement pursuant to Rule 424(c) under the Act during the distribution period describing each property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing members. Each sticker supplement should disclose all compensation and fees received by the Manager and its affiliates in connection with any such acquisition. The post-effective amendment shall include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X only for properties acquired during the distribution period.

	(9) To file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of 10 percent or more (on a cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to the members at least once each quarter after the distribution period of the offering has ended.

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Registration Statement on Form S-11 and has duly caused this Post-Effective Amendment No. 4 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Las Vegas, Nevada, October 23, 2003.



	By: /s/ MICHAEL V. SHUSTEK



	Michael V. Shustek


	Director, Chairman of the Board and Chief Executive Officer

	(Principal Executive Officer of the
	Manager)

	By: /s/ LANCE K. BRADFORD

	Lance K. Bradford
	Director, Secretary and Treasurer
	(Principal Financial and Accounting Officer

	of the Manager)

II-5 EX-8.1 3 a93399a4exv8w1.txt EXHIBIT 8.1 Exhibit 8.1 (WENDEL, ROSEN, BLACK & DEAN LLP LETTERHEAD) October 20, 2003 Vestin Fund II, LLC 2901 El Camino Avenue, Suite 206 Las Vegas, NV 89102 RE: FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN VESTIN FUND II, LLC Ladies and Gentlemen: We have acted as tax counsel for Vestin Fund II, LLC, a Nevada limited liability company (the "Company") in connection with the preparation of the prospectus (the "Prospectus") for the Company to be filed with the Securities and Exchange Commission on or about October 20, 2003, pursuant to the Securities Act of 1933, as amended, (the "Act") as part of Post-Effective Amendment No. 4 (the "Post-Effective Amendment") to that certain Registration Statement on Form S-11 (the "Registration Statement"). This opinion as to certain material federal income tax aspects of an investment in the Company is being delivered at your request in connection with the disclosure requirements under the Act and will be filed as an exhibit to the Prospectus. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Post-Effective Amendment. In connection with our opinion, we have examined: (i) Post-Effective Amendment No. 4 to the Registration Statement and the Prospectus; (ii) the Operating Agreement for the Company that is attached as an exhibit to the Prospectus (the "Operating Agreement"); (iii) the certificate of the Manager (the "Certificate"), dated as of the date hereof; and (iv) such other documents and records pertaining to the organization and operation of the Company as we have considered necessary or appropriate as a basis for the opinions set forth below. In our examination we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such copies. As to any facts material to this opinion, we have relied solely upon: (i) the matters set forth in the Prospectus, (ii) the assumptions contained herein, and (iii) the representations and statements of the Manager, and its officers and representatives, including the facts set forth in the Certificate. We have not undertaken any independent investigation or verification as to any such factual matters. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 2 In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), Treasury Regulations promulgated thereunder (the "Regulations"), pertinent judicial and administrative authorities and interpretative rulings of the Internal Revenue Service (the "IRS"). As indicated in the substantive discussion which follows relative to the federal income tax consequences of an investment in the Company, as to certain issues, we are unable to express an opinion because of uncertainty in the law or for other reasons. Whenever a statement herein is qualified by the expressions "to our knowledge," "we are not aware" or a similar phrase or expression with respect to our knowledge of matters of fact, it is intended to mean our knowledge is based upon the documents, instruments and certificates described above and the current actual knowledge of the attorneys in this firm who are presently involved in substantive legal representation of the Company (but not including any constructive or imputed notice of any information) and that we have not otherwise undertaken any independent investigation for the purpose of rendering this opinion. Our opinion is subject to the limitations, qualifications, exceptions and assumptions set forth herein. Our opinion is limited to the matters discussed below. We give no opinion with respect to other tax matters, whether federal, state or local, that may relate to an investment in the Company. No ruling will be requested from the IRS regarding any of the material federal income tax issues discussed below. Our opinion is not binding on the IRS and does not constitute a guarantee that the IRS will not successfully challenge a Member's tax treatment of any aspect of any investment in the Company. We caution that our opinion is based on the federal income tax laws as they exist on the date hereof. It is possible that subsequent changes in the tax law could be enacted and applied retroactively to an investment in the Company and that such changes could result in a materially different result that the result described in this opinion. The opinions set forth below represent our conclusions based upon the documents reviewed by us, the facts and assumptions presented to us and stated herein. Any material amendments to such documents or changes in any significant fact or assumption stated herein or in the Certificate could affect the opinions expressed herein. We are of the opinion that: a. The Company will be classified as a partnership rather than as an association taxable taxable as a corporation for federal income tax purposes. b. The Company will not be classified as a "publicly traded partnership" for federal income tax purposes. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 3 In addition, unless otherwise expressly indicated, the discussion set forth below under the heading "Other Federal Income Tax Consequences" and in the Prospectus under the heading "Federal Income Tax Consequences" concerning other federal income tax matters constitutes our opinion as to the material federal income tax consequences of an investment in the Company by a Member. 1. THE COMPANY WILL BE CLASSIFIED AS A PARTNERSHIP As discussed in greater detail below, a limited liability company generally is not subject to federal income tax if it is classified as a partnership for federal income tax purposes, but rather each member is required to report on such member's federal income tax return the member's distributive share of the taxable income or loss of the Company for each year. Historically (i.e., prior to 1997), one of the more significant issues which had to be addressed in connection with a discussion of the material federal income tax consequences relative to a limited liability company formed to take advantage of the favorable tax treatment afforded to partnerships was whether such entity may be classified as an association taxable as a corporation for income tax purposes under the entity classification system that existed at that time. However, under Regulations promulgated in December 1996 (the so-called "Check-the-Box" Regulations), a domestic limited liability company with more than one member will be classified as a partnership for federal income tax purposes unless it makes an election to be classified as an association taxable as a corporation. See Regulation Section 301.7701-3(b)(3)(ii). The Company is a domestic limited liability company and if the minimum offering of Units described in the Prospectus is completed will have more than one member. The Manager has represented that it will not cause the Company to make an election to be classified as an association taxable as a corporation. Based on the foregoing and subject to the discussion which follows regarding the tax treatment of publicly traded partnerships, it is our opinion that that the Company will be classified as a partnership for federal income tax purposes. In light of the foregoing opinion, as the context requires in the discussion which follows: (i) the use of the term "partnership" will be construed to refer also to a limited liability company classified as a partnership for federal income tax purposes (e.g., the Company); (ii) the use of the term "partner" will be construed to refer also to a member of a limited liability company (e.g., a Member of the Company); and (iii) "partnership interest" or "interest in the partnership" or similar terms will be construed to refer also to the interest of a member in a limited liability company (e.g., the interest of a Member in the Company). 2. THE COMPANY WILL NOT BE CLASSIFIED AS A PUBLICLY TRADED PARTNERSHIP Section 7704 of the Code treats "publicly traded partnerships" as corporations for federal income tax purposes. Section 7704(b) of the Code defines the term "publicly traded partnerships" as any partnership (including a limited liability company classified as a partnership for federal income tax purposes) if the interests in such partnership are: (i) readily traded on an Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 4 established securities market; or (ii) readily tradable on a secondary market or the substantial equivalent thereof. In June 1988, the IRS issued Notice 88-75 which sets forth comprehensive guidance concerning the application of Section 7704 prior to the adoption of final Regulations under Section 7704. Notice 88-75 primarily addresses the issue of when partnership interests will be considered to be readily tradable on a secondary market or the substantial equivalent thereof under Section 7704(b). In November, 1995, the IRS issued final Regulations under Section 7704 (the "Final PTP Regulations"). See Regulation Section 1.7704-1. The Final PTP Regulations generally retain the conceptual framework of Notice 88-75, but contain a number of modifications. The Final PTP Regulations are generally effective for taxable years beginning after December 31, 1995. The Final PTP Regulations provide that an established securities market includes: (i) a national securities exchange registered under the Securities Exchange Act of 1934; (ii) a national securities exchange exempt from registration because of the limited volume of transactions; (iii) a foreign securities exchange; (iv) a regional or local exchange; and (v) an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers by electronic means or otherwise (i.e., an over-the-counter market). See Final PTP Regulations Section 1.7704-1(b). As indicated above, the primary focus of the Final PTP Regulations (and Notice 88-75) is on determining when partnership interests will be treated as "readily tradable on a secondary market or the substantial equivalent thereof." The Final PTP Regulations provide a number of safe harbors relative to this determination. Included as a safe harbor in the Final PTP Regulations is a safe harbor described under the heading "Lack of Actual Trading" (the "Lack of Actual Trading Safe Harbor"). The Lack of Actual Trade Safe Harbor provides that interests in a partnership will not be considered readily tradable on a secondary market or the substantial equivalent thereof within the meaning of Section 7704(b) of the Code if the sum of the percentage interests in partnership capital or profits that are sold or otherwise disposed of during the taxable year does not exceed 2% of the total interests in partnership capital or profits (the "Two Percent Safe Harbor"). As noted, certain transfers are disregarded for purposes of determining whether the Two Percent Safe Harbor is met under the Final PTP Regulations. For purposes of this safe harbor, the transfers which are disregarded include, but are not limited to: (i) transfers between family members, transfers at death, (ii) transfers in which the basis is determined under Section 732 of the Code, (iii) interests issued by the partnership for cash, property or services, and (iv) interests in the partnership which are redeemed pursuant to the "Redemption and Repurchase Safe Harbor" discussed below. The Final PTP Regulations contain a safe harbor for redemption and repurchase agreements (the "Redemption and Repurchase Safe Harbor"). This safe harbor provides that the transfer of an interest in a partnership pursuant to a "redemption or repurchase agreement" is Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 5 disregarded for purposes of determining whether interests in the partnership are readily tradable on a secondary market or the substantial equivalent thereof certain requirements are met. The Final PTP Regulations provide that a redemption or repurchase agreement means a plan of redemption or repurchase maintained by a partnership whereby the partners may tender their interests in the partnership for purchase by the partnership, another partner or certain persons related to another partner. See Section 1.7704-1(e)(3) of the Final Regulations. The requirements which must be met in order to disregard transfers made pursuant to a redemption or repurchase agreement are: (i) the redemption agreement requires that the redemption cannot occur until at least 60 calendar days after the partner notifies the partnership in writing of the partner's intention to exercise the redemption right; (ii) the redemption agreement requires that the redemption price not be established until at least 60 days after receipt of such notification by the partnership (or the price is established not more than 4 times during the partnership's taxable year); and (iii) the sum of the percentage interests in partnership capital and profits represented by partnership interests that are transferred (other than in transfers otherwise disregarded, as described above) during the taxable year of the partnership, does not exceed 10% of the total interests in partnership capital or profits. See Section 1.7704-1(f) of the Final PTP Regulations. The Operating Agreement provides that, subject to certain limitations, a Member may withdraw or partially withdraw from the Company and obtain the return of his outstanding capital account. These provisions of the Operating Agreement constitute a redemption or repurchase agreement within the meaning of the Final PTP Regulations. The limitations on a Member's right to withdraw his capital account set forth in the Operating Agreement include, without limitation: (i) a requirement that the withdrawal will not be made until at least 61 days after written notice of withdrawal is delivered to the Manager; (ii) the amount distributed to the withdrawing Member will be a sum equal to such Member's capital account as of the date of such distribution; and (iii) in no event will the Manager permit the withdrawal during any calendar year of more than 10% of the outstanding Member Units. In our opinion, these limitations satisfy the requirements of the Final PTP Regulations set forth above. The Operating Agreement provides that no transfer or assignment of a Member's interest in the Company may be made, if the Manager determines that such transfer or assignment would result in the Company being classified as a publicly traded partnership within the meaning of Section 7704(b) of the Code. To prevent such classification, the Operating Agreement provides that (i) the Company will not register Units or permit any other persons to register Units for trading on an established securities market within the meaning of Section 7704(b); (ii) the Manager will prohibit any transfer of Units which would cause the sum of percentage interests in Company capital or profits represented by Company interests that are transferred during any taxable year of the Company to exceed the limitation under the Two Percent Safe Harbor under the Final PTP Regulations (excluding for this purpose transfers which may be disregarded pursuant to the safe harbor); and (iii) the Manager will not permit during any fiscal year of the Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 6 Company any withdrawal of Units except in compliance with the provisions of the Operating Agreement. Based upon the provisions of the Operating Agreement and the representations of the Manager set forth in the Certificate, we are of the opinion that: (i) interests in the Company will not be traded on an established securities market within the meaning of Section 7704 of the Code; (ii) the operation of the Company with regard to the withdrawal by Members will qualify for the Redemption and Repurchase Safe Harbor; (iii) the operation of the Company with regard to the transfer of Units by Members will qualify for the Two Percent Safe Harbor; (iv) based on the opinions rendered in clauses (ii) and (iii) of this paragraph, interests in the Company will not be considered as readily tradable on a secondary market or the substantial equivalent thereof; and (v) based on the opinions rendered in clauses (i) through (iv) of this paragraph, the Company will not be classified as a publicly traded partnership for purposes of Section 7704 of the Code. It should be noted that a partnership which is classified as a publicly traded partnership under Section 7704 of the Code will not be treated as a corporation for federal income tax purposes if 90% or more of its gross income is "qualifying income." Section 7704(c) of the Code defines the term "qualifying income" for this purpose to include, among other "passive-type" items, interest, dividends, real property rents, and gains from the sale of real property, but excludes interest derived in the conduct of a financial business. If a publicly traded partnership is not taxed as a corporation because it meets the qualifying income test, the passive loss rules discussed below are applied separately to the partnership, and a tax-exempt partner's share of the partnership's gross income may be treated as income from an unrelated trade or business under the unrelated trade or business taxable income rules discussed below. It is not clear whether the Company would satisfy the "qualifying income" test of Section 7704(c). (As noted, this inquiry would be relevant only if it were determined that the Company should be classified as a publicly traded partnership.) It is anticipated that more than 90% of the Company's income will be of the passive-type included in the definition of "qualifying income" contained in Section 7704(c). However, it is not clear whether the Company would be considered to be engaged in the conduct of a financial business. If the Company were classified as a publicly traded partnership and considered to be engaged in a financial business, the Company would be treated as a corporation for federal income tax purposes. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 7 3. OTHER FEDERAL INCOME TAX CONSEQUENCES GENERAL PRINCIPLES OF PARTNERSHIP TAXATION A partnership generally is not subject to any federal income taxes. The Company will file, for federal income tax purposes, partnership information returns reporting its operations on the accrual basis for each taxable year. The taxable year of the Company will be the calendar year. The Company will provide Members with income tax information relevant to the Company and their own income tax returns, including each Member's share of the Company's taxable income or loss, if any, capital gain or loss (net short-term and net long-term) and other tax items for the Company's taxable year. Each Member that is not exempt from federal income tax will be required to report on his own income tax return the Member's share of the Company's items of income, gain, loss, deduction and credit. Accordingly, a Member will be subject to tax on his distributive share of the Company's taxable income whether or not any cash distribution is made to the Member. Because the Company will originate mortgage investments that may be subject to the "original issue discount" rules (see "Original Issue Discount Rules" below), it is possible that a Member's taxable income from the Company will exceed any cash distributed to the Member by the Company with respect to a particular year. It is anticipated that substantially all of the income generated by the Company will be taxed as ordinary income for federal income tax purposes. DETERMINATION OF BASIS IN UNITS In general, a Member will not be taxed on Company distributions unless such distributions exceed the Member's adjusted basis in his Units. A Member's adjusted basis in his Units is the amount originally paid for such interest increased by (i) his proportionate share of Company indebtedness with respect to which no partner is personally liable, (ii) his proportionate share of the Company's taxable income, and (iii) any additional contributions to the Company's capital by such Member, and decreased by (x) his proportionate share of losses of the Company, (y) the amount of cash, and fair value of noncash, distributions to such Member, and (z) any decreases in his share of any nonrecourse liabilities of the Company. Any increase in nonrecourse liabilities of the Company is treated as a cash contribution and a decrease in nonrecourse liabilities is treated as a cash distribution, even though the Member contributes or receives no cash, respectively. Distributions in excess of such basis generally will be treated as gain from the sale or exchange of a Member's interest in the Company. ALLOCATIONS OF PROFITS AND LOSSES The Members will receive allocations of the Company's profits and losses and cash distributions in the manner described in Article 7 of the Operating Agreement. Allocations of profits and losses under a partnership agreement will be recognized as long as they have "substantial economic effect" under the Regulations promulgated under Section 704(b) of the Code. In general, the Regulations provide that an allocation contained in a partnership agreement Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 8 will be respected if it satisfies the requirements of one of three tests: (i) it has "substantial economic effect" (the "substantial economic effect test"); (ii) it is in accordance with the partners' interest in the partnership (determined by taking into account all facts and circumstances) (the "partners' interest in the partnership test"); or (iii) it is "deemed" to be in accordance with the partners' interest in the partnership. The substantial economic effect test is a substantially objective test which effectively creates a safe harbor for compliance with the requirements of Section 704(b). However, in order to comply strictly with the requirements of that test, it would be necessary to include in the Operating Agreement a lengthy, intricate and complex set of provisions which may have little practical significance based on the Company's anticipated operations. As a result, and based also on the fact that a principal thrust of the Regulations under Section 704(b) is to prevent losses from being allocated for tax purposes to partners who do not bear the economic risk of loss associated with such allocations and that it is not anticipated that the operation of the Company and the allocation provisions of the Operating Agreement will ever produce a situation in which a Member will be allocated losses in excess of the economic losses actually borne by such Member, the Manager has decided not to include these complex provisions in the Operating Agreement and to rely instead on the partners' interest in the partnership test as the basis for justifying the allocations under the Operating Agreement. The allocations contained in the Operating Agreement are generally intended to match, insofar as practicable, the allocation of profits for tax purposes with the economic benefit of cash distributions among the Members and the allocation of losses with the related economic burden borne by the respective Members. In general, a Member's interest in profits, losses and cash distributions are proportionate to his capital account. Since the allocation of profits, losses and cash distributions under the Operating Agreement will be substantially proportionate to the capital accounts of the Members, in our opinion in most instances such allocations should be substantially in accordance with the "partners' interests in the partnership" within the meaning of this alternative test, and such allocations should be substantially respected for tax purposes. LIMITATIONS ON THE DEDUCTION OF LOSSES It is not anticipated that the Company will incur net losses for income tax purposes in any taxable year. However, if the Company were to incur losses in any year, the ability of a Member to deduct such losses would be subject to the potential application of the limitations discussed below. (i) The Basis Limitation Section 704(d) of the Code provides that a partner's share of partnership losses is allowed as a deduction only to the extent of his adjusted basis in his partnership interest at the end of the year in which the losses occur. Losses disallowed under Section 704(d) may be carried forward indefinitely until adequate basis is available to permit their deduction. Due to this limitation, a Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 9 Member in the Company will be precluded from deducting losses in excess of his adjusted basis in his Units. (ii) The At Risk Limitation Under Section 465 of the Code, a taxpayer (other than a widely-held corporation) may not deduct losses incurred in certain business activities, including the lending activities contemplated by the partnership, in an amount exceeding the aggregate amount the taxpayer is "at risk" in that activity at the close of his taxable year. The effect of these rules generally is to limit the availability of partnership tax losses as offsets against other taxable income of a partner to an amount equal to such partner's adjusted basis in his partnership interest excluding any portion of adjusted basis attributable to partnership nonrecourse indebtedness. In addition, the at risk amount does not include contributions by a partner to the extent the partner used the proceeds of a nonrecourse borrowing to make such contributions. (iii) The Passive Loss Rules Section 469 of the Code limits the deductibility of losses from "passive activities" for individuals, estates, trusts and certain closely-held corporations. A passive activity includes an activity which involves the conduct of a trade or business in which the taxpayer does not materially participate. Generally, losses from passive activities are only allowed to offset income from passive activities and will not be allowed to offset "portfolio" income, trade or business income or other nonpassive income such as wages or salaries. Suspended losses and credits attributable to passive activities are carried forward and treated as deductions and credits from passive activities in the next year. Suspended losses (but not credits) from a passive activity are allowed in full when the taxpayer disposes of his entire interest in the passive activity in a taxable transaction. The Regulations under Section 469 provide that in certain situations, net income, but not net loss from a passive activity (or a portion thereof) is treated as nonpassive. See Regulation Section 1.469-2T(f). One of the items covered by this Regulation is net income from an "equity-financed lending activity." An equity-financed lending activity is defined as an activity that involves a trade or business of lending money, if the average outstanding balance of liabilities incurred in the activity for the taxable year does not exceed 80% of the average outstanding balance of the interest-bearing assets held in the activity for such year. Based on the manner in which it is anticipated that the Company will conduct its operations, at no time will the average outstanding balance of Company liabilities exceed 80% of the average outstanding balance of the Company's interest earning assets. Consequently, if the Company is deemed to be engaged in the trade or business of lending money, such business will constitute an equity-financed lending activity, and income of the Company which arises from that trade or business and would otherwise be considered income from a passive activity will generally be recharacterized as nonpassive income, even though the net losses of the Company or loss on the sale of a Unit will be treated as passive activity losses. If the Company is not Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 10 considered engaged in a trade or business of lending money, then income and loss will be considered portfolio income and loss. In either event, a Member will not be permitted to offset passive losses from other activities against his share of the income of the Company. There are no cases or revenue rulings dealing with the question of establishing the criteria for determining whether an entity (other than a bank) is engaged in the ordinary conduct of a trade or business of lending money for purposes of Section 469. Presumably, this determination would be dependent, at least in part, on the facts and circumstances surrounding the Company's operations, including the number of loans made during any particular year. Due to this uncertainty, we cannot give an opinion as to whether the Company will be considered to be engaged in an equity-based lending activity for this purpose. Under Section 67(a) of the Code, most miscellaneous itemized deductions are deductible by an individual taxpayer only to the extent that, in the aggregate, they exceed 2% of the taxpayer's adjusted gross income; and are subject to additional limitations for certain high-income taxpayers. Deductions from a trade or business are not subject to these limitations. A Member's allocable share of the expenses of the Company will be considered miscellaneous itemized deductions subject to this 2% limitation only if the Company is not considered to be in the trade or business of lending money. COMPUTATION OF GAIN OR LOSS ON SALE OR REDEMPTION OF UNITS Gain or loss on the sale by a Member of his Units (including a redemption by the Company) will be measured by the difference between the amount realized (i.e., the amount of cash and the fair market value of property received), including his share of Company nonrecourse liabilities and his adjusted basis in such Units. CHARACTER OF GAIN OR LOSS Generally, gain recognized by a Member on the sale of Units which have been held over 12 months will be taxable as long-term capital gain, except for that portion of the gain allocable to "substantially appreciated inventory items" and "unrealized receivables," as those terms are defined in Section 751 of the Code, which would be treated as ordinary income. The definition of these terms will not be considered here beyond noting that the Company may have "unrealized receivables" arising from the ordinary income component of "market discount bonds." In addition, if the Company holds property as a result of foreclosure which is unsold at the time a Member sells his Units, or holds an investment in a mortgage loan that is classified as an equity interest, the amount of ordinary income that would result if the Company were to sell such property is generally an "unrealized receivable." In general, following the recent enactment of the Jobs Growth and Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act") for noncorporate taxpayers in taxable years ending after May 6, 2003, long-term capital gain for capital assets held longer than 12 months is subject to a maximum rate of 15% (5% for individuals in the 10% or 15% tax brackets). The Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 11 amount of ordinary income against which a noncorporate taxpayer may deduct a capital loss is the lower of $3,000 (or in the case of a married taxpayer filing a separate return $1,500) or the excess of such losses of the taxpayer over the taxpayer's capital gain. TAX RATES ON A MEMBER'S SHARE OF ORDINARY INCOME FROM THE COMPANY A taxpayer's tax liability with respect to an investment in the Company will depend upon his individual tax bracket. Currently, there are six tax brackets for individuals. Following the recent enactment of the 2003 Tax Act, for calendar year 2003, the first bracket is at 10% (on taxable income not over $14,000 in the case of married taxpayers filing joint returns), the second at 15% (on taxable income from $14,000 - $47,450), the third at 25% (on taxable income from $47,450 - $114,650), the fourth at 28% (on taxable income from $114,650 - $174,700), the fifth at 33% (on taxable income from $174,700 - -$311,950), and the sixth at 35% (on taxable income over $311,950). DISTRIBUTIONS AND DEEMED DISTRIBUTIONS Distributions to Members may take the form of either actual cash distributions or so-called "deemed distributions." A deemed distribution is treated as a cash distribution and can result from a Member's decision to participate in the Company's distribution reinvestment plan. Under the terms of the Operating Agreement, a Member who elects to participate in the distribution reinvestment plan will be deemed to have received a distribution of the amount being reinvested and to have recontributed an equivalent amount to the Company. The Operating Agreement also provides that a deemed distribution and equivalent recontribution will result if the Manager determines to reinvest any of the Company's net proceeds from capital transactions in new mortgage loans. Capital transactions for this purpose are defined in the Operating Agreement to include payments of principal, foreclosures and prepayments of mortgage loans, and any other disposition of a mortgage loan or property. For this purpose, a disposition of a mortgage loan is deemed to occur if any "significant modifications" to the debt instrument are made within the meaning of Section 1001 of the Code and the Regulations thereunder. Distributions to a Member, including the deemed distributions described above, generally do not generate taxable income unless and to the extent the amount of any such distribution exceeds the Member's basis in his Units. Since each of the deemed distributions described above will be matched by a deemed recontribution of an equivalent amount, these transactions will have no net impact on a Member's basis in his Units and should not cause subsequent deemed distributions to be taxable. DEPRECIATION From time to time the Company anticipates that it may acquire equity or leasehold interests in real property by direct investment, foreclosure or otherwise. Generally, the cost of Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 12 the improvements on any such owned real property may be recovered through depreciation deductions over a period of 39 years. See Section 168(c) of the Code. INVESTMENT INTEREST Section 163(d) of the Code, applicable to noncorporate taxpayers and S corporation shareholders, places a limitation upon the deductibility of interest incurred on loans made to acquire or carry property held for investment. Property held for investment includes all investments held for the production of taxable income or gain, but does not include trade or business property or interest incurred to construct such property. In general, investment interest is deductible by noncorporate taxpayers and S corporation shareholders only to the extent it does not exceed net investment income for the taxable year. Net investment income is the excess of investment income over the sum of investment expenses. Interest expense of the Company and interest expense incurred by Members to acquire Units will not be treated as investment interest to the extent attributable to a passive activity of the Company. However, that portion of interest expense allocable to portfolio investments is subject to the investment interest limitations. Interest attributable to debt incurred by a Member in order to purchase or carry Units may constitute "investment interest" subject to the deductibility limitations of Code Section 163(d). Therefore, Members should consider the effect of investment interest limitations on using debt financing for their purchase of Units. TAX TREATMENT OF TAX-EXEMPT ENTITIES Sections 511 through 514 of the Code impose a tax on the "unrelated business taxable income" of organizations otherwise exempt from tax under Section 501(a) of the Code. Entities subject to the unrelated business income tax include qualified employee benefit plans, such as pension and profit-sharing plans, Keogh or HR-10 plans, and individual retirement accounts. Other charitable and tax-exempt organizations are also generally subject to the unrelated business income tax. Such organization, plan or account is referred to as a "Tax-Exempt Entity." Interest income is not subject to this tax unless it constitutes "debt-financed income." Unrelated business taxable income includes gross income, reduced by certain deductions and modifications, derived from any trade or business regularly carried on by a partnership of which the Tax-Exempt Entity is a partner where the partnership is a publicly traded partnership (see the discussion set forth above concerning the classification of the Company as a partnership for federal income tax purposes) or which is an unrelated trade or business with respect to the Tax-Exempt Entity. Among the items generally excluded from unrelated business taxable income are (i) interest and dividend income; (ii) rents from real property (other than debt-financed property or property from which participating rentals are derived); and (iii) gains on the sale, exchange or other disposition of assets held for investment. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 13 In general, the receipt of unrelated business taxable income by a Tax-Exempt Entity has no effect on such entity's tax-exempt status or on the exemption from tax of its other income. However, in certain circumstances, the continual receipt of unrelated business taxable income may cause certain Tax-Exempt Entities to lose their exemption. Moreover, for certain types of Tax-Exempt Entities, the receipt of any unrelated business income taxable may cause all income of the entity to be subject to tax. For example, for charitable remainder trusts, the receipt of any taxable income from an unrelated trade or business during a taxable year will result in the taxation of all of the trust's income from all sources for such year. The Company has obtained a revolving line of credit in the amount of $2 million, which the Manager expects to use from time to time to acquire or make mortgage loans, operate and develop for resale properties on which the Company has foreclosed and for other general business purposes. The Company also incurs secured indebtedness in connection with structured arrangements with other lenders in order to provide them with a senior position in mortgage loans that are jointly funded by the Company and such other lenders. The Manager expects that the Company's total indebtedness under the line of credit, pursuant to the structured arrangements with other lenders and any other source of borrowings will not exceed 70% of the fair market value of the outstanding mortgage loans in the Company's loan portfolio. Any taxable income of the Company attributable to such borrowing, including net interest income from mortgage investments, net rental income from property acquired as a result of foreclosure and gain from the sale of property acquired through foreclosure will be subject to characterization as debt-financed income and, therefore, as unrelated business taxable income. As a result, a portion of each tax exempt member's distributive share of income from its investment in any year may be classified as unrelated business taxable income. Except as described in the preceding two paragraphs, the Manager intends to invest Company assets in such a manner that tax-exempt Members will not derive unrelated business taxable income or unrelated debt-financed income with respect to their interests in the Company. However, if the Company acquires property (e.g., through foreclosure) subject to acquisition indebtedness, the income attributable to the portion of the property which is debt-financed may be treated as unrelated business taxable income to a tax exempt Member. Sale of foreclosure property might also produce unrelated business taxable income if the Company is characterized as a "dealer" with respect to that property. In addition, mortgage loans invested in or funded by the Company which permit the Company to participate in the appreciation value of the properties may be recharacterized by the IRS as an equity interest and such recharacterization could result in unrelated debt-financed income. There can be no assurance that the IRS will agree that the Company's other income is not subject to tax under the unrelated business income and unrelated debt-financed income tax provisions. If a Qualified Plan's (defined below) income from the Company constitutes unrelated business taxable income, such income is subject to tax only to the extent that its unrelated business taxable income from all sources exceeds $1,000 for the taxable year. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 14 In considering an investment in the Company of a portion of the assets of a qualified employee benefit plan and an individual retirement account ("Qualified Plan"), a fiduciary should consider (i) whether the investment is in accordance with the documents and instruments governing the plan; (ii) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 ("ERISA"); (iii) whether the investment is prudent considering, among other matters, that there will not be a market created in which the investment can be sold or otherwise disposed of; and (iv) whether the investment would cause the IRS to impose an excise tax under Section 4975 of the Code. An investment in the Company of the assets of an individual retirement account generally will not be subject to the aforementioned diversification and prudence requirements of ERISA unless the individual retirement account also is treated under Section 3(2) of ERISA as part of an employee pension benefit plan which is established or maintained by an employer, employee organization, or both. COMPANY TAX RETURNS AND AUDITS The Company's income tax returns will be prepared by the Manager. Generally, all Members are required to report Company items on their individual returns consistent with the treatment of such items on the Company's information return. However, a Member may report an item inconsistently if he files a statement with the IRS identifying the inconsistency. Otherwise, additional tax necessary to make the partner's treatment of the item consistent with the Company's treatment of the item may be summarily assessed without a notice of deficiency or an opportunity to protest the additional tax in the Tax Court being afforded to the partner. Penalties for intentional disregard of the consistency requirements may also be assessed. The Company's returns may be audited by the IRS. Tax audits and adjustments are made at the Company level in one unified proceeding, the results of which are binding on all Members. A Member may, however, protest the additional tax by paying the full amount thereof and suing for a refund in either the U.S. Claims Court or a U.S. District Court. A Company must designate a "tax matters partner" to represent the Company in dealing with the IRS. The Manager will serve as the "tax matters partner" to act on behalf of the Company and the Members with respect to "Company items," to deal with the IRS and to initiate any appropriate administrative or judicial actions to contest any proposed adjustments at the Company level. Members with less than a 1% interest in the Company will not receive notice from the IRS of these Company administrative proceedings unless they form a group with other Members which group has an aggregate interest of 5% or more in the Company, and request such notice. However, all Members have the right to participate in the administrative proceedings at the Company level. Members will be notified of adjustments to their distributive shares agreed to at the Company level by the "tax matters partner." If the Company's return is audited and adjustments are proposed by the IRS, the "tax matters partner" may cause the Company to contest any adverse determination as to Company Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 15 status or other matters, and the result of any such contest cannot be predicted. Moreover, Members should be aware that any such contest would result in additional expenses to the Company, and that the costs incurred in connection with such an audit and any ensuing administrative proceedings will be the responsibility of the Company and may adversely affect the profitability, if any, of Company operations. To the extent that funds of the Company are insufficient to meet such expenses, funds may have to be furnished by Members, although they will be under no obligation to do so. Adjustments, if any, resulting from any audit may require each Member to file an amended tax return, and possibly may result in an audit of the Member's own return. Any audit of a Member's return could result in adjustments of non-Company items as well as Company income and losses. The Company will endeavor to provide all required tax information to the Members within 60 days after the close of each calendar year. ORIGINAL ISSUE DISCOUNT RULES The original issue discount rules of Section 1271 through 1275 of the Code will apply to obligations to the Company by third parties, i.e., mortgage loans and obligations issued by the Company, if any. The original issue discount rules will result in the Company realizing as interest income from a mortgage loan the amount that economically accrues under the loan during the course of the year (using compound interest concepts) even where a lesser amount is actually paid or accrued under the terms of the mortgage loan. Identical concepts will be used for determining the Company's interest deduction on its obligations, if any. MARKET DISCOUNT The Company may purchase mortgage investments for an amount substantially less than the remaining principal balance of such mortgage investments. In such circumstances, each monthly payment which the Company receives from a mortgagor will consist of interest at the stated rate for the investment in a mortgage loan and a principal payment. If the Company purchases an investment in a mortgage loan at a discount, for federal income tax purposes the principal portion of each monthly payment will constitute (1) the return of a portion of the Company's investment in the investment in a mortgage loan and (2) the payment of a portion of the market discount for the investment in a mortgage loan. The amount of each monthly payment attributable to market discount will be recognized by the Company as ordinary income and the amount of each monthly payment representing the return of the Company's investment will not constitute taxable income to the Company. Accrued market discount will also be treated as ordinary income on the sale of an investment in a mortgage loan. NO SECTION 754 ELECTION - IMPACT ON SUBSEQUENT PURCHASERS Section 754 of the Code permits a partnership to elect to adjust the basis of its property in the case of a transfer of an interest in the partnership. The effect of such an election would be that, with respect to the transferee partner only, the basis of partnership property would either be Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 16 increased or decreased by the difference between the transferee's basis for his partnership interest and his proportionate share of the partnership's basis for all partnership property. The Manager has advised us that due to the accounting difficulties which would be involved, it will not cause the Company to make an election pursuant to Section 754 of the Code (a "754 Election"), although it is empowered to do so by the Operating Agreement. Accordingly, the share of depreciation deductions, if any, and gain or loss upon the sale of any Company assets allocable to a subsequent purchaser of a Share will be determined by the Company's tax basis in such assets which will not have been adjusted to reflect such purchaser's purchase price for his Share (as would have been possible had the Company made a 754 Election.) This treatment might not be attractive to prospective purchasers of Units, and consequently, a Member might have difficulty in selling these Units or might be forced to sell at a price lower than the price that might have been obtained had such an election been made. TAXATION OF MORTGAGE LOAN INTEREST Mortgage loans invested in or purchased by the Company may, in certain situations, be structured to permit the Company to participate in the appreciation in the value of the properties to which such mortgage loans relate or in the cash flow generated by the operation of such properties by the borrowers. The Manager anticipates that the Company will report for tax purposes all earnings attributable to mortgage loans as interest income. In each case the determination of whether the Company will be treated for tax purposes as a creditor or as a partner or other equity participant will depend on an analysis of the facts and circumstances of the specific mortgage loan. Consequently, we cannot render an opinion as to the tax consequences of any of these prospective transactions, and there is no assurance that the IRS will not successfully recharacterize a mortgage loan as an equity interest. If a mortgage loan is recharacterized as an equity interest, the Company would be required to recognize an allocable share of the income, gain, loss, deductions, credits and tax preference items attributable to the property to which the mortgage loan relates. Recharacterization of a loan as an equity interest also could result in the receipt of unrelated business taxable income for certain tax-exempt Members. TREATMENT OF COMPENSATION TO MANAGER AND ITS AFFILIATES In connection with services provided during the offering stage, the Manager's capital account in the Company will be credited up to a maximum of $2,000,000 for offering expenses paid by the Manager on the Company's behalf to unaffiliated third parties. In connection with the ongoing management services provided by the Manager, the Company will pay the Manager an annual management fee of up to 0.25% of the Company's aggregate capital contributions. In addition, in the event of a resale of real property acquired by the Company by foreclosure, the Company will pay real estate brokerage fees to the Manager and/or its affiliates. Such fees will be up to 3% of sales proceeds to the Manager if it substantially contributes to the sale. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 17 In computing taxable income of the Company for each year, the Manager intends: (i) to deduct the amount of the annual management fee paid such year, (ii) to reduce the Company's gain from the resale of any foreclosed property sold during such year by the amount of all such real estate brokerage fees paid, and (iii) to allocate income and losses to the Manager consistent with its interest in Profits and Losses attributable to its capital account. The ability of the Company to obtain the foregoing treatment relative to these fees and the credited capital account depends in large measure on the value of the services rendered in exchange therefor, which is a question of fact that may depend on events to occur in the future. Due to this uncertainty, we cannot give an opinion as to the proper tax treatment of such fees and promotional interests, and the IRS may attempt to recharacterize one or more aspects of the Company's treatment of such items, by, for example, disallowing the deduction claimed and/or the reduction in gain claimed by the Company therefor. If successful, such characterization could cause the tax benefits generated by the payment of such fees to be deferred or lost. The Manager will also be entitled to certain fees payable by borrowers in connection with the Company's investing in or purchasing a mortgage loan. These fees include, loan brokerage fees for loan selection and origination (2% - 6% of each loan), loan evaluation and processing fees (2% - 5% of each loan) and loan extension fees (2% - 5% of outstanding principal). The exact amount of the foregoing fees will be negotiated with prospective borrowers on a case-by-case basis. In addition, the Manager will act as a servicing agent with respect to the Company's mortgage investments, for which it will be paid by the relevant borrower an annual fee of up to one-quarter of one percent (0.25%) of the unpaid balance of the respective mortgage loan serviced. Since any of the commissions or fees described in the preceding paragraph will be payable by the borrowers, such payment should not have any effect on the calculation of the Company's taxable income. However, the IRS could take the position that these commissions or fees, or any of them, are constructively paid by the Company, in which case interest income of the Company would be increased by the amount of the commissions, and the commissions would be deductible by the Company only to the extent the commissions or fees are reasonable compensation for the services rendered and otherwise considered deductible expenditures. Since this is ultimately an issue of fact which may depend on future events, we are not able to render an opinion regarding the issue. If the IRS were make and prevail on such an assertion as to the treatment of these fees or commissions, the tax effect would be that the Company's income would be increased by the amount of the fees and commissions, and the fees and commissions would be deductible by the Company only to the extent they constitute reasonable compensation for the services rendered. This would result in an increase in the Company's taxable income to the extent the deductibility of the fees and commissions is disallowed, and the amount of income each Member would be required to include in his or her taxable income would be increased by his or her distributive share of such increase in the Company's taxable income. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 18 The Manager or its Affiliates will be entitled to reimbursement from the Company for certain expenses advanced by the Manager or its Affiliates for the benefit of the Company and for salaries and related expenses for nonmanagement and nonsupervisory services performed for the benefit of the Company. The reimbursement of such expenses by the Company will generally be treated in the same manner as if the Company incurred such costs directly. POSSIBLE LEGISLATIVE TAX CHANGES In recent years there have been a number of proposals made in Congress by legislators, government agencies and by the executive branch of the federal government for changes in the federal income tax laws. In addition, the IRS has proposed changes in regulations and procedures, and numerous private interest groups have lobbied for regulatory and legislative changes in federal income taxation. It is impossible to predict the likelihood of adoption of any such proposal, the likely effect of any such proposals upon the income tax treatment presently associated with investment in mortgage loans or the Company, or the effective date, which could be retroactive, of any legislation which may derive from any such past or future proposal. STATE AND LOCAL TAXES The Company may invest in or purchase loans in states and localities which impose a tax on the Company's assets or income, or on each Member based on his share of any income (generally in excess of specified amounts) derived from the Company's activities in such jurisdiction. Members who are exempt from federal income taxation will generally also be exempt from state and local taxation. Members should consult with their own tax advisors concerning the applicability and impact of state and local laws. ERISA CONSIDERATIONS ERISA generally requires that the assets of employee benefit plans be held in trust and that the trustee, or a duly authorized investment manager (within the meaning of Section 3(38) of ERISA), have exclusive authority and sole discretion to manage and control the assets of the plan. ERISA also imposes certain duties on persons who are fiduciaries of employee benefit plans subject to ERISA and prohibits certain transactions between an employee benefit plan and the parties in interest with respect to such plan (including fiduciaries). Under the Code, similar prohibitions apply to all Qualified Plans, including IRA's, Roth IRA's and Keogh Plans covering only self-employed individuals who are not subject to ERISA. Under ERISA and the Code, any person who exercises any authority or control respecting the management or disposition of the assets of a Qualified Plan is considered to be a fiduciary of such Qualified Plan (subject to certain exceptions not here relevant). Furthermore, ERISA and the Code prohibit parties in interest (including fiduciaries) of a Qualified Plan from engaging in various acts of self-dealing. To prevent a possible violation of these self-dealing rules, the Manager and its affiliates may not permit the purchase of Units with assets of any Qualified Plan (including a Keogh Plan or IRA) if they (i) have investment Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 19 discretion with respect to the assets of the Qualified Plan invested in the Company or (ii) regularly give individualized investment advice which serves as the primary basis for the investment decisions made with respect to such assets. ANNUAL VALUATION Fiduciaries of Qualified Plans subject to ERISA are required to determine annually the fair market value of the assets of such Qualified Plans as of the close of any such plan's fiscal year. Although the Manager will provide annually upon the written request of a Member an estimate of the value of the Units based upon, among other things, outstanding mortgage investments, it may not be possible to value the Units adequately from year to year, because there will be no market for them. PLAN ASSETS GENERALLY If the assets of the Company are deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title 1 of ERISA applicable to investments by Qualified Plans and their fiduciaries would extend (as to all plan fiduciaries) to investments made by the Company, (ii) certain transactions that the Company might seek to enter into might constitute "prohibited transactions" under ERISA and the Code because the Manager would be deemed to be a fiduciary of the Qualified Plan Members and (iii) audited financial information concerning the Company would have to be reported annually to the Department of Labor. In 1986, the Department of Labor promulgated final regulations defining the term "plan assets" (the "Final DOL Regulations"). Under the Final DOL Regulations, generally, when a plan makes an equity investment in another entity, the underlying assets of that entity will be considered plan assets unless (1) equity participation by benefit plan investors is not significant, (2) the entity is a real estate operating company or (3) the equity interest is a "publicly-offered security." (i) Exemption for Insignificant Participation by Qualified Plans. The Final DOL Regulations provide that the assets of a corporation or Company in which an employee benefit plan invests would not be deemed to be assets of such plan if less than 25% of each class of equity interests in the corporation or Company is held in the aggregate by "benefit plan investors" (including, for this purpose, benefit plans such as Keogh Plans for owner-employees and IRA's). For purposes of this "25%" rule, the interests of any person (other than an employee benefit plan investor) who has discretionary authority or control with respect to the assets of the entity, or who provides investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, shall be disregarded. Thus, while the Manager and its affiliates are not prohibited from purchasing Units, any such purchases will be disregarded in determining whether this exemption is satisfied. The Company cannot assure "benefit plan investors" that it will always qualify for this exemption. Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 20 (ii) Exemption For a Real Estate Operating Company. The Final DOL Regulations also provide an exemption for securities issued by a "real estate operating company." An entity is a "real estate operating company" if at least 50% of its assets valued at cost (other than short-term investments pending long-term commitment) are invested in real estate which is managed or developed and with respect to which the entity has the right substantially to participate directly in the management or development of real estate. The preamble to the Final DOL Regulations states the Department of Labor's view that an entity would not be engaged in the management or development of real estate if it merely services mortgages on real estate. Thus, it is unlikely that the Company would qualify for an exemption from "plan assets" treatment as a real estate operating company. (iii) Exemption for Publicly Offered Securities. Under the Final DOL Regulations, a "publicly offered security" is a security that is (i) freely transferable, (ii) part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another, and (iii) either is (a) part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or (b) sold to the plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933 and the class of securities of which the security is a part is registered under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. For purposes of this definition, whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. If a security is part of an offering in which the minimum is $10,000 or less, however, certain customary restrictions on the transfer of partnership interests necessary to permit partnerships to comply with applicable federal and state laws, to prevent a termination or reclassification of the entity for federal or state tax purposes and to meet administrative needs (which are enumerated in the Final DOL Regulations) will not, alone or in combination, affect a finding that such securities are freely transferable. The Units will be sold as part of an offering of securities to the public pursuant to registration under the Securities Act of 1933, and the Manager has represented that it will cause the Company to register the Units under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the Company during which the offering of Units to the public occurred. In addition, the Units will not be subject to any restrictions on transfer other than those enumerated in the Company's Operating Agreement, the Final DOL Regulations and referenced in the preceding paragraph. Based on the foregoing, the Units should be "publicly offered securities" within the meaning of the Final DOL Regulations. As a result, the underlying assets of the Company should not be considered to be plan assets under the Final DOL Regulations. This opinion is being rendered to the Company in connection with the disclosure requirements under the Act and will be filed as an exhibit to the Prospectus. We consent to the Vestin Fund II, LLC WENDEL, ROSEN, BLACK & DEAN, LLP October 20, 2003 Page 21 reference to our firm in the Prospectus under "Legal Counsel." In rendering this opinion, we have not been asked to give nor do we express any opinion as to questions or issues arising out of the investment by Members in the Company other than those questions specifically discussed. In reviewing this opinion, prospective investors should be aware that this firm represents the Company and the Manager and its affiliates in connection with the preparation of certain portions of the Registration Statement and expects to continue to represent the Manager and its affiliates in other matters. Very truly yours, WENDEL, ROSEN, BLACK & DEAN, LLP WRB&D:rag EX-23.2 4 a93399a4exv23w2.txt EXHIBIT 23.2 Exhibit 23.2 (WENDEL, ROSEN, BLACK & DEAN LETTERHEAD) October 20, 2003 Vestin Fund II, LLC 2901 El Camino Avenue, Suite 206 Las Vegas, NV 89102 RE: VESTIN FUND II, LLC: REGISTRATION ON FORM S-11 Ladies and Gentlemen: We hereby consent to all references to our firm under the captions "Federal Income Tax Consequences" and "Legal Matters" in the Prospectus that is part of Post-Effective Amendment No. 4 to the Registration Statement on Form S-11 to be filed with the Securities and Exchange Commission on or about October 20, 2003, as may be amended from time to time, and to the quotation or summarization in the Prospectus of our legal opinion filed as an exhibit to the Post-Effective Amendment. Very truly yours, WENDEL, ROSEN, BLACK & DEAN, LLP By /s/ Walter R. Turner ----------------------------------- Walter R. 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		Proposed Maximum	Proposed Maximum	Amount of
Title of Securities	Amount Being	Offering Price	Aggregate	Registration
Being Registered	Registered(1)	Per Unit	Offering Price	Fee(2)


Limited Liability Company Interest	50,000,000	$10.00	$500,000,000	$132,000





	Price to	Selling Commissions/	Proceeds to
	Public	Expense Reimbursement(2)	the Fund


Per Unit	$10.00	—	$10.00

Total Maximum	$500,000,000.00(1)	—	$500,000,000.00(1)


Vestin Fund II, LLC		Vestin Fund II, LLC was organized in December 2000 as a Nevada limited liability company. Under our Operating Agreement, our existence ends on December 31, 2020, unless the members vote to extend our duration. In this prospectus we refer to Vestin Fund II, LLC as “the Company,” “the Fund,” “we,” “us,” or “our.” Our offices are at 2901 El Camino Avenue, Las Vegas, Nevada 89102, and our telephone number is (702) 227-0965.


Our Manager		Our Manager is Vestin Mortgage, Inc. (doing business as Vestin, Inc.), a Nevada corporation, which was incorporated in 1997 as Capsource, Inc. Its executive offices are at 2901 El Camino Avenue, Las Vegas, Nevada 89102, and its telephone number is (702) 227-0965. Vestin Mortgage is a mortgage broker licensed in the State of Nevada since 1997.



Investment Policies		We invest in mortgage loans where our collateral is real property located anywhere in the United States. There may be commercial or residential buildings on the real property, but our collateral may also consist of real property with buildings under construction or no physical structures at all. The loans are selected for us by Vestin Mortgage from among loans obtained by Vestin Mortgage or mortgage brokers with which we are not affiliated. We believe these loans will be attractive to borrowers because of the expediency of Vestin Mortgage’s loan approval and funding process, which takes from 10 to 20 days. See “Our Business Strategy” on page 25. We do not intend to invest in or own real property. However, we may own real property if we foreclose on a defaulted loan.


		We expect to obtain additional sources of financing, including establishing lines of credit or entering into financing arrangements, which we currently intend to use to expand our lending capacity, operate and develop for resale properties on which we have foreclosed, and allocate to other general business purposes. Our total indebtedness under our line of credit will not exceed 70% of the fair market value of the outstanding mortgage loans in our loan portfolio.

Summary Risk Factors		The following are some of the significant risks concerning your investment:

		• There is no public trading market for the units, and we do not expect one to ever develop. Further, the transfer and redemption of your units is restricted. Consequently, you will have a difficult time trying to obtain cash for your units.

		• We rely on Vestin Mortgage, our Manager, for the day-to-day management of our business and the selection of our mortgages. Thus, you will not have an opportunity to evaluate the terms of mortgages or other factors involved in a particular loan.

		• If we do not remain qualified as a partnership for federal income tax purposes, we would be subject to the payment of tax on our income at corporate rates, which would reduce the amount of funds available for payment of distributions to you.


		• Defaults on our mortgage loans may decrease our revenues and your distributions. Investors should be aware that a substantial portion and perhaps a majority of our loans may be secured by non-income producing properties. If there is a default on these loans, we will not receive any income from the loan during the period when we foreclose on the property and attempt to resell it. This will reduce the funds we have available for distribution to you. In addition, if we are unable to recover the full amount of our loan after foreclosure, our future distributions to you may be reduced as we will have less funds to invest in mortgages.

		• Vestin Mortgage controls our daily business affairs and, subject to the provisions of our Operating Agreement, may modify our investment policies without your consent. Investors only vote on limited matters such as changing our structure or changing our basic business purpose. Thus you will have little control over our operations and where funds are invested.

		• Vestin Mortgage will receive substantial fees as a result of our investment in mortgage loans. Most of these fees will be paid by borrowers for obtaining, processing, making and brokering, managing and selling of mortgage loans, as well as for other services. Many of these fees are paid on an up-front basis. The fees for these services are described in greater detail under “Compensation to Vestin Mortgage and Affiliates” in this summary and as set forth in greater detail in the main body of this Prospectus.

		• Any borrowing by us may increase the risk of your investment and reduce the amount we have available to distribute to you.

		• Changes in the real estate market may reduce the demand for the types of loans that we make. In addition, a decline in real estate values could impair our security in outstanding loans. Such results may affect the amount we have available to distribute to you.

		• Vestin Mortgage has not yet identified all of the mortgage loans that we will invest in with the proceeds of this Offering. As a result, you will not have an opportunity to evaluate for yourself the value of all of the real properties that will constitute our collateral or the creditworthiness of all of our borrowers.

		• We were organized in December 2000 and began operation in June 2001. Accordingly we have a very limited operating history. We have limited external sources of financing and are primarily relying on capital contributions received via this Offering. You will have only limited information regarding our past performance to determine the likelihood of our achieving our investment objectives. Before you invest in the Fund, you should carefully review the complete discussion of “Risk Factors” beginning on page 10 of this prospectus.

Estimated Use of Proceeds of Offering		We anticipate that we will invest approximately 97% of the proceeds of this Offering and the distributions reinvested under our reinvestment plan in mortgage loans. We will use approximately 3% of offering proceeds as a working capital reserve.


Conflicts of Interest		We have no directors, officers or employees and depend entirely on Vestin Mortgage to manage our operations. Vestin Mortgage will face various conflicts of interest in managing our affairs.

		• Vestin Mortgage will receive substantial fees from borrowers for obtaining, processing, making and brokering, managing and selling of mortgage loans, as well as for other services. Many of these fees are paid on an up-front basis. The fees for these services are described in greater detail under “Compensation to Vestin Mortgage and Affiliates” in this summary and as set forth in greater detail in the main body of this prospectus. Vestin Mortgage’s compensation is based on the volume and size of the mortgages selected for us, and our interests may diverge from those of Vestin Mortgage and Michael Shustek, the indirect owner of a controlling interest in Vestin Mortgage, in deciding whether we should invest in a particular loan. Vestin Mortgage will receive a short-term benefit through the payment of up-front fees from borrowers irrespective of the risk we may bear in connection with such loans.

		• Vestin Mortgage will be receiving fees from borrowers that would otherwise increase our returns. These fees include the fees listed under “Fees Paid by Borrower” in the above mentioned compensation description. Because Vestin Mortgage receives all of these fees, our interests will diverge from those of Vestin Mortgage and Mr. Shustek when Vestin Mortgage determines whether we should charge higher interest rates or Vestin Mortgage should receive higher fees from the borrower.


		• Vestin Mortgage must allocate its time between our activities and its other activities. These other activities include its current activities as a licensed mortgage broker and acting as the manager of Vestin Fund I, LLC (“Vestin Fund I”) and inVestin Nevada, Inc. (“inVestin Nevada”), funds with objectives similar to ours. Additional such funds may be formed by Vestin Mortgage in the future. Vestin Fund I has raised $100,000,000 pursuant to a registration statement on Form S-11 initially filed with the Securities Exchange Commission on August 23, 2000. inVestin Nevada is seeking to raise $100,000,000 through the sale of subordinated notes to Nevada residents pursuant to a registration statement filed with the Securities Division of the Nevada Secretary of State and in reliance on exemption from registration requirements provided by Section 3(a)(11) of the Securities Act of 1933 and Rule 147 thereunder. As of August 31, 2003, inVestin Nevada has raised approximately $6,836,179.


		• Although we will share our facilities with Vestin Mortgage, we have no ownership in Vestin Mortgage. Therefore, we will not exercise any control over Vestin Mortgage.

		• We may participate in mortgage loans with publicly registered affiliates under certain circumstances. There is a potential risk of impasse on joint venture decisions if such investment is made on a 50/50 basis. In addition, there is a potential risk that, while a participant may have the right to buy an asset from the partnership or joint venture, it may not have the resources.


	(1)	Includes units purchased under our distribution reinvestment plan.

	(2)	All selling commissions and expenses related to this Offering will be paid by Vestin Mortgage. Vestin Mortgage received a deemed capital contribution of 110,000 units in respect of Offering expenses paid by Vestin Mortgage to non-affiliated third parties. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs.


			Page

SUMMARY				1
RISK FACTORS				10
	Investment Risks			10
		You will have limited information to review our past performance		10
		Your units lack liquidity and marketability		10
		You have a limited ability to have your units redeemed		10
		We must rely on Vestin Mortgage to manage our operations and select our loans for investment		11
		Our Manager lacks experience with certain real estate markets		11
		We depend on key personnel of Vestin Mortgage		11
		Any borrowing by us will increase your risk and may reduce the amount we have available to distribute to members		11
		Any indemnification of our Manager by us will decrease the amount available for distribution to you		12
	Risks of the Mortgage Lending Business			12
		Defaults on our mortgage loans will decrease our revenues and your distributions		12
	Risks of Underwriting Standards and Procedures			14
		Our loans are not guaranteed by any government agency		14
		Our mortgage loans will not be marketable and we expect no secondary market to develop		14
		Our loan portfolio may be riskier if it is not diversified geographically		14
		We may have difficulty protecting our rights as a secured lender		15
		By becoming the owner of property, we may become liable for unforeseen environmental obligations		15
		Our results are subject to fluctuations in interest rates and other economic conditions		15
		We face competition for mortgage loans that may reduce available yields and fees available		16
		Our lending operations are subject to certain regulatory requirements		16
	Conflicts of Interest Risks			16
		Vestin Mortgage will face conflicts of interest concerning the allocation of its personnel’s time		16
		Vestin Mortgage will face conflicts of interest arising due to our fee structure		17
		Vestin Mortgage will face conflicts of interest relating to other investments in mortgage loans		17
		We may have a lack of control over participations		17
	Lack of Control by Members			17
		Your right to vote is limited and you are bound by majority vote		17
		The value of your units may decrease below ten dollars per unit		18
	Risks Related to Vestin Capital			18
		Vestin Capital has a limited operating history and track record in public offerings		18
		Vestin Capital is an Affiliate of Vestin Mortgage		18
	Federal Income Tax Risks			18
		Your cash flow and distributions will be reduced if we are taxed as a corporation		18
		An IRS audit of our books and records could result in an audit of your tax returns		19
		Inconsistencies between federal, state and local tax rules may adversely affect your return		19
	Retirement Plan Risks			19
		An investment in the Fund may not qualify as an appropriate investment under all retirement plans		19
USE OF PROCEEDS				20
INVESTOR SUITABILITY STANDARDS				22
OUR BUSINESS STRATEGY				25
INVESTMENT OBJECTIVES AND POLICIES				25
	Acquisition and Investment Policies			26
	Mortgage Loans to Affiliates			30
	Purchase of Loans from Vestin Mortgage and its Affiliates			30


		Page

	Types of Loans We Intend to Invest In		30
	Prepayment Penalties and Exit Fees		32
	Extensions to Term of Loan		32
	Balloon Payment		32
	Repayment of Mortgages on Sales of Properties		32
	Variable Rate Loans		33
	Interest Rate Caps		33
	Borrowing		33
	No Trust or Investment Company Activities		34
	Various Other Policies and Procedures		34
	Competition and General Economic Conditions		34
	Regulation		34
MANAGEMENT			35
	Our Management		35
	Vestin Mortgage		35
	Removal of Vestin Mortgage as Manager		35
	Evaluation and Acquisition by Vestin Mortgage		36
	Mortgage Loans		36
	Prior Experience		37
	Litigation Involving Vestin Mortgage		44
	Directors and Executive Officers of Vestin Mortgage and Vestin Group		45
	Executive Compensation		49
	Share Ownership		50
COMPENSATION OF VESTIN MORTGAGE AND AFFILIATES			54
CONFLICTS OF INTEREST			56
SELECTED FINANCIAL DATA			59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			60
GENERAL INFORMATION AS TO PROMOTERS			70
FIDUCIARY RESPONSIBILITY			71
	Indemnification		71
SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS			73
	Your Status		73
	Limited Liability of Members		73
	Term of the Fund		73
	Meetings		73
	Voting and Other Rights of Members		73
	Description of the Units		74
	Capital Accounts		74
	Capital Contribution of Vestin Mortgage		74
	Unit Repurchases and Deemed Distributions		75
	Write-Down of Investments		75
	Members’ Return on Investment		75
	Distribution Reinvestment Plan		76
	Reinvestment of Proceeds of Capital Transactions		76
	Assignment and Transfer of Units		77
	Repurchase of Units, Withdrawal from the Fund		77
	Special Power of Attorney		78


		Page

FEDERAL INCOME TAX CONSEQUENCES			79
	Classification as a Partnership		80
	We Will Not Be Classified as a Publicly Traded Partnership		80
	General Principles of Partnership Taxation		82
	Determination of Basis in Units		82
	Allocations of Profits and Losses		83
	Limitations on the Deduction of Losses		83
	The Basis Limitation		83
	The At Risk Limitation		83
	The Passive Loss Rules		84
	Computation of Gain or Loss on Sale or Redemption of Units		84
	Character of Gain or Loss		84
	Tax Rates on a Member’s Share of Ordinary Income from the Fund		85
	Distributions and Deemed Distributions		85
	Depreciation		85
	Investment Interest		85
	Tax Treatment of Tax-Exempt Entities		86
	Partnership Tax Returns, Tax Information and Audits		87
	Vestin Mortgage is Tax Matters Partner		88
	Original Issue Discount Rules		88
	Market Discount		88
	No Section 754 Election-Impact on Subsequent Purchasers		88
	Treatment of Compensation of Vestin Mortgage and its Affiliates		89
	Possible Legislative Tax Changes		89
	State and Local Taxes		90
	ERISA Considerations		90
	Annual Valuation		90
	Plan Assets Generally		91
HOW WE PROTECT OUR RIGHTS AS A LENDER			93
	Overview of Mortgages		93
	Foreclosure		93
	Environmental Risks		94
	Second Mortgages; Rights of Senior Mortgages		94
	Statutory Rights of Redemption		95
	Anti-Deficiency Legislation		95
	Bankruptcy Laws		96
	Enforceability of Certain Provisions		96
REPORTS TO MEMBERS			99
PLAN OF DISTRIBUTION			100
LEGAL MATTERS			100
EXPERTS			101
AVAILABLE INFORMATION			101


*	Does not include warrants. Including warrants, Mr. Shustek’s beneficial ownership is approximately 68%.


Compensation to Vestin Mortgage		Vestin Mortgage and Affiliates has received the following compensation:


		Type of Compensation		Form of Compensation

		Offering Stage:

		Although our expenses in connection with this prospectus are billed directly to us, Vestin Mortgage shall pay such expenses. Vestin Mortgage’s capital account in the Fund has been credited in the amount of $1,100,000 for offering expenses paid to attorneys, brokers, accountants, and other charges incurred in connection with this Offering that were paid to non-related third parties. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs. The credit in the amount of $1,100,000 received by Vestin Mortgage was reimbursement for the following approximate Offering expenses paid to non-related third parties:		Deemed capital contribution of $1,100,000
		Legal....................$391,000
		Accounting..............$ 42,000
		Filing Fees..............$260,000
		Other....................$407,000


		Paid by Borrower
		Loan Brokerage Fee		2%-6% of each loan, competitive fee based on local market conditions
		Loan Evaluation and Processing Fees		Up to 5% of each loan, competitive fee based on local market conditions
		Servicing Fee for Administering Loans		Subject to regulatory requirements, annual fee of up to 0.25% of outstanding principal
		Loan Extension or Modification Fee		2%-5% of outstanding principal, as permitted by local law and local market conditions
		Paid by Us
		Annual Management Fee		Up to 0.25% of our aggregate capital contributions, recorded monthly in arrears; Vestin Mortgage may in its discretion waive all or a part of its management fee to the extent it deems appropriate to do so. In making such an assessment, Vestin Mortgage will review our performance and the impact of its fees on our performance.
		Administrative Fees on Resales of Foreclosed Property		If a foreclosure occurs, up to 3% of proceeds to Vestin Mortgage where it substantially contributed to sale; up to 6% for all persons involved. No foreclosed real property will be sold to Vestin Mortgage or any of its affiliates.


Members’ Return on Investment		Our mortgage loans will generate monthly payments of interest or principal, which Vestin Mortgage intends to distribute to you. Distributions of interest received will be paid monthly by cash or distribution reinvestment. All net income attributable to interest payments from borrowers will be distributed to the members, which will include an allocation to Vestin Mortgage corresponding to the relative size of Vestin Mortgage’s capital account. Vestin Mortgage’s capital account will consist of cash contributed by Vestin Mortgage directly to the Fund as well as credits for payments made by Vestin Mortgage on our behalf to non- affiliates for services and/or goods rendered in connection with this Offering. Vestin Mortgage received a deemed capital contribution of 110,000 units in respect of Offering expenses paid by Vestin Mortgage to non-affiliated third parties. Vestin Mortgage will not be reimbursed or credited for any further Offering expenses it incurs.

		We will also receive net proceeds in the form of the repayment of principal or the prepayment of a mortgage loan, or net proceeds of a foreclosure sale. We may not actually distribute these proceeds as cash, but under our Operating Agreement, for tax purposes only, any such proceeds are deemed to be distributed to the members and then recontributed to us by the member. Any distributions of net proceeds of loan repayments will be made to the members, including Vestin Mortgage, pro rata based upon their capital accounts.

Distribution Reinvestment Plan		You may elect to reinvest the distributions of our net income that you receive from the Fund when you return your subscription agreement or at a later date. If you so elect to participate in our distribution reinvestment plan, you will be taxed on your share of our taxable income even though you will not receive any cash distributions. Additionally, solely for tax purposes, you will be deemed to have received and recontributed to us any proceeds we receive from loan repayments, foreclosures, other capital transactions, or any loan modifications treated as a disposition for tax purposes. We believe that this characterization will not affect the tax liability of our members. However, if the Internal Revenue Service unexpectedly were to disagree, you may have a tax liability with no cash distributions to pay that liability. We may end the distribution reinvestment plan at any time. See “Summary of Operating Agreement, Rights of Members and Description of Units—Distribution Reinvestment Plan.”

ERISA Considerations		The section of this prospectus entitled “ERISA Considerations” describes the effect the purchase of units will have on individual retirement accounts, or IRAs, retirement plans subject to the Employee Retirement Income Security Act of 1974, also known as ERISA, and the Internal Revenue Code of 1986, which we call the Internal Revenue Code. ERISA is a federal law that regulates the operation of retirement plans. Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an IRA should read this section of the prospectus very carefully.

Units		Your investment will be recorded on our books only. We will not issue unit certificates. If you wish to redeem or transfer your units, you must send a written request for redemption to us.


Operating Agreement		Your relationship with the Fund and with Vestin Mortgage will be governed by the Operating Agreement. Some of the significant features of the Operating Agreement are as follows:

		We will allocate to you our income, gains, losses and distributions in the same proportion that your capital account bears to all of the capital accounts of all of our members.

		Our business operations are managed by Vestin Mortgage. You will have voting rights only with respect to certain fundamental matters such as changing the manager, mergers, or changing the nature of our business. In this prospectus, when we refer to a majority, we mean those members whose capital accounts together are over 50% of the amount of all of the members’ capital accounts. A majority can bind all of our members on fundamental matters affecting our business. If such a vote occurs, you will be bound by the majority vote even if you did not vote with the majority.

		Michael V. Shustek, an officer and a director of Vestin Mortgage, is the owner of a controlling interest in Vestin Group, the company that owns Vestin Mortgage. Accordingly, Mr. Shustek may be deemed to have indirect control of the conduct of our business, subject to the rights of the majority described above and elsewhere in this prospectus.

		The Operating Agreement is discussed in more detail in “Summary of Operating Agreement, Rights of Members and Description of Units,” beginning on page 73. If any statements in this prospectus differ from the Operating Agreement, you should rely on the Operating Agreement. The Operating Agreement is attached as Exhibit A to this prospectus.


The Offering		We are offering for sale up to 50,000,000 units of limited liability company interest at $10.00 per unit. As of June 30, 2003, we sold approximately 39,778,300 units of the total 50,000,000 units offered. These units include units issued under our distribution reinvestment plan. The minimum initial purchase is 200 units for $2,000, except to the extent that state suitability standards dictate otherwise.



Tax Considerations		In the opinion of our tax counsel, we will be treated for federal income tax purposes as a partnership. You should consult your own tax advisor regarding personal tax consequences that might be associated with your investment in the units. See “Federal Income Tax Risks,” beginning at page 18, and “Federal Income Tax Consequences,” beginning at page 79 of this prospectus.


Suitability		To invest in units, you must have either:

		• a net worth, exclusive of home, home furnishings and automobiles, of at least $45,000 and a minimum annual gross income of at least $45,000; or


		• a minimum net worth of at least $150,000. As described more fully in “Investor Suitability Standards,” beginning on page 22, a significant number of states have more stringent requirements than those set forth above. Additionally, you will have to make additional representations to us before we determine that the investment is suitable for you.


		Operational Stage:


To Purchase Units		To purchase units you must have received the prospectus prior to completing and signing the subscription agreement, which is Exhibit B to this prospectus at page B-1 or Exhibit C to this prospectus at page C-1, as applicable. You must deliver the subscription agreement to the Manager or the securities dealer that has solicited your investment, together with payment for the number of units specified in the subscription agreement. We may accept or reject your subscription in whole or in part. If we do not accept your subscription, your purchase payment will be returned to you promptly without interest.

		Our acceptance of your subscription agreement is effective when we countersign it, for the number of units set forth in the subscription agreement. Subscriptions will be accepted no sooner than five (5) business days following the date of the Subscription Agreement or rejected within 30 days of their receipt. If we reject your subscription agreement, your funds will be returned to you within 10 business days. If we accept your subscription agreement, you will be an owner of the units and a member of the Fund within 5 business days after we accept your subscription. If we do accept your subscription agreement, we will provide you with a confirmation of the number of units you have acquired. Because the units are not certificated, we will not mail you a unit certificate.


	You will have limited information to review our past performance.


	We must rely on Vestin Mortgage to manage our operations and select our loans for investment.


	Our Manager lacks experience with certain real estate markets.


	Any borrowing by us will increase your risk and may reduce the amount we have available to distribute to members.


	Any indemnification of our Manager by us will decrease the amount available for distribution to you.


	Defaults on our mortgage loans will decrease our revenues and your distributions.


	Our mortgage loans will not be marketable and we expect no secondary market to develop.


	Our loan portfolio may be riskier if it is not diversified geographically.


	We may have difficulty protecting our rights as a secured lender.


	By becoming the owner of property, we may become liable for unforeseen environmental obligations.


	Our results are subject to fluctuations in interest rates and other economic conditions.


	We face competition for mortgage loans that may reduce available yields and fees available.


	Our lending operations are subject to certain regulatory requirements.


	Vestin Mortgage will face conflicts of interest concerning the allocation of its personnel’s time.


	Your right to vote is limited and you are bound by majority vote.


	The value of your units may decrease below ten dollars per unit.


	Vestin Capital has a limited operating history and track record in public offerings.


	Your cash flow and distributions will be reduced if we are taxed as a corporation.


	An IRS audit of our books and records could result in an audit of your tax returns.