UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-K
 
 (Mark
one)
 
 [X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended December 31,
2007
 
 Or
 
 [   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For the
transition period from _________ to _________
 
 Commission
File Number 333-125121
 
 VESTIN
      REALTY MORTGAGE II, INC.(Exact
      name of registrant as specified in its
charter)
 
 
 MARYLAND
              
              61-1502451(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
 
 
 6149
SOUTH RAINBOW BOULEVARD, LAS VEGAS, NEVADA 89118
 (Address
of principal executive offices)  (Zip Code)
 
 Registrant’s
telephone number, including area code 702.227.0965
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 None
              
              None(Title
      of each class)
              
              (Name
      of each exchange on which
registered)
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 Common
      Stock, $0.0001 Par Value(Title
      of class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes
[   ] No [X]
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes
[   ] No [X]
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X] No [   ]
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer [   ]
              Accelerated
      filer [X]Non-accelerated
      filer [   ](Do
      not check if a smaller reporting company)
              Smaller
      reporting company
[   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes [   ] No [X]
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
 
 Class
              
              
              Market
      Value as of
                June
      30, 2007Common
      Stock, $0.0001 Par Value
              
              $
              223,980,991.67
 
 Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
 
 Class
              
              
              Number
      of Shares Outstanding
                As
      of March 10, 2008Common
      Stock, $0.0001 Par Value
              
              
              14,873,584
 
 
  Table of Contents
  
 TABLE
OF CONTENTS
 
 PagePART IITEM 1.
              BUSINESS
              1ITEM 1A.
              RISK FACTORS
              11ITEM 1B.
              UNRESOLVED STAFF COMMENTS
              23ITEM 2.
              PROPERTIES
              23ITEM 3.
              LEGAL PROCEEDINGS
              23ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              23PART IIITEM 5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
              23ITEM 6.
              SELECTED FINANCIAL DATA
              27ITEM 7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
              28ITEM 7A.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              47ITEM 8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA
              48ITEM 9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
              86ITEM 9A.
              CONTROLS AND PROCEDURES
              87ITEM 9A(T).
              CONTROLS AND PROCEDURES
              90ITEM 9B.
              OTHER INFORMATION
              90PART IIIITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
              90ITEM 11.
              EXECUTIVE COMPENSATION
              95ITEM 12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              95ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
              96ITEM 14.
              PRINCIPAL ACCOUNTING FEES AND SERVICES
              96PART IVITEM 15.
              EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              97EXHIBIT INDEX
              98SIGNATURES
              99
 
 
 
  Table of Contents
  
 PARTI
 
 Note
Regarding Forward-Looking Statements
 
 This
report and other written reports and oral statements made from time to time by
us may contain forward-looking statements.  Such forward-looking
statements may be identified by the use of such words as “expects,” “plans,”
“estimates,” “intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,”
“projects,” “anticipates,” “believes” and words of similar
expression.  Forward-looking statements are likely to address such
matters as our business strategy, future operating results, future sources of
funding for real estate loans brokered by us, future economic conditions and
pending litigation involving us.  Some of the factors which could
affect future results are set forth in the discussion under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Factors Affecting Our Operating Results.”
 
 ITEM
      1.
              BUSINESS
 
 General
 
 Vestin
Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
liability company for the purpose of investing in commercial real estate loans
(hereafter referred to as “real estate loans”).  Vestin Realty
Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
corporation for the sole purpose of effecting a merger with Fund
II.  On March 31, 2006, Fund II merged into VRM II and the members of
Fund II received one share of VRM II’s common stock for each membership unit of
Fund II.  References in this report to the “Company”, “we”, “us” or
“our” refer to Fund II with respect to the period prior to April 1, 2006 and to
VRM II with respect to the period commencing on April 1,
2006.  Because we were a limited liability company (“LLC”) during the
prior periods reflected in this report, we make reference to Fund II’s “members”
rather than “stockholders” in reporting our financial results.
 
 We invest
in loans secured by real estate through deeds of trust or mortgages (hereafter
referred to collectively as “deeds of trust” and as defined in our Management
Agreement as “Mortgage Assets”).  We commenced operations in June
2001.
 
 We
operate as a real estate investment trust (“REIT”).  We are not a
mutual fund or an investment company within the meaning of the Investment
Company Act of 1940, nor are we subject to any regulation
thereunder.  As a REIT, we are required to have a December 31 fiscal
year end.
 
 Our
manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
Group”), a Delaware corporation.  Michael Shustek, the CEO and
director of our manager and CEO, President and a director of us, wholly owns
Vestin Group, Inc., which is engaged in asset management, real estate lending
and other financial services through its subsidiaries.  Our manager,
prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and
was generally engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property.  On July 1, 2006, the
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. that has continued the business of brokerage, placement and
servicing of real estate loans.  Vestin Originations, Inc. is a wholly
owned subsidiary of Vestin Group.  On September 1, 2007, the servicing
of real estate loans was assumed by our manager.
 
 Pursuant
to our management agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us, and provides similar
services to our subsidiaries.  Without limiting the foregoing, our
manager performs other services as may be required from time to time for
management and other activities relating to our assets, as our manager shall
deem appropriate.  Consequently, our operating results are dependent
upon our manager’s ability and performance in managing our operations and
servicing our assets.
 
 Vestin
Mortgage, Inc. is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”),
as the successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III,
LLC (“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned
by our manager’s CEO.  These entities also invest in real estate
loans.
  - 1
-
 Table of Contents
  
 The
consolidated financial statements include the accounts of us and our wholly
owned taxable REIT subsidiary, TRS II, Inc.  All significant
inter-company transactions and balances have been eliminated in
consolidation.
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through Vestin II Capital Trust I (“VCT I), a special
purpose business trust.  VCT I, is a Delaware statutory
trust.  Our interest in VCT I is accounted for using the equity method
and the assets and liabilities are not consolidated into our financial
statements due to our determination that VCT I is a variable interest entity in
which we are not the primary beneficiary under Financial Accounting Standards
Board Interpretation No. 46R (“FIN 46R”).
 
 Segments
 
 We
operate as one business segment.
 
 Real
Estate Loan Objectives
 
 As of
December 31, 2007, our loans were in the following states: Arizona, California,
Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington.  The
loans we invest in are selected for us by our manager from among loans
originated by Vestin Originations or non-affiliated mortgage
brokers.  When Vestin Originations or a non-affiliated mortgage broker
originates a loan for us, that entity identifies the borrower, processes the
loan application, brokers and sells, assigns, transfers or conveys the loan to
us.  We believe that our loans are attractive to borrowers because of
the expediency of our manager’s loan approval process, which takes about ten to
twenty days.
 
 As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  Because of our increased willingness
to fund riskier loans, borrowers are generally willing to pay us an interest
rate that is two to five points above the rates generally charged by other
commercial lenders.  We invest a significant amount of our funds in
loans in which the real property, held as collateral, is not generating any
income to the borrower.  The loans in which we invest are generally
riskier because the borrower’s repayment depends on their ability to refinance
the loan or develop the property so they can refinance the loan.
 
 Our
principal investment objectives are to maintain and grow stockholder value
by:
 
 ·
              Producing
      revenues from the interest income on our real estate
  loans;
 
 ·
              Providing
      cash distributions from the net income generated by our real estate loans;
      and
 
 ·
              Reinvesting,
      to the extent permissible, payments of principal and sales (net of
      expenses).
 
 Acquisition
and Investment Policies
 
 We seek
to invest approximately 97% of our assets in real estate
loans.  Approximately 3% will be held as a working capital cash
reserve.  As of December 31, 2007, approximately 83% of our assets,
net of allowance for loan losses, are classified as investments in real estate
loans.
 
 Generally,
the collateral on our real estate loans is 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.
 
 Our real
estate investments are not insured or guaranteed by any government
agency.
 
 Our
manager continuously evaluates prospective investments, selects the loans in
which we invest and makes all investment decisions on our behalf.  In
evaluating prospective real estate loan investments, our manager considers such
factors as the following:
  - 2
-
 Table of Contents
  
 ·
              The
      ratio of the amount of the investment to the value of the property by
      which it is secured, or the loan-to-value
ratio;
 
 ·
              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, if
  applicable;
 
 ·
              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.
 
 Our
manager may obtain our loans from an affiliated or non-affiliated mortgage
broker who may solicit previous or new borrowers in those states where
permissible.  We may purchase existing loans that were originated by
third party lenders or brokered by Vestin Originations to facilitate our
purchase of the loans.  Vestin Originations and/or our manager will
sell, assign, transfer or convey the loans to us without a premium, but may
include its service fees and compensation.
 
 When
selecting real estate loans for us, our manager generally adheres to the
following guidelines, which are intended to control the quality of the
collateral given for our loans:
 
 1.Priority of
Loans.Generally, our assets are secured by first deeds of
trust.  First deeds of trust are loans secured by a full or divided
interest in a first deed of trust secured by the property.  We will
not invest in any loan that is junior to more than one loan.  As of
December 31, 2007, approximately 99.18% of the principal amount of our
outstanding investments in loans was secured by first deeds of
trust.
 
 2.Loan-to-Value
Ratio.The amount of our loan combined with the outstanding
debt secured by a senior loan on a security property generally does not exceed
the following percentage of the appraised value of the security property at
origination:
 
 Type
      of Secured Property
              Loan-to-Value
      RatioResidential
              75%Unimproved
      Land
              60%
       (of anticipated as-if developed value)Acquisition
      and Development
              60%
       (of anticipated as-if developed value)Commercial
      Property
              75%
       (of anticipated as-if developed value)Construction
              75%
       (of anticipated post- developed value)Leasehold
      Interest
              75%
       (of value of leasehold
interest)
 
 We may
deviate from these guidelines under certain circumstances.  For
example, our manager, in its discretion, may increase any of the above
loan-to-value ratios if 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 attached to the real 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
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,
our manager, in its sole discretion, shall be free to accept any reasonable
financing terms that it deems to be in our best interest.  As of
December 31, 2007, our actual loan-to-value ratio for our loan portfolio as a
whole, prior to allowances for loan losses based on updated appraisals obtained
during the year, was 72.64% on a weighted average basis.
  - 3
-
 Table of Contents
  
 Loan-to-value
ratios are based on appraisals that the manager receives at the time of loan
underwriting and may not reflect subsequent changes in value
estimates.  Such appraisals, which may have been commissioned by the
borrower and may precede the placement of the loan with us, are generally dated
no greater than 12 months prior to the date of loan origination.  The
appraisals may be for the current estimate of the “as-if developed” value of the
property, 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, 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 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, we may not recover the full amount of the
loan.
 
 We or the
borrower retain appraisers who are state certified or licensed appraisers and/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 National
Society of Real Estate Appraisers, American Society of Real Estate Appraisers,
or from among appraisers with other qualifications acceptable to Vestin
Originations and/or our manager.  However, appraisals are only
estimates of value and cannot be relied on as measures of realizable
value.  An employee or agent of Vestin Originations or our manager
will review each appraisal report and will generally conduct 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.
 
 3.  Terms of Real Estate
Loans.Our loans as of December 31, 2007, had original terms
of two months to twenty-four months, excluding extensions.  Most of
our loans are for an initial term of 12 months.  Generally 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.
 
 As of
December 31, 2007, all of our loans provided 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 real estate loans that require
borrowers to maintain interest reserves funded from the principal amount of the
loan for a period of time.  At December 31, 2007, we had approximately
$108.8 million in investments in real estate loans that had interest reserves
where the total outstanding principal due to our co-lenders and us was
approximately $128.6 million.  These loans had interest reserves of
approximately $10.4 million, of which our portion was approximately $8.8
million.  At December 31, 2006, we had approximately $71.5 million in
investments in real estate loans that had interest reserves where the total
outstanding principal due to our co-lenders and us was approximately $120.3
million.  These loans had interest reserves of approximately $5.6
million, of which our portion was approximately $4.3 million.
 
 4.  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, 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 liability insurance coverage for all
  loans.
 
 ·
              Borrowers
      will obtain fire and casualty insurance for all loans secured by improved
      real property, covering us in an amount sufficient to cover the
      replacement cost of improvements.
 
 ·
              All
      insurance policies, notes, deeds of trust or loans, escrow agreements, and
      any other loan documents for a particular transaction will cover us as a
      beneficiary.
  - 4
-
 Table of Contents
  
 5.  Purchase of Real Estate Investments
from Affiliates.We may acquire real estate loans from our
affiliates, including our manager, without a premium, but may include allowable
fees and expenses, but without allowance of any other compensation for the
loans.
 
 6.  Note
Hypothecation.We may also acquire real estate loans secured
by assignments of secured promissory notes.  These real estate loans
must satisfy our stated investment standards, including our loan-to-value
ratios, and may not exceed 80% of the principal amount of the assigned note upon
acquisition.  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 value of the property, and the
real estate loan will not exceed 80% of the principal amount of the assigned
note.  For real estate loans secured by promissory notes, we will rely
on the appraised value of the underlying property, as determined by an
independent written appraisal that was conducted within the then-preceding
twelve months.  If an appraisal was not conducted within that period,
then we will arrange for a new appraisal to be prepared for the property prior
to acquisition of the loan.
 
 7.  Participation.We
participate in loans with other lenders, including affiliates and voluntarily
comply with the North American Securities Administrators Association (“NASAA”)
Guidelines or otherwise approved by our board of directors, 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 of our loan portfolio;
      or
 
 ·
              A
      loan fits within our investment guidelines, however it would constitute
      more than 20% of our anticipated capital contribution or otherwise be
      disproportionately large given our then existing
  portfolio.
 
 Loans in
which unaffiliated investors have participated through inter-creditor agreements
(“Inter-creditor Agreements”) are accounted for as secured borrowings in
accordance with Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In
the event of borrower non- performance, the Inter-creditor Agreements generally
provide that the Lead Lenders must repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on the participated
loan amount; (ii) substituting an alternative loan acceptable to the Investor;
or (iii) repurchasing the participation from the Investor for the outstanding
balance plus accrued interest.
 
 An
Investor may participate in certain loans with the Lead Lenders through
participation agreements.  In the event of borrower non-performance,
the participation agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lenders being
repaid.
 
 As of
December 31, 2007, 80% of our loans were loans in which we participated with
other lenders, most of whom are our affiliates.
 
 8.  Diversification.We
voluntarily comply with NASAA Guidelines, unless otherwise approved by our board
of directors, which provide that we neither invest in or make real estate 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 real estate loans to or from
any one borrower, which would exceed, in the aggregate, an amount greater than
20% of our capital.  As of December 31, 2007, our single largest loan
accounted for approximately 9% of our stockholders’ equity.  The loan
yields interest at 14% per annum and, as of December 31, 2007, our portion of
the outstanding balance of the loan was approximately $25.7
million.  As of March 10, 2008, this loan was performing according to
the terms of the loan.
 
 9.  Reserve Fund.We
have established contingency working capital reserves of approximately 3% of our
capital to cover our unexpected cash needs.
  - 5
-
 Table of Contents
  
 10.  Credit
Evaluations.When reviewing a loan proposal, our manager
determines whether a borrower has sufficient equity in the security
property.  Our manager may also consider the income level and
creditworthiness of a borrower to determine its ability to repay the real estate
loan.
 
 11.  Sale of Real Estate Loan
Investments.Although our manager has no plans to do so, our
manager may sell, our real estate loans or interest in our loans to either
affiliates or non-affiliated parties when our manager believes that it is
advantageous for us to do so.  However, we do not expect that the
loans will be marketable or that a secondary market will ever develop for
them.
 
 Real
Estate Loans to Affiliates
 
 We will
not invest in real estate loans made to our manager, Vestin Group or any of our
affiliates.  However, we may acquire an investment in a real estate
loan payable by our manager when our manager has assumed the obligations of the
borrower under that loan, through a foreclosure on the property.
 
 Investment
of Loans from our manager and Its Affiliates
 
 In
addition to those loans our manager selects for us, we invest in loans that were
originated by Vestin Originations or other parties as long as the loan(s)
otherwise satisfies all of our lending criteria.  However, we will not
acquire a loan from or sell a loan to a real estate program in which our manager
or an affiliate has an interest except in compliance with NASAA Guidelines or as
otherwise approved by our board of directors.
 
 Types
of Loans We Invest In
 
 We
primarily invest in loans that are secured by first or second trust deeds on
real property.  Such loans fall into the following categories: raw and
unimproved land, acquisition and development, construction, commercial property
and residential loans.  The following discussion sets forth certain
guidelines our manager intends to follow in allocating our investments among the
various types of loans.  Our manager, however, may change these
guidelines at its discretion, subject to review by our board of
directors.  Actual investments will be determined by our manager
pursuant to the terms of the management agreement, and the actual percentages
invested among the various loan categories may vary from the guidelines
below.
 
 Raw
and Unimproved Land Loans
 
 Generally,
15% to 25% of the loans invested in by us may be 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.  We will
generally invest in loans for up to 60% of the as-if developed appraised value
of the property and we generally require that the borrower has 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, and successful development by the purchaser, upon which development is
dependent on availability of financing.  As of December 31, 2007,
approximately 33% of our loans were in this category.
 
 Acquisition
and Development Loans
 
 Generally,
10% to 25% of the loans invested in by us may be acquisition and development
loans.  Such 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, together with the costs
associated with obtaining entitlements, including zoning, mapping and other
required governmental approvals.  We will generally invest in loans
with a face value of up to 60% of the appraised value of the
property.  Loan-to-value ratios on acquisition and development loans
are calculated using as-if developed appraisals.  Such appraisals have
the same valuation limitations as raw and unimproved land loans, described
above.  As of December 31, 2007, approximately 6% of our loans were in
this category.
 
  - 6
-
 Table of Contents
  Construction
Loans
 
 Generally,
10% to 70% of our loans may be construction loans.  Such loans provide
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 generally finance up to 75% of the appraised
value of the property and proposed improvements.  Such appraisals have
the same valuation limitations as raw and unimproved land loans, described
above.  As of December 31, 2007, approximately 16% of our loans were
in this category.
 
 Commercial
Property Loans
 
 Generally,
20% to 50% of the loans we invest in may be commercial property
loans.  Such loans provide funds to allow borrowers to acquire
income-producing property or to make improvements or renovations to the property
in order to increase the net operating income of the property so that it may
qualify for institutional refinancing.  Generally, we review the
property appraisal and generally invest in loans for up to 75% of such appraised
value of the property.  As of December 31, 2007, approximately 45% of
our loans were in this category
 
 Residential
Loans
 
 A small
percentage of the loans invested in by us may be 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
generally invest in loans for up to 75% of the value of the
property.  As of December 31, 2007, none of our loans were in this
category.
 
 Collateral
 
 Each loan
is secured by a lien on either a fee simple or leasehold interest in real
property as evidenced by a first deed of trust or a second deed of
trust.
 
 First
Deed of Trust
 
 Most of
our loans are secured by first deeds of trust.  Thus as a lender, we
will have rights as a first priority lender of the collateralized
property.  As of December 31, 2007, approximately 99.18% of our loans
were secured by first deeds of trust.
 
 Second
Deed of Trust
 
 Up to 10%
of our loans may be secured by second deeds of trust.  In a second
priority loan, the rights of the lender (such as the right to receive payment on
foreclosure) will be subject to the rights of the first priority
lender.  In a wraparound loan, the lender’s rights will be comparably
subject to the rights of a first priority lender, but the aggregate indebtedness
evidenced by the loan documentation will be the first priority loan plus the new
funds the lender invests.  The lender would receive all payments from
the borrower and forward to the senior lender its portion of the payments the
lender receives.  As of December 31, 2007, approximately 0.82% of our
loans were secured by a second deed of trust.
 
 Prepayment
Penalties and Exit Fees
 
 Generally,
the loans we invest in will not contain prepayment penalties but may contain
exit fees payable when the loan is paid in full, by the borrower, to Vestin
Originations or its affiliates as part of their compensation.  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 may allow
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.
  - 7
-
 Table of Contents
  As of
December 31, 2007, none of our loans had a prepayment penalty and 24 of our
loans, totaling approximately $157.6 million, had an exit fee.
 
 Extensions
to Term of Loan
 
 Our
original loan agreements generally permit extension to the term of the loan by
mutual consent.  Such extension is 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
compliance with the material terms of the loan, including, but not limited to,
the borrower’s obligation to make interest payments on the loan.  As
of December 31, 2007, approximately 41% of our loans, totaling approximately
$151.7 million, had received an extension to the terms of the loan.
 
 Interest
Reserves
 
 We may
invest in loans that include a commitment for an interest reserve, which is
usually established at loan closing.  The interest reserve may be
advanced by us or other lenders with the amount of the borrower’s indebtedness
increased by the amount of such advances.  At December 31, 2007, we
had approximately $108.8 million in investments in real estate loans that had
interest reserves where the total outstanding principal due to our co-lenders
and us was approximately $128.6 million.  These loans had interest
reserves of approximately $10.4 million, of which our portion was approximately
$8.8 million.
 
 Balloon
Payment
 
 As of
December 31, 2007, all of our loans provided for payments of interest only with
a “balloon” payment of principal payable in full at the end of the
term.  There are no specific criteria used in evaluating the credit
quality of borrowers for real estate 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 real
estate 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.
 
 Repayment
of Loans on Sale of Properties
 
 We may
require a borrower to repay a real estate loan upon the sale of the 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.
 
 Variable
Rate Loans
 
 Occasionally
we may acquire variable rate loans.  Variable rate loans originated by
Vestin Originations 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).  As of December 31, 2007, all of the loans in our real estate
loan portfolio were fixed rate loans, with the exception of two loans with a
variable interest rate, totaling approximately $16.3 million.  One of
these loans was non-performing as of December 31, 2007, see Note D – Investments in Real Estate
Loans in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for more
information.
 
 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.  Our manager and Vestin Originations attempt 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 Originations contain provisions under
which the interest rate cannot fall below the initial rate.
  - 8
-
 Table of Contents
  
 Variable
rate loans generally have interest rate caps.  For these loans, there
is the risk that the market rate may exceed the interest cap rate.
 
 Borrowing
 
 We may
incur indebtedness to:
 
 ·
              Make
      distributions to enable us to comply with REIT distribution
      requirements;
 
 ·
              Finance
      our investments in real estate
loans;
 
 ·
              Prevent
      a default under real estate loans that are senior to our real estate
      loans;
 
 ·
              Discharge
      senior real estate loans if this becomes necessary to protect our
      investment in real estate loans; or
 
 ·
              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 real estate
loans.  This indebtedness may be with recourse to our
assets.
 
 In
addition, we may enter into structured arrangements with other lenders in order
to provide them with a senior position in real estate loans that we might
jointly fund.  For example, we might establish a wholly owned special
purpose corporation that would borrow funds from an institutional lender under
an arrangement where the resulting real estate 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 would assure the institutional lender of repayment
in full prior to our receipt of any repayment on the jointly funded real estate
loans.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  We may borrow up to 70% of the fair
market value of our outstanding real estate loans at any time and consequently,
subject to the terms of the trust preferred securities, we may borrow additional
funds in order to further expand our loan portfolio.  These borrowings
will require us to carefully manage our cost of funds.  The junior
subordinated notes sold in June 2007 in connection with the trust preferred
financing bear interest at a fixed rate of 8.75% through July 2012; thereafter
the interest rate is LIBOR plus 3.5%, resetting quarterly.  In order
to benefit from this arrangement, we need to loan the proceeds at rates in
excess of the rates payable on the junior subordinated notes.  No
assurance can be given that we will be successful in this effort, particularly
if non-performing loans reduce our effective rate of return on our outstanding
loans.
 
 Competition
 
 Generally,
real estate developers depend upon the timely completion of a project to obtain
a competitive advantage when selling their properties.  We have sought
to attract real estate developers by offering expedited loan processing, which
generally provides quick loan approval and funding of a loan.  As a
result, we have established a market niche as a non-conventional real estate
lender.
 
 We
consider our direct competitors to be the providers of real estate loans who
offer short-term, equity-based loans on an expedited basis for higher fees and
rates than those charged by other financial institutional lenders such as
commercial banks, insurance companies, mortgage brokers and pension
funds.  Many of the companies against which we compete have
substantially greater financial, technical and other resources than either our
company or our manager.  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.
 
  - 9
-
 Table of Contents
  Regulation
 
 We are
managed by Vestin Mortgage, subject to the oversight of our board of directors,
pursuant to the terms and conditions of our Management
Agreement.  Vestin Originations, an affiliate of Vestin Mortgage,
operates as a mortgage broker and is subject to extensive regulation by federal,
state and local laws and governmental authorities.  Vestin
Originations conducts its real estate loan business under a license issued by
the State of Nevada Mortgage Lending Division.  Under applicable
Nevada law, the division has broad discretionary authority over Vestin
Originations’ activities, including the authority to conduct periodic regulatory
audits of all aspects of Vestin Originations’ operations.
 
 We, our
manager and Vestin Originations 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 our activities.  In addition, our manager
is subject to the Employee Retirement Income Security Act of 1974.
 
 The NASAA
Guidelines have been adopted by various state agencies charged with protecting
the interest of the investors.  Administrative fees, loan fees, and
other compensation paid to our manager and its affiliates would be generally
limited by the NASAA Guidelines.  These guidelines also include
certain investment procedures and criteria, which are required for new loan
investments.  We are not required to comply with NASAA Guidelines;
however, we voluntarily do so unless a majority of our unaffiliated directors
determines that it is in our best interest to diverge from NASAA
Guidelines.
 
 Because
our business is regulated, the laws, rules and regulations applicable to us are
subject to regular modification and change.  There can be no assurance
that laws, rules or regulations will not be adopted in the future that could
make compliance much more difficult or expensive, restrict our ability to broker
or service loans, further limit or restrict the amount of commissions, interest
and other charges earned on loans brokered by us, Vestin Originations, our
manager, or otherwise adversely affect our business or prospects.
 
 Employees
 
 We have
no employees.  Our manager (Vestin Mortgage), Vestin Originations and
their parent company, Vestin Group, Inc., have provided and will continue to
provide all of the employees necessary for our operations.  As of
December 31, 2007, those entities had a total of 23 full-time and no part-time
employees.  All employees are at-will employees and none are covered
by collective bargaining agreements, except John Alderfer our manager’s prior
CFO.  Mr. Alderfer is party to an employment, non-competition and
confidentiality contract with Vestin Group, Inc., the parent company of our
manager, through December 31, 2008.
 
 Available
Information
 
 Our
Internet website address is www.vestinrealtymortgage2.com.  We
make available free of charge through http://phx.corporate-ir.net/phoenix.zhtml?c=193758&p=irol-sec
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and all amendments to those reports as soon as reasonably practical
after such material is electronically filed with or furnished, pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the United
States Securities and Exchange Commission (“SEC”).  Further, a copy of
this annual report on Form 10-K is located at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549.  Information on the
operations of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.  The SEC maintains an internet site that contains
reports, proxy and information statements and other information regarding our
filings at www.sec.gov.  Information
contained on our website does not constitute a part of this Report on Form
10-K.
 
  - 10
-
 Table of Contents
  ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and
distributions.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.  We seek to mitigate the risk by
estimating the value of the underlying collateral and insisting on adequate
loan-to-value ratios.  However, we cannot be assured that these
efforts will fully protect us against losses on defaulted loans.  Our
appraisals are generally dated within 12 months of the date of loan origination
and may not reflect a decrease in the value of the real estate due to events
subsequent to the date of the appraisals.  Any subsequent decline in
real estate values on defaulted loans could result in less security than
anticipated at the time the loan was originally made, which may result in our
not recovering the full amount of the loan.  Our weighted average
loan-to-value ratio, based on updated appraisals obtained during the year and
prior to allowances for loan losses, as of December 31, 2007, was 72.64%, as
compared to 69.97% as of December 31, 2006.   Any failure of a
borrower to pay interest on loans will reduce our revenues, the distributions we
pay to stockholders and, most likely, the value of common
stock.  Similarly, any failure of a borrower to repay loans when due
may reduce the capital we have available to make new loans, thereby adversely
affecting our operating results.
 
 As of
December 31, 2007, we had in our portfolio approximately $19.4 million in
delinquent loans, net of allowance for loan losses approximately $11.2 million,
which does not include allowances of approximately $1.7 million for performing
loans, and approximately $28.6 million of real estate held for sale for a total
of approximately $48.0 million in non-performing assets, which represented
approximately 18% of our stockholders’ equity.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders, which may lead to an increase in
non-performing assets in our loan portfolio and create additional risks of
return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  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.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.
 
 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.
  - 11
-
 Table of Contents
  In
addition, most of the appraisals are prepared on an as-if developed basis, which
approximates the post-construction value of the collateralized property assuming
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 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 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.
 
 We
typically make “balloon payment” loans, which are riskier than loans with
payments of principal over an extended period of time.
 
 The loans
we invest in or purchase generally 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.  As of December 31, 2007, all of our loans provided
for payments of interest only with a “balloon” payment of principal payable in
full at the end of the term.  Loans with balloon payments are riskier
than loans with payments of principal over an extended time period such as 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.  The borrower’s
ability to achieve a successful sale or refinancing of the property may be
adversely impacted by deteriorating economic conditions or illiquidity in the
credit markets.  There are no specific criteria used in evaluating the
credit quality of borrowers for 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.
 
 A
prolonged economic slowdown, lengthy or severe recession or significant increase
in interest rates could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the year ended December 31,
2007, we VRM I and Fund III conducted updated appraisals on a number of
properties securing our loans, representing approximately 60% of our loan
portfolio, and concluded that the estimated value of such properties should be
reduced by approximately $22.9 million.  Our share of this reduction
was approximately $18.1 million, which has adversely impacted our weighted
average loan to value ratio.  As a commercial real estate lender
willing to invest in riskier loans, rates of delinquencies, foreclosures and
losses on our loans could be higher than those generally experienced in the
commercial mortgage lending industry during periods of economic slowdown or
recession.  We are of the opinion that problems in the sub-prime
residential mortgage market have adversely affected the general economy and the
availability of funds for commercial real estate developers.  We
believe this lack of available funds has led to an increase in defaults on our
loans.  Furthermore, problems experienced in U.S. credit markets since
the summer of 2007 have reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary to pay back our
loans.  Thus, an extended period of illiquidity in the credit markets
could result in a material increase in the number of our loans that are not paid
back on time.  For the year ended December 31, 2007, loan originations
accounted for all loans funded, except for eight loans that were refinanced
during that period.  All eight of these refinanced loans had interest
rates equal to or higher than the interest rates on the original
loan.  Any sustained period of increased delinquencies, defaults or
foreclosures will likely have an adverse affect upon our ability to originate,
purchase and securitize loans, which could significantly harm our business,
financial condition, liquidity and results of operations.
 
  - 12
-
 Table of Contents
  Our
loans are not guaranteed by any governmental agency.
 
 Our loans
are not insured or guaranteed by a federally owned or guaranteed mortgage
agency.  Consequently, our recourse, if there is a default, may be to
foreclose upon the real property securing a loan and/or pursuing the borrower’s
guarantee of the principal.  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.
 
 Our
real estate loans may not be marketable, and we expect no secondary market to
develop.
 
 We do not
expect our real estate 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.
 
 The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  We may borrow up to 70% of the fair
market value of our outstanding real estate loans at any time and consequently,
subject to the terms of the trust preferred securities, we may borrow additional
funds in order to further expand our loan portfolio.  These borrowings
will require us to carefully manage our cost of funds.  The junior
subordinated notes sold in June 2007 in connection with the trust preferred
financing bear interest at a fixed rate of 8.75% through July 2012; thereafter
the interest rate is LIBOR plus 3.5%, resetting quarterly.  In order
to benefit from this arrangement, we need to loan the proceeds at rates in
excess of the rates payable on the junior subordinated notes.  Loans
made during the six months ended December 31, 2007 had a weighted average
interest rate of 11.79%.  However, no assurance can be given that we
will be successful in continuing to make loans at rates in excess of our cost of
funds, particularly if non-performing loans reduce our effective rate of return
on our outstanding loans or if there is a continuing decline in interest
rates.
 
 In
addition, the indenture governing the junior subordinated notes sets forth a
number of covenants, which may constrain our flexibility in operating our
business.  Should we breach a material covenant or if we are unable to
meet our payment obligations on the junior subordinated notes, the purchasers of
the trust preferred securities will likely declare us in default, resulting in
acceleration of the principal sums due on the notes and restrictions on the
payment of dividends to our stockholders.
 
 The terms
of any additional 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 loan 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 that will result in a decrease of the amount
available for distribution.
 
 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.  During October 2006, we, our manager, Vestin
Originations, Inc., VRM I and Fund III entered into an intercreditor agreement
with an unrelated third party related to the funding of a construction real
estate loan.  The secured borrowing was recognized pro rata between
us, VRM I and Fund III for the amount each entity has funded for the
loan.  During May 2007, the secured borrowings were paid in
full.
 
 We may
need cash to meet our minimum REIT distribution requirements and limit U.S.
federal income taxation.  Because we are required to distribute
annually to our stockholders at least 90% of our REIT taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) to qualify as a REIT and because we intend to distribute substantially
all of our REIT taxable income and net capital gain, our ability to expand our
loan portfolio will depend in large part on external sources of
capital.  In addition, if our minimum distribution requirements to
maintain our REIT status and minimize U.S. federal income taxation become large
relative to our cash flow as a result of our taxable income exceeding our cash
flow from operations, then we may be required to borrow funds or raise capital
by selling assets to meet those distribution requirements.
  - 13
-
 Table of Contents
  Any
equity financing may result in substantial dilution to our stockholders, and any
debt financing may include restrictive covenants.  We may not be able
to raise capital on reasonable terms, if at all.
 
 We
may have difficulty protecting our rights as a secured lender.
 
 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;
 
 ·
              Required
      licensing and regulatory approvals may complicate our ability to foreclose
      or to sell a foreclosed property where our collateral includes an
      operating business.  See Note O – Legal Matters Involving The
      Company in the notes to the consolidated financial statement under
      Part II, Item 8 Financial Statements and
      Supplementary Data of this Annual Report on Form 10-K for further
      information.
 
 ·
              We
      may not be able to pursue deficiency judgments after we foreclose on
      collateral; and
 
 ·
              State
      and federal bankruptcy laws can prevent us from pursuing any actions,
      regardless of the progress in any of these suits or
      proceedings.
 
 By
becoming the owner of property, we may incur additional obligations, which may
reduce the amount of funds available for distribution.
 
 We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  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.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.
 
 Under
applicable environmental laws, 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.
 
  - 14
-
 Table of Contents
  Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 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
distributions to stockholders.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 §
              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 Originations or our manager, 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; and
 
 §
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if 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 real estate 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.  As of December 31,
      2007, none of our loans had a prepayment penalty, although 24 of our
      loans, totaling approximately $157.6 million, had an exit
      fee.  However, depending upon the amount by which interest rates
      decline, the amount of the exit fees is generally not significant in
      relation to the potential savings borrowers may realize as a result of
      prepaying their loans.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
December 31, 2007, our loans were in the following states: Arizona, California,
Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington, with
approximately 45%of our loans in Nevada.  Depending on the market and
on our company’s performance, we plan to expand our investments throughout the
United States.  However, our manager has limited experience outside of
the Western and Southern United States.  Real estate markets vary
greatly from location to location and the rights of secured real estate lenders
vary considerably from state to state.
 
 Legal
actions seeking damages and appraisal rights could harm our operating results
and financial condition.
 
 We have
been named in several legal actions seeking damages and appraisal rights in
connection with the REIT conversion.  See Note N – Legal Matters Involving The
Manager and Note O – Legal Matters Involving The
Company in the notes to the consolidated financial statement under Part
II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.  While we believe these actions are without merit, the defense
of such actions has materially increased our legal costs and may require the
substantial attention of our management.  This in turn might adversely
impact our operating results.  During the year ended December 31,
2007, we incurred legal expenses of approximately $1.5 million related to such
actions.  Moreover, any adverse outcome in such actions could result
in our having to pay substantial damages, which would reduce our cash resources
and harm our financial condition.
 
 We
face competition for real estate loans that may reduce available yields and fees
available.
 
 We
consider our direct competitors to be the providers of real estate loans who
offer short-term, equity-based loans on an expedited basis for higher fees and
rates than those charged by other financial institutional lenders such as
commercial banks, insurance companies, mortgage brokers and pension
funds.  Many of the companies against which we compete have
substantially greater financial, technical and other resources than either our
company or our manager.
  - 15
-
 Table of Contents
  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.  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 our
distributions to stockholders.
 
 We
may have a lack of control over participations.
 
 We will
consider investing in or purchasing loans jointly with other lenders and
purchasers, some of whom might be affiliates of Vestin Mortgage.  We
will initially have, and will maintain a controlling interest as lead lender in
participations with non-affiliates.  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 or otherwise
approved by our board of directors.  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.
 
 MANAGEMENT
AND CONFLICTS OF INTEREST RISKS
 
 We
rely on our manager to manage our day-to-day operations and select our loans for
investment.
 
 Our
ability to achieve our investment objectives and to make distributions depends
upon our manager’s and its affiliate’s performance in obtaining, processing,
making and brokering loans for us to invest in and determining the financing
arrangements for borrowers.  Stockholders 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.  We pay our manager an annual
management fee of up to 0.25% of our aggregate capital received by us and Fund
II from the sale of shares or membership units.  This fee is payable
regardless of the performance of our loan portfolio.  Our manager’s
duties to our stockholders are generally governed by the terms of the
management contract, rather than by common law principles of fiduciary
duty.  Moreover, our manager is not required to devote its employees’
full time to our business and may devote time to business interests competitive
to our business.
 
 Our
manager’s lack of experience with certain real estate markets could impact its
ability to make prudent investments on our behalf.
 
 As of
December 31, 2007, our loans were in the following states:  Arizona,
California, Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and
Washington.  Depending on the market and on our company’s performance,
we plan to expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southern United States.  Real estate markets vary greatly
from location to location and the rights of secured real estate lenders vary
considerably from state to state.  Our manager’s limited experience in
most U.S. real estate markets may impact its ability to make prudent investment
decisions on our behalf.  Accordingly, where our manager deems it
necessary, it plans to utilize independent real estate advisors and local legal
counsel located in markets where it lacks experience for consultation prior to
making investment decisions.  Stockholders 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.
 
  - 16
-
 Table of Contents
  Our
success depends on key personnel of our manager, the loss of whom could
adversely affect our operating results, and on our manager’s ability to attract
and retain qualified personnel.
 
 Our
success depends in part upon the continued contributions of certain key
personnel of our manager, including; Michael V. Shustek (Chief Executive Officer
and President), Rocio Revollo (Chief Financial Officer), James M. Townsend
(Chief Operating Officer) and Daniel B. Stubbs (Senior Vice President,
Underwriting) some of whom would be difficult to replace because of their
extensive experience in the field, extensive market contacts and familiarity
with our company.  If any of these key employees were to cease
employment, our operating results could suffer.  None of the key
personnel of our manager are subject to an employment, non-competition or
confidentiality agreement with our manager, or us and we do not maintain “key
man” life insurance policies on any of them.  Our future success also
depends in large part upon our manager’s ability to hire and retain additional
highly skilled managerial, operational and marketing personnel.  Our
manager may require additional operations and marketing people who are
experienced in obtaining, processing, making and brokering loans and who also
have contacts in the relevant markets.  Competition for personnel is
intense, and we cannot be assured that we will be successful in attracting and
retaining skilled personnel.  If our manager were unable to attract
and retain key personnel, the ability of our manager to make prudent investment
decisions on our behalf may be impaired.
 
 Vestin
Mortgage serves as our manager pursuant to a long-term management agreement that
may be difficult to terminate and does not reflect arm’s length
negotiations.
 
 We have
entered into a long-term management agreement with Vestin Mortgage to act as our
manager.  The term of the management agreement is for the duration of
our existence.  The management agreement may only be terminated upon
the affirmative vote of a majority in interest of stockholders entitled to vote
on the matter or by our board of directors for cause upon 90 days’ written
notice of termination.  Consequently, it may be difficult to terminate
our management agreement and replace our manager in the event that our
performance does not meet expectations or for other reasons unless the
conditions for termination of the management agreement are
satisfied.  The management agreement was negotiated by related parties
and may not reflect terms as favorable as those subject to arm’s length
bargaining.
 
 Our
manager will face conflicts of interest concerning the allocation of its
personnel’s time.
 
 Our
manager is also the manager of VRM I, Fund III and inVestin, companies with
investment objectives similar to ours.  Our manager and Mr. Shustek,
who indirectly owns 100% of our manager, anticipate that they may also sponsor
other real estate programs having investment objectives similar to
ours.  As a result, our manager and Mr. Shustek may have conflicts of
interest in allocating their time and resources between our business and other
activities.  During times of intense activity in other programs and
ventures, our manager and its key people will likely devote less time and
resources to our business than they ordinarily would.  Our management
agreement with our manager does not specify a minimum amount of time and
attention that our manager and its key people are required to devote to our
company.  Thus, our manager may not spend sufficient time managing our
operations, which could result in our not meeting our investment
objectives.
 
 Our
manager and its affiliates will face conflicts of interest arising from our fee
structure.
 
 Vestin
Originations, an affiliate of our manager, will receive substantial fees from
borrowers for transactions involving real estate loans.  Many of these
fees are paid on an up-front basis.  In some cases, Vestin
Originations or our manager may be entitled to additional fees for loan
extensions or modifications and loan assumptions, reconveyances and exit
fees.  These and other fees are quantified and described in greater
detail under “Management Agreement — Compensation.”  Vestin
Originations’ compensation is based on the volume and size of the real estate
loans selected for us, regardless of their performance, which could create an
incentive to make or extend riskier loans.  Our interests may diverge
from those of our manager, Vestin Originations and Mr. Shustek to the extent
that Vestin Originations benefits from up-front fees that are not shared with
us.
 
 Vestin
Originations will be receiving fees from borrowers that would otherwise increase
our returns.  Because Vestin Originations receives all of these fees,
our interests will diverge from those of our manager, Vestin Originations and
Mr. Shustek when our manager decides whether we should charge the borrower
higher interest rates or our manager’ affiliates should receive higher fees from
borrowers.
  - 17
-
 Table of Contents
  
 We paid
our manager a management fee of approximately $1.1 million for the year ended
December 31, 2007.  In addition, Vestin Mortgage and Vestin
Originations received a total of approximately $4.7 million and $13.0 million,
respectively, in fees directly from borrowers for the year ended December 31,
2007.  The amounts received from borrowers represent fees earned by
Vestin Mortgage and Vestin Originations for loans originated for all funds
managed by Vestin Mortgage, including us, VRM I, Fund III and
inVestin.  Our assets represented approximately 77% of the assets
managed by Vestin Mortgage as of December 31, 2007.
 
 Our
manager will face conflicts of interest relating to other investments in real
estate loans.
 
 We expect
to invest in real estate loans when one or more other companies managed by our
manager are also investing in real estate loans.  There is a risk that
our manager may select for us a real estate loan investment that provides lower
returns than a real estate loan investment purchased by another program or
entity managed by our manager.  Our manager also serves as the manager
for VRM I, Fund III and inVestin, which have similar investment objectives as
our company.  There are no restrictions or guidelines on how our
manager will determine which loans are appropriate for us and which are
appropriate for VRM I, Fund III, inVestin or another company that our manager
manages.  Moreover, our manager has no obligation to provide us with
any particular opportunities or even a pro rata share of opportunities afforded
to other companies it manages.
 
 Our
manager may face conflicts of interest in considering a possible combination of
the Company with VRM I.
 
 After
announcing our interest in exploring a possible combination of VRM I with VRM
II, our board of directors recently decided to postpone consideration of such a
combination.  VRM I is a company, which is engaged in making mortgage
loans similar to the loans that we make and is managed by our
manager.  There may be cost savings and operating synergies that could
be achieved by combining the VRM I with VRM II.  Notwithstanding the
postponement, it is possible the potential combination will be considered again
in the future.  At this time, no decision has been made with respect
to whether a combination will be pursued, nor with respect to the possible form
of any such combination.  Since our manager owes a duty to the
investors in each of these entities, it could face a conflict of interest in
considering such a possible combination.  Any decision with respect to
a proposed combination with VRM I will most likely be subject to the approval of
the independent directors or stockholders of VRM I.
 
 UNITED
STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT QUALIFICATION
 
 Our
failure to qualify as a REIT would subject us to U.S. federal income tax, which
would reduce amounts available for distribution to our
stockholders.
 
 We have
elected to be taxed as a REIT under the Code.  Our qualification as a
REIT requires us to satisfy numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations, and
involves the determination of various factual matters and circumstances not
entirely within our control.  We intend that our organization and
method of operation will enable us to qualify as a REIT, but we may not so
qualify or we may not be able to remain so qualified in the
future.  Future legislation, new regulations, administrative
interpretations or court decisions could adversely affect our ability to qualify
as a REIT or adversely affect our stockholders.
 
 If we
fail to qualify as a REIT in any taxable year, we would be subject to U.S.
federal income tax (including any applicable alternative minimum tax) on our
taxable income at corporate rates, and we would not be allowed to deduct
distributions made to our stockholders in computing our taxable
income.  We may also be disqualified from treatment as a REIT for the
four taxable years following the year in which we failed to
qualify.  The additional tax liability would reduce our net earnings
available for investment or distribution to stockholders.  In
addition, we would no longer be required to make distributions to our
stockholders.  Even if we continue to qualify as a REIT, we will
continue to be subject to certain U.S. federal, state and local taxes on our
income and property.
 
  - 18
-
 Table of Contents
  Distributions
from a REIT are currently taxed at a higher rate than corporate
distributions.
 
 Under the
Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax
rate on both distributions from certain domestic and foreign corporations and
net long-term capital gain for individuals was reduced to 15% until
2008.  The Tax Increase Prevention and Reconciliation Act of 2005,
which signed into law on May 17, 2006, extended the 15% long-term net capital
gain rate to 2010.  However, this reduced rate of tax on distributions
generally will not apply to our distributions (except those distributions
identified by the company as “capital gain dividends” which are taxable as
long-term capital gain) and therefore such distributions generally will be taxed
as ordinary income.  Ordinary income generally is subject to U.S.
federal income tax rate at a rate of up to 35% for individuals.  The
higher tax rate on our distributions may cause the market to devalue our common
stock relative to stock of those corporations whose distributions qualify for
the lower rate of taxation.  Please note that, as a general matter,
distributions from a REIT will be taxed at the same rate as stockholders’ share
of Vestin Realty Mortgage II’s taxable income attributable to its realized net
interest income.
 
 A
portion of our business is potentially subject to prohibited transactions
tax.
 
 As a
REIT, we are subject to a 100% tax on our net income from “prohibited
transactions.”  In general, prohibited transactions are sales or other
dispositions of property to customers in the ordinary course of
business.  Sales by us of property in the course of our business will
generally constitute prohibited transactions.
 
 We intend
to avoid the 100% prohibited transactions tax on property foreclosed upon by
Fund II prior to the REIT conversion by holding and selling such properties
through one or more wholly-owned taxable REIT subsidiaries.  However,
under the Code, no more than 20% of the value of the assets of a REIT may be
represented by securities of one or more taxable REIT subsidiaries and a taxable
REIT subsidiary generally cannot operate a lodging or health care
facility.
 
 As of
December 31, 2007, we held two properties with a total carrying value of
approximately $28.6 million recorded as investments in real estate held for sale
and no properties in which we or an affiliate provided the financing, recorded
as real estate held for sale – seller financed.  United States
generally accepted accounting principals (“GAAP”) requires us to include real
estate held for sale – seller financed until the borrower has met and maintained
certain requirements.  The real estate held for sale collectively
constituted approximately 8% of our assets as of December 31, 2007.
 
 Taxable
REIT subsidiaries are subject to corporate-level tax, which may devalue our
common stock relative to other companies.
 
 Taxable
REIT subsidiaries are corporations subject to corporate-level
tax.  Our use of taxable REIT subsidiaries may cause the market to
value its common stock lower than the stock of other publicly traded REITs which
may not use taxable REIT subsidiaries and lower than the equity of mortgage
pools taxable as non-publicly traded partnerships such as Fund II’s intended
qualification prior to the REIT conversion, which generally are not subject to
any U.S. federal income taxation on their income and gain.
 
 Our
use of taxable REIT subsidiaries may have adverse U.S. federal income tax
consequences.
 
 We must
comply with various tests to continue to qualify as a REIT for U.S. federal
income tax purposes, and our income from and investments in taxable REIT
subsidiaries generally do not constitute permissible income and investments for
purposes of the REIT qualification tests.  While we will attempt to
ensure that our dealings with our taxable REIT subsidiaries will not adversely
affect our REIT qualification, we cannot be assured that we will successfully
achieve that result.  Furthermore, we may be subject to a 100% penalty
tax, or our taxable REIT subsidiaries may be denied deductions, to the extent
our dealings with our taxable REIT subsidiaries are not deemed to be arm’s
length in nature.
 
  - 19
-
 Table of Contents
  We
may endanger our REIT status if the distributions we receive from our taxable
REIT subsidiaries exceed applicable REIT gross income tests.
 
 The
annual gross income tests that must be satisfied to ensure REIT qualification
may limit the amount of distributions that we can receive from our taxable REIT
subsidiaries and still maintain our REIT status.  Generally, not more
than 25% of our gross income can be derived from non-real estate related
sources, such as distributions from a taxable REIT subsidiary.  If,
for any taxable year, the distributions we received from our taxable REIT
subsidiaries, when added to our other items of non-real estate related income,
represent more than 25% of our total gross income for the year, we could be
denied REIT status, unless we were able to demonstrate, among other things, that
our failure of the gross income test was due to reasonable cause and not willful
neglect.
 
 We
may lose our REIT status if we issue shares under our stockholders’ rights
plan.
 
 Under
Section 562(c) of the Code, a REIT generally cannot make a distribution unless
the distribution is pro rata, with no preference to any share of stock as
compared to other shares of the same class of stock.  A REIT that is
not in compliance with this requirement may lose its REIT
status.  Under our stockholders’ rights plan, upon certain events,
some holders of our common stock and not others will have the right to acquire
shares of Series A preferred stock.  When effective, this right could
be treated as a deemed distribution to those holders of our common stock
entitled to the right with no distribution to other such
holders.  Thus, this right, when effective, could be treated as a
distribution that is not consistent with the requirements of Section 562(c) of
the Code, which could result in the loss of our REIT qualification.
 
 RISK
OF OWNERSHIP OF OUR COMMON STOCK
 
 The
market price and trading volume of our common stock may be
volatile.
 
 The
market price of our common stock since trading commenced, on May 1, 2006, to
December 31, 2007, has ranged from $2.00 to $15.96 (adjusted for the 1-for-2.6
reverse stock split in December 2007).  We believe the price of our
stock in the months after we were listed was affected by, among other things,
selling pressure from stockholders seeking immediate liquidity and the level of
non-performing assets, which we own.  We continue to own a significant
level of non-performing assets and our sector of the market has suffered from
the problems encountered by sub-prime residential lenders.  Our stock
price may continue to be highly volatile and subject to wide
fluctuations.  In addition, the trading volume in our common stock may
fluctuate and cause significant price variations to occur.  Our
Company will be dissolved on December 31, 2020 unless the holders of a majority
of our common stock determine otherwise.  As we move closer to the
dissolution date, we expect to stop making new loans and our stock price could
approach our book value per share.  However, no assurance can be given
that the stock price will approach book value and then prevailing market
conditions may affect the price of our stock even as we near 2020.
 
 The
market price of our common stock may fluctuate or decline significantly in the
future.  Some of the factors, many of which are beyond our control,
that could negatively affect our stock price or result in fluctuations in the
price or trading volume of our common stock include:
 
 ·
              Increases
      in loans defaulting or becoming non-performing or being written
      off;
 
 ·
              Actual
      or anticipated variations in our quarterly operating results or
      distributions;
 
 ·
              Publication
      of research reports about us or the real estate
  industry;
 
 ·
              Changes
      in market valuations of similar
companies;
 
 ·
              Changes
      in tax laws affecting REITs;
 
 ·
              Litigation;
  - 20
-
 Table of Contents
  ·
              Adverse
      market reaction to any increased indebtedness we incur in the future;
      and
 
 ·
              General
      market and economic conditions.
 
 Market
interest rates could have an adverse effect on our stock price.
 
 One of
the factors that will influence the price of our common stock will be the
dividend yield on our common stock (as a percentage of the price of our common
stock) relative to market interest rates.  Thus, an increase in market
interest rates may lead prospective purchasers of our common stock to expect a
higher dividend yield, a lack of which could adversely affect the market price
of our common stock.
 
 We
are the subject of stockholder litigation which may depress the price of our
stock.
 
 A number
of lawsuits have been filed against us by stockholders who claim, among other
things, that they were improperly denied dissenter’s rights in connection with
the conversion of Fund II into a REIT.  We believe the suits are
without merit and we intend to vigorously defend against such
claims.  Nonetheless, the outcome of the lawsuits cannot be predicted
at this time, nor can a meaningful evaluation be made of the potential impact
upon us if the plaintiffs were to prevail in their claims.  The
resulting uncertainty may depress the price of our stock.  Moreover,
concerns about the costs of defense and the potential diversion of our manager’s
time to deal with these lawsuits may have an adverse effect upon the price of
our stock.
 
 Our
charter documents and Maryland law contain provisions that may delay, defer or
prevent a change of control transaction.
 
 Our
charter and bylaws and Maryland corporate law contain a number of provisions (as
further described in exhibit 3.2 Bylaws of the Registrant
under the Exhibit Index included in Part IV, Item 15 Exhibits and Financial Statement
Schedules of this Report Form 10-K) that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price for
holders of our common stock or otherwise be in their best interests,
including:
 
 ·
              Ownership
      Limit.  Our articles of incorporation, subject to certain
      exceptions, authorizes our board of directors to take such actions as are
      necessary and desirable to preserve our qualification as a REIT and to
      limit any person to actual or constructive ownership of no more than a
      9.8% of the number or value, whichever is more restrictive, of the
      outstanding shares of our stock, unless our board of directors waives this
      ownership limit.  However, our board of directors may not grant
      a waiver of the ownership limit that would permit a person to acquire more
      than 15% of our stock without exception.  The ownership limit
      may have the effect of precluding a change in control of us by a third
      party, even if such change in control would be in the interest of our
      stockholders (and even if such change in control would not reasonably
      jeopardize our REIT status).
 
 ·
              Staggered
      Board.  Our board of directors is divided into three
      classes, with each class serving staggered three-year
      terms.  This classification of our board of directors may have
      the effect of delaying or preventing changes in our control or
      management.
 
 ·
              Removal of
      Directors.  Directors may be removed only for cause and
      only by the affirmative vote of stockholders holding at least a majority
      of the shares then outstanding and entitled to be cast for the election of
      directors.
 
 ·
              Stockholders’ Rights
      Plan.  We have a stockholders’ rights plan that enables
      our board of directors to deter coercive or unfair takeover tactics and to
      prevent a person or a group from gaining control of us without offering a
      fair price to all stockholders.  Unless our board of directors
      approves the person’s or group’s purchase, after that person gains control
      of us, all other stockholders will have the right to purchase securities
      from us at a price that is less than their then fair market
      value.  Purchases by other stockholders would substantially
      reduce the value and influence of the shares of our common stock owned by
      the acquiring person or group.  Our board of directors, however,
      can prevent the stockholders’ rights plan from operating in this
      manner.  This gives our board of directors’ significant
      discretion to approve or disapprove a person’s or group’s efforts to
      acquire a large interest in us.
  - 21
-
 Table of Contents
  
 ·
              Duties of Directors with
      Respect to Unsolicited Takeovers.  Under Maryland law, a
      director is required to perform his or her duties (a) in good faith, (b)
      in a manner he or she believes to be in the best interests of the
      corporation and (c) with the care that an ordinarily prudent person in a
      like position would use under similar circumstances.  Maryland
      law provides protection for Maryland corporations against unsolicited
      takeovers by, among other things, retaining the same standard of care in
      the performance of the duties of directors in unsolicited takeover
      situations.  The duties of directors of Maryland corporations do
      not require them to (a) accept, recommend or respond to any proposal by a
      person seeking to acquire control of the corporation, (b) authorize the
      corporation to redeem any rights under, or modify or render inapplicable,
      any stockholders rights plan, (c) make a determination under Maryland
      Business Combination Act or Maryland Control Share Acquisition Act or (d)
      act or fail to act solely because of the effect of the act or failure to
      act may have on an acquisition or potential acquisition of control of the
      corporation or the amount or type of consideration that may be offered or
      paid to the stockholders in an acquisition. Moreover, under Maryland law
      the act of the directors of a Maryland corporation relating to or
      affecting an acquisition or potential acquisition of control is not
      subject to any higher duty or greater scrutiny than is applied to any
      other act of a director.  Maryland law also contains a statutory
      presumption that an act of a director of a Maryland corporation satisfies
      the applicable standards of conduct for directors under Maryland
      law.
 
 ·
              Maryland General Corporation
      Law.  Certain provisions of the MGCL may have the effect
      of inhibiting a third party from making a proposal to acquire us or of
      impeding a change of control under circumstances that otherwise could
      provide the holders of shares of our common stock with the opportunity to
      realize a premium over the then-prevailing market price of such shares,
      including:
 
 ·
              “business
      combination” provisions that, subject to limitations, prohibit certain
      business combinations between us and an “interested stockholder” (defined
      generally as any person who beneficially owns 10% or more of the voting
      power of our shares or an affiliate or associate of ours who, at any time
      within the two-year period prior to the date in question, was the
      beneficial owner of 10% or more of our then outstanding voting shares) or
      an affiliate thereof for five years after the most recent date on which
      the stockholder becomes an interested stockholder, and thereafter imposes
      special appraisal rights and special stockholder voting requirements on
      these combinations; and
 
 ·
              “control
      share” provisions that provide that “control shares” of our company
      (defined as shares which, when aggregated with other shares controlled by
      the stockholder, entitle the stockholder to exercise one of three
      increasing ranges of voting power in electing directors) acquired in a
      “control share acquisition” (defined as the direct or indirect acquisition
      of ownership or control of “control shares”) have no voting rights except
      to the extent approved by our stockholders by the affirmative vote of at
      least two-thirds of all the votes entitled to be cast on the matter,
      excluding all interested shares.
 
 ·
              We
      have opted out of the control share provisions of the MGCL pursuant to a
      provision in our bylaws.  However, our board of directors may by
      amendment to our bylaws opt in to the control share provisions of the MGCL
      in the future.
 
 ·
              Advance Notice of Director
      Nominations and Stockholder Proposals.  Our bylaws impose
      certain advance notice requirements that must be met for nominations of
      persons for election to the board of directors and the proposal of
      business to be considered by
stockholders.
 
 Our
rights and the rights of our stockholders to take action against our directors
and officers are limited.
 
 Maryland
law provides that a director has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably
believes to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances.  Our charter limits the liability of our directors and
officers to us and our stockholders for money damages, except for liability
resulting from:
  - 22
-
 Table of Contents
  
 ·
              Actual
      receipt of an improper benefit or profit in money, property or services;
      or
 
 ·
              A
      final judgment based upon a finding of active and deliberate dishonesty by
      the director or officer that was material to the cause of action
      adjudicated.
 
 In
addition, our articles of incorporation authorize us to obligate our company,
and our bylaws require us, to indemnify our directors and officers for actions
taken by them in those capacities to the maximum extent permitted by Maryland
law.  As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise exist under
common law.  Accordingly, in the event that actions taken in good
faith by any of our directors or officers impede the performance of our company,
stockholders’ ability to recover damages from such director or officer will be
limited.
 
 ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
 
 None.
 
 ITEM
      2.
              PROPERTIES
 
 Our
manager shares office facilities, in Las Vegas, Nevada, with its parent
corporation, Vestin Group, in a building which a company wholly owned by our CEO
holds the majority interest and an unrelated third party holds the minority
interest.  Our manager believes that this facility is adequate for
their foreseeable office space needs.  We do not have any separate
offices.
 
 ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note N - Legal
Matters Involving The Manager and Note O - Legal Matters Involving The
Company in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for information
regarding legal proceedings, which discussion is incorporated herein by
reference.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
      HOLDERS
 
 None.
 
 PARTII
 
 ITEM
      5.
              MARKET
      FOR REGISTRANT’SCOMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES
 
 Market
Information
 
 Our
common stock is traded on the Nasdaq Global Select Market under the symbol VRTB
and began trading on May 1, 2006.  The price per share of common stock
presented below represents the highest and lowest sales price for our common
stock on the Nasdaq Global Select Market during each quarter since it began
trading, as adjusted for the 1-for-2.6 reverse stock split issued on December
31, 2007.
 
 2007
              
              High
              
              
              LowFirst
      Quarter
              
              $
              14.66
              
              
              $
              13.00Second
      Quarter
              
              $
              15.44
              
              
              $
              13.13Third
      Quarter
              
              $
              15.96
              
              
              $
              10.30Fourth
      Quarter
              
              $
              13.39
              
              
              $
              9.26
 
  - 23
-
 Table of Contents
  
 2006
              
              High
              
              
              LowFirst
      Quarter
              
              $
              N/A
              
              
              $
              N/ASecond
      Quarter
              
              $
              14.00
              
              
              $
              2.00Third
      Quarter
              
              $
              14.98
              
              
              $
              9.02Fourth
      Quarter
              
              $
              14.48
              
              
              $
              13.34
 
 On
December 15, 2006, the Company paid a stock dividend of .30 shares for every
1.00 outstanding share to stockholders of record as of November 30,
2006.
 
 On
December 31, 2007, a 1-for-2.6 reverse stock split became effective, thereby
decreasing the number of outstanding common shares from 38,653,315 to 14,866,219
and increasing the market price per share from $3.75 to $9.75.  All
share, per share, membership unit and per membership unit information in this
Report has been retroactively adjusted to reflect the reverse stock
split.
 
 On
December 11, 2007, our board of directors declared a cash dividend of $0.04 per
common share for the month of December 2007, which was paid on January 29, 2008
to stockholders of record as of December 31, 2007. After giving effect to the
1-for-2.6 reverse stock split, which was effective on December 31, 2007, the
dividend was $0.104 per common share.
 
 On
January 16, 2008, our board of directors declared a cash dividend of $0.106 per
common share for the month of January 2008, payable on February 28, 2008 to
stockholders of record as of February 8, 2008.
 
 On
February 21, 2008, our board of directors declared a cash dividend of $0.106 per
common share for the month of February 2008, payable on March 28, 2008 to
stockholders of record as of March 7, 2008.
 
 On March
10, 2008, the common stock closed at $8.18 per share.
 
 Holders
 
 As of
March 10, 2008, there were approximately 1,647 holders of record of 14,873,584
shares of our common stock.
 
 Dividend
Policy
 
 In order
to maintain its qualification as a REIT under the Code, we are required to
distribute (within a certain period after the end of each year) at least 90% of
our REIT taxable income for such year (determined without regard to the
distributions made deduction and by excluding net capital gain).  We
currently intend, to the extent practicable, to distribute substantially all of
our REIT taxable income and net capital gain each year.  We may
distribute an amount in excess of our REIT taxable income, which amount will be
treated as a return of capital to the stockholder.  We anticipate that
distributions generally will be paid from cash available for distribution
(generally equal to cash from operations other than repayments of mortgage loan
principal less an amount set aside for creation or restoration of reserves
during the quarter).  However, the actual amount and timing of the
dividends will be as determined and declared by our board of directors and will
depend on our financial condition, earnings and other factors.  In
August 2006, our board of directors voted to authorize a Dividend Declaration
Policy that allows, at the Company’s discretion, for dividends to be declared
monthly instead of quarterly.  Dividends declared per share for the
year ended December 31, 2007 and dividends declared par share / cash
distributions per membership unit for the twelve months ended December 31, 2006
are listed below:
  - 24
-
 Table of Contents
  
 Date
      of Declaration
              Record
      Date
              Date
      Paid
              
              Dividend
      Per ShareJanuary
      22, 2007
              February
      8, 2007
              February
      26, 2007
              
              $
              0.13February
      20, 2007
              March
      9, 2007
              March
      26, 2007
              
              
              0.13March
      21, 2007
              April
      9, 2007
              April
      26, 2007
              
              
              0.13April
      19, 2007
              May
      9, 2007
              May
      30, 2007
              
              
              0.13May
      8, 2007
              June
      7, 2007
              June
      26, 2007
              
              
              0.14June
      7, 2007
              July
      9, 2007
              July
      26, 2007
              
              
              0.14July
      24, 2007
              August
      9, 2007
              August
      30, 2007
              
              
              0.13August
      20, 2007
              September
      10, 2007
              September
      28, 2007
              
              
              0.13September
      19, 2007
              October
      10, 2007
              October
      30, 2007
              
              
              0.12October
      16, 2007
              November
      9, 2007
              November
      29, 2007
              
              
              0.12November
      15, 2007
              December
      3, 2007
              December
      28, 2007
              
              
              0.10December
      11, 2007
              December
      31, 2007
              January
      29, 2008
              
              
              0.10Dividends
      declared per common share for year ended December 31, 2007
              
              $
              1.50
 
 
 Distributions
      During:
              
              Cash
      Distribution to Members Per Membership UnitJanuary
      2006
              
              $
              0.10February
      2006
              
              
              0.10March
      2006
              
              
              0.21Cash
      distributions per membership unit for the three months ended March 31,
      2006
              
              $
              0.42Date
      of Declaration
              Record
      Date
              Date
      Paid
              
              Dividend
      Per ShareJuly
      27, 2006
              August
      7, 2006
              August
      21, 2006
              
              $
              0.32August
      25, 2006
              September
      12, 2006
              September
      27, 2006
              
              
              0.12September
      25, 2006
              October
      12, 2006
              October
      27, 2006
              
              
              0.12October
      24, 2006
              November
      13, 2006
              November
      29, 2006
              
              
              0.13November
      22, 2006
              December
      11, 2006
              December
      27, 2006
              
              
              0.13December
      18, 2006
              December
      31, 2006
              January
      26, 2007
              
              
              0.27Total
      dividends declared during the nine months ended December 31,
      2006
              
              $
              1.09Dividends
      declared per common share / cash distributions to members per membership
      unit for the twelve months ended December 31, 2006
              
              $
              1.51
 
 * The
dividend per share prices and cash distributions per membership unit have been
adjusted to reflect the 1-for-2.6 reverse stock split issued on December 31,
2007.
 
 Performance
Graph
 
 The
following graph, provided by Research Data Group, Inc., compares the cumulative
total return to stockholders of our common stock for the period from May 1,
2006, the date our stock began trading to December 31, 2007 under the symbol
VRTB, to the cumulative total return of the Nasdaq Composite Index (U.S.) and
the NAREIT Mortgage Index for the same period. This graph assumes the investment
of $100.00 on May 1, 2006 in our common stock, the Nasdaq Composite Index (U.S.)
and NAREIT Mortgage Index (published by the National Association of REITs) and
assumes any dividends are reinvested.
  - 25
-
 Table of Contents
  
 
 
 
 05/01/06
              
              
              06/30/06
              
              
              09/30/06
              
              
              12/31/06
              
              
              03/31/07
              
              
              06/30/07
              
              
              09/30/07
              
              
              12/31/07Vestin
      Realty Mortgage II, Inc.
              
              $
              100.00
              
              
              $
              95.04
              
              
              $
              116.50
              
              
              $
              121.83
              
              
              $
              124.59
              
              
              $
              140.55
              
              
              $
              123.49
              
              
              $
              97.92NASDAQ
      Composite
              
              $
              100.00
              
              
              $
              93.42
              
              
              $
              97.43
              
              
              $
              104.79
              
              
              $
              105.10
              
              
              $
              112.63
              
              
              $
              117.35
              
              
              $
              114.49NAREIT
      Mortgage
              
              $
              100.00
              
              
              $
              101.54
              
              
              $
              101.47
              
              
              $
              108.32
              
              
              $
              92.87
              
              
              $
              86.69
              
              
              $
              62.29
              
              
              $
              62.45
 
 Recent Sales of Unregistered
Securities
 
 On June
22, 2007, as reported in our 8-K filed June 27, 2007, we completed the issuance
of $60.1 million in unsecured trust preferred securities through the special
purpose business trust, VCT I to Merrill Lynch International, Bear Stearns &
Co. Inc. and Taberna Funding LLC.  We are obligated to pay the trust
preferred securities with respect to distributions and amounts payable upon
liquidation, redemption or repayment.  The securities were sold to
three institutional investors in a non-public offering pursuant to Section 4(2)
of the Securities Act of 1933.
 
  - 26
-
 Table of Contents
  Equity Compensation Plan
Information
 
 None.
 
 Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of the company’s common stock.  Depending upon market
conditions, shares may be repurchased from time to time at prevailing market
prices through open market or privately negotiated transactions.
 
 We are
not obligated to purchase any shares.  Subject to applicable
securities laws, including SEC Rule 10b-18, repurchases may be made at such
times and in such amounts, as our management deems appropriate.  The
share repurchase program may be discontinued or terminated at any time and we
have not established a date for completion of the share repurchase
program.  The repurchases will be funded from our available
cash.  As of December 31, 2007, up to an additional $8,560,000 worth
of shares may be repurchased under this program.
 
 No
purchases were made pursuant to this program or otherwise during the three
months ended December 31, 2007.
 
 ITEM
      6.
                SELECTEDFINANCIAL
DATA
 
 Balance
      atVestin
      Realty Mortgage II, Inc.
              
              12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005
              
              
              6/30/2004(Unaudited)Balance
      Sheet Data:Investments
      in real estate loans (net of allowance)
              
              $
              278,190,000
              
              
              $
              221,849,000
              
              
              $
              227,875,000
              
              
              $
              222,716,000
              
              
              $
              217,553,000
              
              
              $
              303,853,000Cash,
      cash equivalents, certificates of deposits and marketable securities –
      related party
              
              $
              22,803,000
              
              
              $
              19,178,000
              
              
              $
              47,893,000
              
              
              $
              78,690,000
              
              
              $
              11,566,000
              
              
              $
              14,362,000Real
      estate held for sale
              
              $
              28,563,000
              
              
              $
              30,079,000
              
              
              $
              38,639,000
              
              
              $
              39,805,000
              
              
              $
              51,215,000
              
              
              $
              28,264,000Real
      estate held for sale-seller financed
              
              $
              --
              
              
              $
              14,774,000
              
              
              $
              22,887,000
              
              
              $
              13,131,000
              
              
              $
              12,631,000
              
              
              $
              5,708,000Assets
      under secured borrowing
              
              $
              --
              
              
              $
              13,796,000
              
              
              $
              19,754,000
              
              
              $
              25,689,000
              
              
              $
              25,655,000
              
              
              $
              61,924,000Total
      assets
              
              $
              336,168,000
              
              
              $
              303,042,000
              
              
              $
              361,949,000
              
              
              $
              385,358,000
              
              
              $
              339,470,000
              
              
              $
              425,600,000Long
      term liabilities
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Total
      liabilities
              
              $
              64,409,000
              
              
              $
              24,556,000
              
              
              $
              46,809,000
              
              
              $
              28,316,000
              
              
              $
              28,390,000
              
              
              $
              64,531,000Stockholders'
      equity
              
              $
              271,759,000
              
              
              $
              278,486,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Members’
      equity
              
              $
              --
              
              
              $
              --
              
              
              $
              315,140,000
              
              
              $
              357,042,000
              
              
              $
              311,080,000
              
              
              $
              361,069,000
 
  - 27
-
 Table of Contents
  
 For
      the Year Ended
              
              
              For
      the Twelve Months Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Year Ended12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005
              
              
              6/30/2004(Unaudited)Income
      Statement Data:Revenues
              
              $
              29,010,000
              
              
              $
              22,053,000
              
              
              
              11,738,000
              
              
              $
              15,950,000
              
              
              $
              27,549,000
              
              
              $
              40,771,000Operating
      expenses
              
              
              11,879,000
              
              
              
              10,624,000
              
              
              
              1,514,000
              
              
              
              3,410,000
              
              
              
              8,730,000
              
              
              
              10,169,000Operating
      income
              
              
              17,131,000
              
              
              
              11,429,000
              
              
              
              10,224,000
              
              
              
              12,540,000
              
              
              
              18,819,000
              
              
              
              30,602,000Non-operating
      income
              
              
              1,843,000
              
              
              
              1,426,000
              
              
              
              490,000
              
              
              
              249,000
              
              
              
              409,000
              
              
              
              365,000Income
      (loss) from real estate held for sale
              
              
              (2,046,000
              )
              
              
              2,996,000
              
              
              
              (170,000
              )
              
              
              (903,000
              )
              
              
              (10,340,000
              )
              
              
              764,000Net
      income
              
              $
              16,928,000
              
              
              $
              15,851,000
              
              
              
              10,544,000
              
              
              $
              11,886,000
              
              
              $
              8,888,000
              
              
              $
              31,731,000Income
      from operations per common share / membership unit
              
              $
              1.15
              
              
              $
              0.77
              
              
              $
              0.62
              
              
              $
              0.68
              
              
              $
              1.08
              
              
              $
              1.58Basic
      and diluted earnings per common share / membership unit
              
              $
              1.14
              
              
              $
              1.06
              
              
              
              0.64
              
              
              $
              0.65
              
              
              $
              0.51
              
              
              $
              1.64Cash
      dividends declared per common share / cash distributions per membership
      unit
              
              $
              1.50
              
              
              $
              1.51
              
              
              $
              0.52
              
              
              $
              0.61
              
              
              $
              1.16
              
              
              $
              1.51Weighted
      average common shares / membership units
              
              
              14,909,651
              
              
              
              14,935,585
              
              
              
              16,441,433
              
              
              
              18,370,442
              
              
              
              17,382,394
              
              
              
              19,321,244
 
 The
information in this table should be read in conjunction with the accompanying
audited consolidated financial statements and notes to the consolidated
financial statements included elsewhere in this document.
 
 ITEM
      7.
              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the year ended December 31, 2007, the twelve months
ended December 31, 2006, the six months ended December 31, 2005 and 2004 and the
fiscal year ended June 30, 2005.  This discussion should be read in
conjunction with our financial statements and accompanying notes and other
detailed information regarding us appearing elsewhere in this report on Form
10-K and our reports on Form 10-Q, Part I, Item 2 Management’s Discussion and
Analysis of Financial Conditions and Results of Operations for the quarters
ended March 31, 2007, June 30, 2007 and September 30, 2007.
 
 FORWARD-LOOKING
STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” should be read in conjunction with the consolidated
financial statements, related notes, and other detailed information included
elsewhere in this report on Form 10-K.  We are including this
cautionary statement to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995.  Statements that are not historical fact are forward-looking
statements.  Certain of these forward-looking statements can be
identified by the use of words such as “believes,” “anticipates,” “expects,”
“intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,”
or other similar expressions.  Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors, which could
cause actual results, performance or achievements to differ materially from
future results, performance or achievements.  These forward-looking
statements are based on our current beliefs, intentions and
expectations.
  - 28
-
 Table of Contents
  These
statements are not guarantees or indicative of future
performance.  Important assumptions and other important factors that
could cause actual results to differ materially from those forward-looking
statements include, but are not limited to, those factors, risks and
uncertainties described in Part I Item 1A Risk Factors of this Annual
Report on Form 10-K and in our other securities filings with the Securities and
Exchange Commission (“SEC”).  Our future financial condition and
results of operations, as well as any forward-looking statements, are subject to
change and involve inherent risks and uncertainties.  The
forward-looking statements contained in this report are made only as of the date
hereof.  We undertake no obligation to update or revise information
contained herein to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as 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 many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate 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 non-performing assets, foreclosures and related loan losses which
we may experience.  Our capital, subject to a 3% reserve, will
constitute the bulk of the funds we have available for investment in real estate
loans.  We do not have any arrangements in place, except for the funds
we received pursuant to the VCT I closing, to materially increase the funds we
will have available to invest from any other sources.  See discussion
under – “Capital and Liquidity.”
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through the special purpose business trust, VCT I to
Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  The proceeds derived from the sale of these securities will
increase the capital we have available to invest.  These securities
have a fixed interest rate equal to 8.75% through July 2012, and thereafter are
subject to a variable rate equal to LIBOR plus 3.5% per annum, resetting
quarterly.  The securities mature on July 30, 2020 and may be called
at par by the Company any time after July 30, 2012.  These costs are
being amortized to interest expense over the term of the notes.  We
are obligated to pay the trust preferred securities with respect to
distributions and amounts payable upon liquidation, redemption or
repayment.
 
 Our
operating results during the past several years have been adversely affected by
increases in allowances for loan losses.  At December 31, 2007, the
following loans were non-performing (based on current information and events, it
is probable that we 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); RightStar, Inc. (Part I & Part II), Monterrey Associates LP,
Forest Development LLC, Pirates Lake, Ltd, Jeffrey's Court, LLC, V & M Homes
at the Palms, Inc. and Brawley CA 122, LLC.  These loans are currently
carried on our books at a value of approximately $19.4 million, net of allowance
for loan losses of approximately $11.2 million, which does not include the
allowances of approximately $1.7 million relating to the decrease in the
property value for performing loans as of December 31, 2007.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  On February 5, 2008, we, VRM I and
Fund III foreclosed upon Pirates Lake, Ltd. and classified it as real estate
held for sale.  On March 7, 2008, we, VRM I and Fund III foreclosed
upon Forest Development LLC and classified it as real estate held for
sale.  For additional information, see “Specific Loan Allowance” in
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
  - 29
-
 Table of Contents
  
 Non-performing
assets, net of allowance for loan losses, totaled approximately $48.0 million or
14% of our total assets as of December 31, 2007, as compared to approximately
$49.6 million or 16% of our total assets as of December 31, 2006.  At
December 31, 2007, non-performing assets consisted of approximately $28.6
million of real estate held for sale and approximately $19.4 million of
non-performing loans, net of allowance for loan losses.  During the
year ended December 31, 2007, we entered into a sales contract for the sale of a
partially completed golf course near Austin, Texas at a price that would not
result in a material gain or loss.  The sale contract required that
the buyer complete the purchase on or before June 29, 2007; however, the buyer
has chosen to extend the closing date multiple times by paying a non-refundable
extension fee that has been applied to the value recorded for such loan on our
books.  The first extension was in June 2007, at which time we
received a $100,000 non-refundable extension fee from the buyer to extend the
closing date to October 2007.  Since then the buyer has elected to
extend the closing date to May 2008, by paying a non-refundable extension fee of
$50,000 every 30 days until closing.  As of December 31, 2007, we had
received a total of $250,000 in extension fees.  In addition, the
buyer paid $50,000 in January 2008 to extend the closing date an extra 30
days.  There can be no assurance that the sale will be
completed.  In addition, during the year ended December 31, 2007, our
manager evaluated the carrying value of real estate acquired through foreclosure
located in Cathedral City, California.  Based on our manager’s
estimate, we have written down the value of the property by approximately $1.3
million.  We also recognized expenses related to real estate held for
sale for this property of approximately $2.8 million.
 
 The level
of our non-performing assets may reflect the continuing weakness in certain
sectors of the economy and the risk inherent in our business strategy that
entails more lenient underwriting standards and expedited loan approval
procedures.  As the economy weakens and our borrowers who develop and
sell commercial real estate projects are unable to complete their projects or
obtain takeout financing or are otherwise adversely impacted, we may experience
an increase in loan defaults, which may reduce the amount of funds we have to
pay dividends to our stockholders.  Such conditions may also require
us to restructure loans.  The weighted average term of our outstanding
loans, including extensions and loans related to real estate held for sale –
seller financed, was 19 months as of both December 31, 2007 and
2006.
 
 A
recession or uncertain economic conditions during the next year could have a
material impact on the collectibility of our loans.  The downturn in
the real estate markets where we conduct business might increase defaults on our
loans and might require us to record additional reserves.  The
problems experienced by some lenders in the sub-prime market may have a material
adverse affect on the commercial mortgage markets in which we
operate.  We are aware that weakness in the credit markets has had an
adverse impact upon our markets.  In addition, we are aware that
weakness in residential lending has had and may continue to have an adverse
impact upon our markets.  Recognizing the risk, we seek to maintain an
adequate loan-to-value ratio, which, as of December 31, 2007, was 72.64%, prior
to allowances for loan losses, on a weighted average basis generally using
appraisals prepared on an “as-if developed basis” in connection with the loan
origination.
 
 The
increase in the weighted average loan-to-value ratio, prior to allowances for
loan losses, from 69.97%, as of December 31, 2006, to 72.64%, as of December 31,
2007, is primarily due to 10 loans that were funded during the year ended
December 31, 2007, totaling approximately $40.3 million, with loan-to-value
ratios ranging from 72.32% to 80.00%.  The majority of these loans
were to repeat borrowers with a history of good standing with us.  The
original terms of these loans were 12 months.  In addition, during the
year ended December 31, 2007, we VRM I and Fund III conducted updated appraisals
on a number of properties securing our loans, representing approximately 60% of
our loan portfolio, and concluded that the estimated value of such properties
should be reduced by approximately $22.9 million.  Our share of this
reduction was approximately $18.1 million, which has adversely impacted our
weighted average loan to value ratio.  We hope to retain sufficient
cushion in the underlying equity position to protect the value of our loans in
the event of a default.  Nevertheless, no assurances can be given that
a marked increase in loan defaults accompanied by a rapid decline in real estate
values will not have a material adverse effect upon our financial condition and
operating results.
 
 During
the year ended December 31, 2007, we provided a specific reserve allowance for
two non-performing loans and two performing loans based on updated appraisals of
the underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year.  For further information
regarding allowance for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated financials statements in Part II,
Item 8 Financial Statements
and Supplementary Data of this Annual Report on Form
10-K.
  - 30
-
 Table of Contents
  
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note H – Related Party Transactions in
the notes to our consolidated financials statements in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 As of
December 31, 2007, our loans were in the following states: Arizona, California,
Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington.
 
 The
Year Ended December 31, 2007
 
 Total
Revenues:  For the year ended December 31, 2007, total revenues
increased by approximately $6.9 million or 31.5% compared to the same period in
2006, due in significant part to the following factors:
 
 ·
              Interest
      income from investments in real estate loans totaled approximately $27.0
      million during the year ended December 31, 2007, compared to approximately
      $21.7 million during 2006.  This increase was primarily due to
      the increase in investment in real estate loans to approximately $48.7
      million and the increase in the weighted average interest rate from 10.9%
      as of December 31, 2006 to 12.0% as of December 31, 2007.  The
      increase in real estate loans resulted in part from the availability of
      additional funds raised in the trust preferred financing consummated in
      June 2007.  For additional information on our loan portfolio,
      see Note D- Investment
      Real Estate Loans of the Notes to the Consolidated Financial
      Statements included in Part II, Item 8Financial Statements and
      Supplementary Dataof this Report Form
  10-K
 
 ·
              During
      the year ended December 31, 2007, we recognized a gain of approximately
      $1.0 million related to an impaired real estate loan that was paid in
      full.
 
 ·
              During
      the year ended December 31, 2007, we earned approximately $0.6 million in
      other income from principal payments on notes receivable that were fully
      reserved.
 
 Total Operating
Expenses:  For the year ended December 31, 2007, total
operating expenses were approximately $11.9 million compared to approximately
$10.6 million during the twelve months ended December 31, 2006, an increase of
approximately $1.3 million or 11.8%.  Expenses were primarily affected
by the following factors:
 
 ·
              Our
      operating expenses are impacted materially by the recognition of loan
      losses.  During the year ended December 31, 2007, we recognized
      provisions for loan losses of approximately $3.1 million related to the
      following; a performing land loan for property located in Glendale,
      Arizona, a performing commercial loan on a 100 unit condominium/apartment
      project in North Las Vegas, Nevada, a non-performing loan secured by
      various real estate collateral, including a 248 unit apartment complex in
      Oklahoma City, Oklahoma, and a non-performing loan secured by 25 acres for
      proposed 122 single-family subdivision in Brawley,
      California.  During the twelve months ended December 31, 2006,
      we recognized a provision for loan loss of $5.5 million related to the
      loans secured by 4 cemeteries and 8 mortuaries in Hawaii.  See
      “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part II, Item 8Financial Statements and
      Supplementary Dataof this Report Form
  10-K.
 
 ·
              We
      recognized approximately $2.7 million of interest expense during the year
      ended December 31, 2007 related to the junior subordinated notes issued in
      connection with the trust preferred financing.  During the
      twelve months ended December 31, 2006, we recognized approximately $0.9
      million of interest expense related to secured borrowings held during the
      period compared to approximately $0.5 million for the year ended December
      31, 2007.  We had no secured borrowings as of December 31,
      2007.
  - 31
-
 Table of Contents
  
 ·
              Professional
      fees increased approximately $1.8 million during the year ended December
      31, 2007, compared to the same period in 2006, primarily due to the
      accrual of approximately $1.2 million in legal fees relating to the legal
      actions that have been filed against us in connection with the REIT
      conversion and RightStar.  See Note O – Legal Matters Involving The
      Company of the Notes to the Consolidated Financial Statements
      included in Part II, Item 8Financial Statements and
      Supplementary Dataof this Report Form
  10-K.
 
 Non-operating income:For the
year ended December 31, 2007, total income from other non-operating income
totaled approximately $1.8 million, primarily consisting of approximately $1.5
million in bank interest income.
 
 Total Income (Loss) from Real Estate
Held for Sale:  For the year ended December 31, 2007, a loss
was incurred from real estate held for sale of approximately $2.0 million
compared to income of approximately $3.0 million during 2006.  This
decline was primarily due to the following factors:
 
 ·
              During
      the year ended December 31, 2007, our manager evaluated the carrying value
      and estimated liabilities associated with the real estate acquired through
      foreclosure located in Cathedral City, CA and based on these updated
      estimates, concluded that a write down of approximately $1.3 million was
      appropriate with respect to this property. We also recognized expenses
      related to real estate held for sale for this property, which totaled
      approximately $2.8 million for the year ended December 31,
      2007.
 
 ·
              During
      the twelve months ended December 31, 2006, we recorded approximately $4.1
      million in rental revenue related to three apartment complexes which were
      classified as real estate held for
sale.
 
 ·
              The
      sale of the apartment complex in Austin, Texas in July 2006, resulted in a
      gain of approximately $1.6 million.  In addition, we sold the
      278- unit apartment complex in Fort Worth, TX “Windrush” during September
      2006, which resulted in a net gain of $56,000.  These gains were
      offset by a loss of approximately $0.5 million recognized on the sale of a
      150 unit condominium conversion complex in Houston, Texas during December
      2006. There was no gain on sale of real estate held for sale during
      2007.
 
 ·
              During
      the twelve months ended December 31, 2006, we incurred expenses related to
      real estate held for sale not sold through seller financing of
      approximately $4.9 million, primarily related to the three apartment
      complexes referred to above.  There were no similar expenses
      incurred during the year ended December 31,
  2007.
 
 ·
              We
      recorded a gain on sale of real estate held for sale related to seller
      financed loans of approximately $2.0 million during year ended December
      31, 2007, as a result of two seller financed loans being paid in
      full.
 
 Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to make distributions, other than capital gain
dividends, to our stockholders each year in an amount at least equal to (1) the
sum of (a) 90% of our taxable income, computed without regard to the dividends
paid deduction and our net capital gain, and (b) 90% of the net income, after
tax, from foreclosure property, minus (2) the sum of certain specified items of
noncash income over 5% of our REIT taxable income, determined without regard to
the dividends paid and our net capital gain.  Because we expect to
make distributions based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our distributions may at times
be more or less than our reported earnings as computed in accordance with
GAAP.
 
 Total
taxable income and REIT taxable income are non-GAAP financial measurements, and
do not purport to be an alternative to reported net income or cash flow from
operations determined in accordance with GAAP as a measure of operating
performance.  Our total taxable income represents the aggregate amount
of taxable income generated by us and our wholly owned taxable REIT subsidiary,
TRS II, Inc.  REIT taxable income is calculated under U.S. federal tax
laws in a manner that, in certain respects, differs from the calculation of net
income pursuant to GAAP.  REIT taxable income excludes the
undistributed taxable income of TRS II, Inc., which is not included in REIT
taxable income until distributed to us.
  - 32
-
 Table of Contents
  Subject
to certain TRS value limitations, there is no requirement that the TRS II, Inc.
distribute their earnings to us.  Since we are structured as a REIT
and the Internal Revenue Code requires that we distribute substantially all of
our net taxable income in the form of distributions to our stockholders, we
believe that presenting investors with the information management uses to
calculate our taxable income is useful to investors in understanding the amount
of the minimum distributions that we must make to our stockholders so as to
comply with the rules set forth in the Internal Revenue Code.  Because
not all companies have identical calculations, this presentation of total
taxable income and REIT taxable income may not be comparable to those and
reported by other companies.
 
 In
addition to satisfying the 90% taxable income distribution rule referred to
above, the amount of distribution we make is ultimately based on distributing
100% of the REIT taxable income in order to limit any tax
liability.  The distribution of this additional 10% of REIT taxable
income is typically made in the following tax year as IRC section 858 allows us
to carryback distributions made, for example, in 2007 to 2006, for the purposes
of zeroing out our REIT taxable income.  As a result, included in the
$22.4 million in distributions made during the year ended December 31, 2007 is
approximately $1.8 million that was used to zero out our 2006 REIT taxable
income.
 
 The table
below reconciles the differences between reported net income and total estimated
taxable income and estimated REIT taxable income for the year ended December 31,
2007:
 
 For
      the Year EndedDecember
      31, 2007Net
      income, as reported
              
              $
              16,928,000Add
      (deduct):Provision
      for loan losses
              
              
              3,116,000Gain
      on sale of real estate held for sale-seller financed
              
              
              (2,003,000
              )Capitalization
      of REO expenditures on a tax basis
              
              
              2,025,000Write
      down on real estate held for sale
              
              
              1,266,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              (1,044,000
              )Provision
      for doubtful accounts related to receivable
              
              
              235,000Recovery
      of allowance for doubtful notes receivable
              
              
              (594,000
              )Accrued
      legal reserve
              
              
              982,000Other
      book to tax differences
              
              
              90,000Total
      estimated taxable income
              
              
              21,001,000Less:
      Estimated taxable income attributable to TRS II, Inc.
              
              
              (17,000
              )Estimated
      REIT taxable income (prior to deductions for dividends
    paid)
              
              $
              20,984,000
 
 The
Twelve Months Ended December 31, 2006
 
 Total
Revenues:  For the twelve months ended December 31, 2006, total
revenues were approximately $22.1 million due in significant part to the
following factors:
 
 ·
              We
      recognized interest income from investments in real estate loans of
      approximately $21.7 million.  Our revenue is dependent upon the
      balance of our investment in real estate loans and the interest earned on
      these loans.  As of December 31, 2006, our investment in real
      estate loans, including loans related to seller financed real estate held
      for sale, was approximately $242.4 million with a weighted average
      interest rate of 10.94%.  As of December 31, 2005, our
      investment in real estate loans, including loans related to seller
      financed real estate held for sale, was approximately $256.5 million with
      a weighted average interest rate of 10.06%.  The decline in
      investments in real estate loans is attributable to a decline in the
      capital we had available for investments.  Our capital was
      reduced by redemptions of approximately $30.5 million paid to our members
      during the three months ended March 31,
2006.
 
 In
addition, our interest income was affected by the performances of our
loans.  During the twelve months ended December 31, 2006, four loans
totaling approximately $37.0 million became non-performing.  In
addition, one of the non-performing loans, with a balance of approximately $25.6
million was foreclosed upon and reclassified to real estate held for
sale.
  - 33
-
 Table of Contents
  
 Total Operating
Expenses:  For the twelve months ended December 31, 2006, total
operating expenses were approximately $10.6 million.  Expenses were
primarily affected by the following factors:
 
 ·
              Recognition
      of provisions for loan loss of $5.5 million related to the loans secured
      by 4 cemeteries and 8 mortuaries in
Hawaii.
 
 ·
              Interest
      expense was approximately $1.4 million primarily due to $906,000 of
      interest expenses related to secured borrowings.  In addition,
      we incurred $522,000 of expense related to notes payable on three real
      estate owned apartment properties.  These notes were paid in
      full in April 2006.
 
 ·
              Professional
      fees of approximately $1.3 million include $720,000 of accounting fees
      related to our public filings during the twelve months ended December 31,
      2006.  In addition, we incurred legal expense of $587,000 due in
      part to several legal actions, seeking damages and appraisal rights in
      connection with the REIT conversion, during the twelve months ended
      December 31, 2006.
 
 ·
              We
      recognized a provision for doubtful receivable relating to a note
      receivable in default of $329,000 during the twelve months ended December
      31, 2006.
 
 ·
              Included
      in other expenses are expenses totaling $371,000 related to the liability
      insurance expense for our directors and officers and expenses relating to
      investor services for the twelve months ended December 31,
      2006.
 
 Non-operating
income:We earned approximately $1.3 million in bank interest
income on certificates of deposits held at banking institutions.  This
was attributable to the purchase of investments in certificates of deposits of
approximately $17.1 million during the twelve months ended December 31,
2006.
 
 Total Income(Loss) from Real Estate
Held for Sale:  For the twelve months ended December 31, 2006,
total income from real estate held for sale was approximately $3
million.
 
 ·
              During
      the twelve months ended December 31, 2006, we recorded approximately $4.1
      million in rental revenue related to three apartment complexes that were
      classified as real estate held for sale.  During the twelve
      months ended December 31, 2006, we sold these properties as described
      below.
 
 ·
              The
      sale of the apartment complex in Austin, TX, resulted in a gain of
      approximately $1.6 million.  In addition, we sold the 278- unit
      apartment complex in Fort Worth, TX “Windrush” during September 2006,
      which resulted in a net gain of $56,000.  These gains were
      offset by a loss of approximately $0.5 million recognized on the sale of a
      150 unit condominium conversion complex in Houston, TX “The Club at
      Stablechase” during December 2006.
 
 ·
              In
      addition to the gain and losses on the sale of real estate held for sale
      referred above, we recorded a gain of $60,000 on the sale of a real estate
      parcel in Cedar Park, TX.
 
 ·
              During
      the twelve months ended December 31, 2006, we incurred expenses related to
      real estate held for sale not sold through seller financed of
      approximately $4.9 million, primarily related to the three apartment
      complexes referred to above.
  - 34
-
 Table of Contents
  
 ·
              We
      recorded a gain on sale of real estate held for sale because of the
      recognition of approximately $2.3 million of deposit liabilities received
      from seller financed loans during the twelve months ended December 31,
      2006.  As of December 31, 2006, we had approximately $14.8
      million, in real estate held for sale – seller financed.  Upon
      the sale of real estate held for sale where we provide the financing, GAAP
      requires the new borrower to have a certain percentage equity ownership
      (ranging from 10% to 25%) to allow us to record the sale of
      property.  In addition, the borrower must maintain a minimum
      commitment in the property on a continuing basis.  Therefore,
      until the borrower meets these requirements, the proceeds received from
      the borrower are recorded as a deposit liability or applied to the balance
      of the real estate held for sale – seller finance, depending on the
      guidelines established by GAAP.  Our revenues will continue to
      be impacted until we are able to convert these assets into investment in
      real estate loans or the loans are paid in full and we reinvest the
      proceeds into new loans.
 
 Dividends:  From
April 1 through December 31, 2006, we declared dividends to our stockholders of
approximately $16.3 million.
 
 Distributions to Members:During the three months ended March 31, 2006, we distributed
approximately $6.1 million to Fund II’s members, resulting in a distribution in
excess of net income available for distribution of approximately $2.4
million.  Distributions made during this period included approximately
$2.1 million in respect of net income available for distribution generated
during the six months ended December 31, 2005.
 
 The
Six Months Ended December 31, 2005 Compared to Six Months Ended December 31,
2004
 
 Revenues:  Revenues
for the six months ended December 31, 2005 decreased compared to the same period
in 2004 by approximately $4.2 million or 26.4% primarily due to the
following:
 
 ·
              Decrease
      in interest income of approximately $3.1 million is related to the
      decrease in investments in real estate loans and secured borrowings of
      approximately $7.2 million and $27.8 million, respectively, from September
      30, 2004 to September 30, 2005.  This decrease was partially
      offset by the increase in real estate loans during the three months ended
      December 31, 2005.
 
 ·
              Included
      in other income for the six months ended December 31, 2004 is an insurance
      settlement we received of approximately $0.8 resulting from deficient
      procedures performed by the voucher control company we used for
      construction control on a golf course in Austin,
  Texas.
 
 Non-performing
assets include loans in non-accrual status of approximately $36.4 million as of
December 31, 2005 compared to approximately $34.4 million as of December 31,
2004 and real estate held for sale not sold through seller financed of
approximately $38.6 million as of December 31, 2005 compared to approximately
$39.8 million as of December 31, 2004.
 
 Total Operating
Expenses:For the six months ended December 31, 2005 and 2004,
total expenses were approximately $1.5 million and $3.4 million, a decrease of
approximately $1.9 million or 55.6%.  Expenses were affected by the
following factors:
 
 ·
              Interest
      expense decreased by approximately $2 million due to the decrease in
      secured borrowing of approximately $5.9 million for the six months ended
      December 31, 2005 compared to the same period in
  2004.
 
 ·
              For
      the six months ended December 31, 2004, we recorded approximately $0.2
      million in provision for loan losses.  No provision for loan
      losses was recorded during the same period in
  2005.
 
  - 35
-
 Table of Contents
  These
decreases were partially offset by the following increases:
 
 ·
              Included
      in other expenses for the six months ended December 31, 2005 is allowance
      for bad debt of $183,000 related to an accounts receivable balance from a
      third party for reimbursement of expenses incurred by us related to the
      loan secured by 4 cemeteries and 8 mortuaries in
  Hawaii.
 
 ·
              Also
      included in other expenses during the six months ended December 31, 2005,
      is a loan fee of $100,000 related to two loans which a third party
      investor participated through an Inter-creditor
  Agreement.
 
 Total Loss from real estate held for
sale: For the six months ended December 31, 2005 and 2004, total loss
from real estate held for sale was approximately $0.2 million and $0.9 million,
respectively.
 
 ·
              Gain
      on sale of real estate held for sale related to seller financed loans,
      which were paid during the six months ended December 31, 2005 of
      approximately $1.1 million.
 
 ·
              For
      the six months ended December 31, 2005, we recorded operating income of
      approximately $2.3 million related to the three real estate owned
      apartment complexes, which were acquired through foreclosure during
      2005.  We had no similar income during the same period in
      2004.
 
 ·
              During
      the six months ended December 31, 2004, we recorded a gain on sale of real
      estate held for sale relating to raw land in Mesquite,
      Nevada.  The transaction resulted in a gain of approximately
      $0.8 million.
 
 ·
              During
      the six months ended December 31, 2004, we recorded approximately $0.1
      million in write downs on real estate held for sales as a result of a
      reassessment of the value of two of our real estate properties based on
      purchase offers received.
 
 ·
              We
      incurred expenses related to real estate held for sale for the six months
      ended December 31, 2005 of approximately $3.6 million related to the three
      real estate owned apartment complexes, which were acquired through
      foreclosure during 2005
 
 As of
December 31, 2005 and 2004, we had approximately $22.9 million and $13.1
million, respectively, in real estate held for sale-seller
financed.  As of December 31, 2005 and 2004, we had approximately $0.9
million and $0.8 million, respectively, in deposit liability.
 
 Annualized Rate of Return to
Members.  For the six months ended December 31, 2005 and 2004,
the annualized rate of return to members, as calculated in accordance with GAAP,
was 4.89% and 4.94%, respectively
 
 Distributions to
Members.  The following is a schedule of distributions made to
members for the six months ended December 31, 2005 and 2004.
 
 For
      the Six
                Months
      Ended
                December
      31, 2005
              
              
              For
      the Six
                Months
      Ended
                December
      31, 2004(Unaudited)Distributions
      of Net Income Available for Distribution
              
              $
              8,586,000
              
              
              $
              11,160,000Distributions
      in Excess of Net Income Available for a Distribution Generated During the
      Period
              
              
              --
              
              
              
              --Total
      Distributions
              
              $
              8,586,000
              
              
              $
              11,160,000
 
  - 36
-
 Table of Contents
  Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in the operating agreement, which governed Fund II as cash flows from
operations, less certain reserves, and may exceed net income as calculated in
accordance with GAAP.  We have presented net income available for
distribution because management believes this financial measure is useful and
important to members as net income available for distribution is the minimum
amount required to be distributed to members pursuant to our operating
agreement.  Although we generally do not plan to make distributions in
excess of net income available for distribution, we may do so from time to
time.  Any such distribution will be treated as a return of capital
for income tax purposes.  In addition, cash flows from operations,
which are the significant component of net income available for distribution,
affect the capital available for investment in new loans.  This
non-GAAP financial measure should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP or as an
alternative to cash flows from operating activities as a measure of our
liquidity.  We compensate for these limitations by relying primarily
on our GAAP results and using net income available for distribution only
supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
 
 For
      the Six
                Months
      Ended
                December
      31, 2005
              
              
              For
      the Six
                Months
      Ended
                December
      31, 2004(Unaudited)Distribution
      of Net Income Available for Distribution
              
              $
              8,586,000
              
              
              $
              11,160,000Additions
      to Working Capital Reserves (Amount Not Distributed)
              
              
              2,052,000
              
              
              
              1,016,000Gain
      on Sale of Marketable Securities
              
              
              (203,000
              )
              
              
              --Gain
      on Real Estate Held for Sale
              
              
              (47,000
              )
              
              
              (758,000
              )Gain
      on Real Estate Held for Sale – Seller Financed
              
              
              (1,079,000
              )
              
              
              --Amortized
      Interest Income
              
              
              (272,000
              )
              
              
              --Interest
      Income Accrued to Loan Balance
              
              
              --
              
              
              
              280,000Change
      in Operating Assets and Liabilities:Net
      Change in Amounts Due from Fund I
              
              
              1,560,000
              
              
              
              5,761,000Net
      Change in Other Operating Assets
              
              
              (247,000
              )
              
              
              680,000Net
      Change in Accounts Payable and Accrued Liabilities
              
              
              (842,000
              )
              
              
              143,000Net
      Change in Amounts Due to Related Parties
              
              
              (540,000
              )
              
              
              (553,000
              )Net
      Cash Provided by Operating Activities
              
              $
              8,968,000
              
              
              $
              17,729,000Net
      Cash Provided by Investing Activities
              
              $
              1,521,000
              
              
              $
              39,928,000Net
      Cash Provided (Used) in Financing Activities
              
              $
              18,578,000
              
              
              $
              (16,827,000
              )
 
 Fiscal
Year Ended June 30, 2005 Compared To June 30, 2004
 
 Total
Revenues.  For the fiscal year ended June 30, 2005, total
revenues were approximately $27.5 million compared to approximately $40.7
million for the fiscal year ended June 30, 2004, a decrease of approximately
$13.2 million or 32. 4%.  The decline in revenue was primarily due to
the following:
 
 ·
              A
      decrease in interest income of approximately $13.5 million related to a
      decrease in investments in real estate loans and secured borrowings of
      approximately $83.7 million and $36.3 million, respectively, as of June
      30, 2005.  The decrease is primarily related to non-performing
      assets and member redemptions for the year ended June 30,
      2005.  In addition, the average interest rate on our loans as of
      June 30, 2005 was 9.95%, compared to 10.9% at June 30,
      2004.  While there has been some movement in the economy towards
      higher interest rates, it is not clear if or when any such rate increases
      will impact our business.
  - 37
-
 Table of Contents
  
 ·
              We
      recognized approximately $2.3 million in revenue related to a finder’s fee
      on the sale of real estate in the City of Mesquite, Nevada during the
      fiscal year ended June 30, 2004.  We had no such comparable
      revenue for the fiscal year ended June 30, 2005.  Our company
      and Fund I were presented with an opportunity to purchase the property but
      were prohibited by their respective operating agreements from purchasing
      the property.  Instead, our manager facilitated the purchase and
      subsequent sale of the property.  The subsequent sale of the
      property was made possible due to buyer financing provided by our company
      and Fund I.  Our manager negotiated that the buyer (an
      unaffiliated third party) pay a finder’s fee in the form of an
      approximately $2.3 million promissory note to our company and an
      approximately $4.7 million promissory note to Fund I to reflect the fact
      that the transaction was made possible by financing provided by our
      company and Fund I.  The total $7.0 million finder’s fee was
      allocated to our company and Fund I based on the same ratio of the
      financing that each provided in the transaction.  We received a
      promissory note in lieu of cash from an unaffiliated party in connection
      with the sale.  The note required monthly interest payments at a
      rate of 8.5% per annum and had an original maturity date of June 13,
      2005.  We were using the cost recovery method of accounting for
      the transaction.  Accordingly, we did not recognize any income
      on the $2.3 million note until the principal balance of both notes was
      paid in full.  Under the cost recovery method, interest payments
      received by our company in excess of the principal balance are not
      recorded as income until such time as the note is paid in full, which
      occurred in the first calendar quarter of 2004.  In February
      2004, both notes were paid in full and we recorded the $2.3 million as
      revenue related to the sale of real estate related to the original note
      and approximately $0.3 million in interest income related to interest
      payments received prior to loan
payoff.
 
 Non-performing
assets include loans in non-accrual status totaling approximately $36.0 million
as of June 30, 2005 compared to $46.0 million as of June 30, 2004 and real
estate held for sale not sold through seller financed totaling approximately
$51.2 million as of June 30, 2005 compared to $28.3 million as of June 30,
2004.  The amount of non-performing assets may reflect the risks
inherent in our business strategy that entails more lenient underwriting
standards and expedited loan approvals procedures, as well as the effects of a
weakening economy.  Our revenues will continue to be impacted until we
are able to convert these non-performing assets into interest paying real estate
loans.  We will attempt to accomplish this by working with the
borrower where possible and by foreclosing on the underlying property where
necessary.  We intend to sell properties acquired through foreclosure
as soon as practicable, consistent with its objective of avoiding a loss of
principal on our loans.  However, we cannot predict how quickly we
will be able to sell foreclosed properties.
 
 As of
June 30, 2005, our manager had granted extensions on nine 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.  However, our manager only grants extensions when a
borrower is in compliance with the material 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 us from borrowers whose loans had
been extended as of June 30, 2005 was approximately $76.0 million.  At
June 30, 2005, an extended loan of approximately $1.5 million was a
non-performing loan.  Our manager concluded that no additional
allowance for loan losses was necessary with respect to such loans.
 
 Total Operating
Expenses.  For the year ended June 30, 2005, total expenses
were approximately $8.7 million compared to $10.2 million for the year ended
June 30, 2004, a decrease of approximately $1.5 million or
14.15%.  The decrease is primarily related to the
following:
 
 ·
              We
      recognized an impairment value of $500,000 due to a restructured
      loan.
 
 ·
              We
      recognized professional fees related to a restructured loan in the amount
      of $590,000.
 
 ·
              The
      increase in expenses was partially offset by a decrease in interest
      expense of approximately $2.2 million due to a decrease in the amount of
      secured borrowings.  As of June 30, 2005 and 2004, secured
      borrowings were approximately $25.7 million and $61.9 million,
      respectively, representing a decrease of approximately $36.2
      million.
  - 38
-
 Table of Contents
  
 ·
              We
      recognized an allowance for loan loss of approximately $2.3 million, for
      the year ended June 30, 2005, on a loan secured by 4 cemeteries and 8
      mortuaries in Hawaii (RightStar).
 
 Total Income (Loss) from Real Estate
Held for Sale:For the year ended June 30, 2005, total loss
from real estate held for sale totaled approximately $10.3 million, compared to
total income of approximately $0.8 million for the year ended June 30, 2004, a
decrease in income of approximately 1,453.40% due in significant part to the
following factors:
 
 ·
              We
      wrote down the carrying value of a 126 unit assisted living facility
      located in Phoenix, Arizona by approximately $5.9 million during the year
      ended June 30, 2005.
 
 ·
              We
      wrote down the carrying value of the 166 residential lots located in
      Henderson, Nevada by $179,000 during the year ended June 30,
      2005.
 
 ·
              We
      wrote down the carrying value of two real estate parcels located in Austin
      and Cedar Park, Texas by approximately $1.0 million during the year ended
      June 30, 2005.
 
 ·
              We
      wrote down the carrying value of the 74 unit (90 beds) assisted living
      facility located in San Bernardino, California by $282,000 during the year
      ended June 30, 2005.
 
 ·
              We
      sold a 126 unit hotel in Mesquite, Nevada and sustained a loss of $829,000
      during the year ended June 30,
2005.
 
 ·
              For
      the year ended June 30, 2005 and 2004, we recognized expenses related to
      the maintenance of real estate held for sale of approximately $2.8 million
      and $1.6 million, respectively, which was an increase of approximately
      $1.2 million.  The increase in these expenses is related to the
      increase in real estate held for sale at June 30, 2005 of approximately
      $51.2 million compared to $28.3 million at June 30, 2004, an increase of
      approximately $22.9 million.
 
 Annualized Rate of Return to
Members.  For the year ended June 30, 2005, the annualized rate
of return to members, as calculated in accordance with GAAP, was 1.97% compared
to 6.63% for fiscal 2004.
 
 Distributions to
Members.  The following is a schedule of distributions made to
members for the years ended June 30, 2005 and 2004.
 
 For
      the Year Ended
                June
      30, 2005
              
              
              For
      the Year Ended
                June
      30, 2004Distributions
      of Net Income Available for Distribution
              
              $
              19,006,000
              
              
              $
              29,097,000Distributions
      in Excess of Net Income Available for a Distribution Generated During the
      Period
              
              
              1,107,000
              
              
              
              --Total
      Distributions
              
              $
              20,113,000
              
              
              $
              29,097,000
 
 Net
income available for distribution is a non-GAAP financial measure that is
defined in our operating agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to members as
net income available for distribution is the minimum amount required to be
distributed to members pursuant to our operating agreement.  In
addition, cash flows from operations, which are the significant component of net
income available for distribution, affect the capital available for investment
in new loans.  This non-GAAP financial measure should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP or as an alternative to cash flows from operating
activities as a measure of our liquidity.  We compensate for these
limitations by relying primarily on our GAAP results and using net income
available for distributions only supplementally.
  - 39
-
 Table of Contents
  
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows.
 
 For
      the Year Ended
                June
      30, 2005
              
              
              For
      the Year Ended
                June
      30, 2004Distribution
      of Net Income Available for Distribution
              
              $
              19,006,000
              
              
              $
              29,097,000Additions
      to Working Capital Reserves (Amount Not Distributed)
              
              
              --
              
              
              
              5,249,000Gain
      on sale of real estate held for sale
              
              
              (760,000
              )
              
              
              --Loss
      on sale of real estate held for sale
              
              
              932,000
              
              
              
              --Interest
      income accrued to loan balance
              
              
              402,000
              
              
              
              --Change
      in operating assets and liabilities:Interest
      and other receivables
              
              
              216,000
              
              
              
              (444,000
              )Due
      to Manager
              
              
              (289,000
              )
              
              
              (1,072,000
              )Due
      to Vestin Group
              
              
              (384,000
              )
              
              
              (23,000
              )Due
      to/from VRM I
              
              
              1,427,000
              
              
              
              (2,771,000
              )Note
      receivable from VRM I
              
              
              4,278,000
              
              
              
              --Prepaid
      expenses
              
              
              (20,000
              )
              
              
              --Accounts
      payable and accrued liabilities
              
              
              811,000
              
              
              
              219,000Net
      cash provided by operating activities
              
              $
              25,619,000
              
              
              $
              30,255,000Net
      cash provided by investing
              
              $
              33,067,000
              
              
              $
              23,792,000Net
      cash (used) by financing
              
              $
              (60,057,000
              )
              
              $
              (47,851,000
              )
 
 CAPITAL
AND LIQUIDITY
 
 Liquidity
is a measure of a company’s ability to meet potential cash requirements,
including ongoing commitments to fund lending activities and general operating
purposes.  Subject to a 3% reserve, we generally seek to use all of
our available funds to invest in real estate loans.  Distributable
cash flow generated from such loans is paid out to our stockholders, in the form
of a dividend.  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 our
manager will manage our affairs.  We may pay our manager an annual
management fee of up to 0.25% of our aggregate capital received by us and Fund
II from the sale of shares or membership units.
 
 During
the year ended December 31, 2007, cash flows provided by operating activities
approximated $18.1 million.  Investing activities consisted of cash
provided by loan payoffs and sales of real estate loans of approximately $99.6
million.  Cash used for new investments and purchases of real estate
loans totaled approximately $157.6 million and proceeds from full payment of
loans related to real estate held for sale – seller financed totaled
approximately $10.6 million.  In addition, investing activities
consisted of the purchase of approximately $1.0 million in certificates of
deposit and redemptions of approximately $1.2 million in certificates of
deposit.  Financing activities consisted of dividends to stockholders,
net of reinvestment, of approximately $24.4 million, the purchase of treasury
stock totaling approximately $1.4 million and deferred financing costs of
approximately $2.3 million.  In addition, financing activities
consisted of proceeds from issuance of junior preferred securities of
approximately $60.0 million.
 
 At
December 31, 2007, we had approximately $20.2 million in cash, $102,000 in
certificates of deposit, $2.5 million in marketable securities – related party
and approximately $336.9 million in total assets.  We intend to meet
short-term working capital needs through a combination of proceeds from loan
payoffs, loan sales and/or borrowings.  We believe we have sufficient
working capital to meet our operating needs in the near term.
 
 Since we
distribute most or all of our distributable cash generated by operations, our
sources of liquidity include  repayments of outstanding loans,
dividend reinvestments by our stockholders, arrangements with third parties to
participate in our loans and proceeds from issuance of note payable and secured
borrowings.
  - 40
-
 Table of Contents
  
 We rely
primarily upon repayment of outstanding loans to provide capital for investment
in new loans.  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.  Non-performing assets
included loans in non-accrual status, net of allowance for loan losses, and real
estate held for sale not sold through seller financing, totaling approximately
$19.4 million and $28.6 million, respectively, as of December 31, 2007, compared
to approximately $19.5 million and $30.1 million, respectively, as of December
31, 2006.  It is possible that no earnings will be recognized from
these assets until they are disposed of, or that no earnings will be recognized
at all, and the time it will take to dispose of these assets cannot be
predicted.  Our manager believes that these non-performing assets are
a result of factors unique to specific borrowers and
properties.  Because of the estimated value of the underlying
properties, we do not currently believe that any losses beyond those already
recognized will be incurred from these assets upon final
disposition.  However, it is possible that we will not be able to
realize the full estimated carrying values upon disposition.
 
 We have
no current plans to sell any new shares except through our dividend reinvestment
program.  As of March 10, 2008, approximately 9% of our stockholders
owning less than 1% our outstanding shares have elected to reinvest their
dividends.  The level of dividend reinvestment in the future will
depend upon our performance, as well as the number of our stockholders who
prefer to reinvest rather than receive current dividends.
 
 Loans in
which unaffiliated investors have participated through inter-creditor agreements
(“Inter-creditor Agreements”) are accounted for as secured borrowings in
accordance with Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In
the event of borrower non- performance, the Inter-creditor Agreements generally
provide that the Lead Lenders must repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on the participated
loan amount; (ii) substituting an alternative loan acceptable to the Investor;
or (iii) repurchasing the participation from the Investor for the outstanding
balance plus accrued interest.
 
 During
October 2006, we, our manager, Vestin Originations, Inc., VRM I and Fund III
entered into an intercreditor agreement with an unrelated third party related to
the funding of a construction real estate loan.  The secured borrowing
was recognized pro rata between us, VRM I and Fund III for the amount each
entity has funded for the loan.  During May 2007, the secured
borrowings were paid in full.  As of December 31, 2007, we did not
have any funds used under Inter-creditor Agreements as compared to approximately
$13.8 million used under Inter-creditor Agreements as of December 31,
2006.
 
 On June
22, 2007 we completed the issuance of $60.1 million in unsecured trust preferred
securities through the special purpose business trust, VCT I to Merrill Lynch
International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly. VCT I used the proceeds from the sale
of the trust preferred securities and the common securities to purchase our
junior subordinated notes.  The terms of the junior subordinated notes
match the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
indenture governing the notes includes a number of covenants including the
following financial covenants:  (i) we must maintain a Tangible Net
Worth of not less than $225,000,000, (ii) our trailing twelve months EBITDA must
not be less than 2.5 times our Interest Expense and (iii) our ratio of Total
Debt to Tangible Net Worth must not exceed 0.5 to 1.00.  All defined
terms are set forth in the indenture.  As of December 31, 2007, we
were in compliance with all financial covenants included in the
indenture.
 
  - 41
-
 Table of Contents
  On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws, including
SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.  As of December 31, 2007, we had
purchased 109,634 shares as treasury stock, post reverse split on December 31,
2007, through the repurchase program noted above.  These shares are
carried on our books at cost totaling approximately $1.4 million
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 8.65% to
15.00%.  Revenue by product will fluctuate based upon relative
balances during the period.  We had investments in 46 real estate
loans, as of December 31, 2007, with a balance of approximately $291.1 million
as compared to investments in 37 real estate loans, including loans related to
real estate held for sale – seller financed, as of December 31, 2006, with a
balance of approximately $242.4 million.
 
 At
December 31, 2007, the following loans were non-performing (based on current
information and events, it is probable that we 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); RightStar, Inc. (Part I & Part
II), Monterrey Associates LP, Forest Development LLC, Pirates Lake, Ltd,
Jeffrey's Court, LLC, V & M Homes at the Palms, Inc. and Brawley CA 122,
LLC.  These loans are currently carried on our books at a value of
approximately $19.4 million, net of allowance for loan losses of approximately
$11.2 million, which does not include the allowances of approximately $1.7
million relating to the decrease in the property value for performing loans as
of December 31, 2007.  These loans have been placed on non-accrual of
interest status and are the subject of pending foreclosure
proceedings.  On August 7, 2007, we, VRM I and Fund III entered into a
settlement agreement with the borrower of the Pirates Lake, Ltd. loan whereby
the foreclosure was postponed.  Principal, accrued interest and
$75,000 for expenses incurred by us, VRM I and Fund III relating to the loan
were due on October 1, 2007.  On October 2, 2007, the borrower was in
default of the settlement and loan agreements. Subsequently the borrower filed
for protection under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of Texas. On November 7, 2007, our
legal counsel was successful in seeking the dismissal, with prejudice, of the
subject bankruptcy, together with the lifting of the automatic stay from
foreclosure.  On February 5, 2008, we, VRM I and Fund III foreclosed
upon Pirates Lake, Ltd. and classified it as real estate held for
sale.  On March 7, 2008, we, VRM I and Fund III foreclosed upon Forest
Development LLC and classified it as real estate held for sale.  Our
manager has evaluated these loans and concluded that the value of the underlying
collateral is sufficient to protect us from loss of principal.  No
specific allowance was deemed necessary.
 
 During
March 2007, our manager extended the Mid-State Raceway loan from March 31, 2007
to March 31, 2008.  As part of the extension agreement, the borrower
made a principal payment of approximately $3.0 million, of which our portion was
approximately $2.6 million, and the loan interest rate increased from 9% to
12%.  As of December 31, 2007, this loan had a balance of
approximately $19.8 million, of which our portion was approximately $17.0
million.
 
  - 42
-
 Table of Contents
  Our
manager periodically reviews and makes a determination 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 or included as
income when the asset is disposed.  During the year ended December 31,
2007, we have provided a specific reserve related to two non-performing loans
and two performing loans, based on updated appraisals and evaluation of the
borrower obtained by our manager during the year ended December 31,
2007.  Our manager evaluated these loans and concluded that the
remaining underlying collateral was sufficient to protect us against further
losses of principal or interest.  Our manager will continue to
evaluate these loans in order to determine if any other allowance for loan
losses should be recorded.  For additional information on our
investments in real estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.
 
 Asset
Quality and Loan Reserves
 
 Losses
may occur from investing in real estate 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 real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a periodic basis, our manager
evaluates our real estate 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 real
      estate 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.  For additional information regarding
the roll-forward of the allowance for loan losses for the year ended December
31, 2007, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.
 
 Investments
in Real Estate Held for Sale
 
 At
December 31, 2007, we held two properties with a total carrying value of
approximately $28.6 million, which were acquired through foreclosure and
recorded as investments in real estate held for sale.  Our investments
in real estate held for sale are accounted for at the lower of cost or fair
value less costs to sell with fair value based on appraisals and knowledge of
local market conditions.  It is not our intent to invest in or own
real estate as a long-term investment.  We seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  For
additional information on our investments in real estate held for sale, refer to
Note F –Real Estate Held for
Sale of the Notes to the Consolidated Financial Statements included in
Part II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.
 
  - 43
-
 Table of Contents
  Investments
in Real Estate Held for Sale — Seller Financed
 
 At
December 31, 2007, we had no investments where we provided the financing to the
purchaser classified as real estate held for sale – seller
financed.  GAAP requires us to include real estate held for sale –
seller financed until the borrower has met and maintained certain
requirements.  We may share ownership of such properties with VRM I,
Fund III, our manager, or other related and/or unrelated
parties.  These investments in real estate held for sale – seller
financed are accounted for at the lower of cost or fair value less costs to sell
with fair value based on appraisals and knowledge of local market
conditions.  For additional information on our investments in real
estate loans, refer to Note G – Real Estate Held for Sale-Seller
Financed of the Notes to the Consolidated Financial Statements included
in Part II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities, other then the
interest in VCT I as discussed in Note K – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part II, Item 8
Financial Statements and
Supplementary Data of this Annual Report on Form 10-K, nor do we have any
interests in non-exchange traded commodity contracts.
 
 CONTRACTUAL
OBLIGATIONS
 
 The
following summarizes our contractual obligations at December 31,
2007:
 
 Contractual
      Obligation
              
              Total
              
              
              Less
      Than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      Than
                5
      YearsJunior
      subordinated notes payable (1)
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000Total
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000
 
 (1)
              See
      Note K – Junior
      Subordinated Notes of the Notes to the Consolidated Financial
      Statements included in Part II, Item 8 Financial Statements and
      Supplementary Data of this Annual Report on Form
    10-K.
 
 CRITICAL
ACCOUNTING ESTIMATES
 
 Revenue
Recognition
 
 Interest
income on loans is accrued by the effective interest method.  We do
not accrue 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 we 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.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at December 31, 2007, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
              
              $
              2,627,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              13,134,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (2,627,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (13,134,000
              )
 
  - 44
-
 Table of Contents
  The
purpose of this analysis is to provide an indication of the impact that the
weighted average interest rate fluctuations would have on our financial
results.  It is not intended to imply our expectation of future
revenues or to estimate earnings.  We believe that the assumptions
used above are appropriate to illustrate the possible material impact on the
consolidated financial statements.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment in our investment in real estate loans
portfolio.  Our manager’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, which may indicate
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 or included as income.
 
 The
following table presents a sensitivity analysis to show the impact on our
financial condition at December 31, 2007, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
              
              $
              2,911,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              14,553,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (2,911,000
              )Allowance
      for loan losses assumption decreased by 4.4% of loan
    portfolio
              
              $
              (12,873,000
              )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approves loans more quickly than other real estate
lenders and, due to our expedited underwriting process, there is a risk that the
credit inquiry we perform will not reveal all material facts pertaining to a
borrower and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
  - 45
-
 Table of Contents
  
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 Real Estate Held For
Sale
 
 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, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
FAS 144 - Accounting for the
Impairment or Disposal of Long Lived Assets,we seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  The
carrying values of real estate held for sale are assessed on a regular basis
from updated appraisals, comparable sales values or purchase
offers.
 
 Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
and initial continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sale agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sale
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sales agreements are recorded under the deposit method or cost recovery method
as defined in FAS 66.  Under the deposit method, no profit is
recognized and any cash received from the buyer is reported as a deposit
liability on the balance sheet.  Under the cost recovery method, no
profit is recognized until payments by the buyer exceed the carrying basis of
the property sold.  Principal payments received will reduce the
related receivable, and interest collections will be recorded as unrecognized
gross profit on the balance sheet.  The carrying values of these
properties are included in real estate held for sale on the accompanying
consolidated balance sheets.
 
  - 46
-
 Table of Contents
  ITEM
      7A.
              QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.
 
 Most of
our assets consisted of investments in real estate loans, which from time to
time include those that are financed under Inter-creditor
Agreements.  At December 31, 2007, our aggregate investment in real
estate loans was approximately $278.2 million, net of allowance, with a weighted
average effective interest rate of 12.00%.  Most of the real estate
loans had an initial term of 12 months.  The weighted average term of
outstanding loans, including extensions, at December 31, 2007, was 19
months.  All but two of the outstanding real estate loans at December
31, 2007, were fixed rate loans.  One of the two variable interest
rate loans was non-performing as of December 31, 2007, see Note D – Investments in Real Estate
Loans in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.  All of
the real estate loans are held for investment purposes; none are held for
sale.  We intend to hold such real estate loans to
maturity.  None of the real estate loans had prepayment penalties and
24 loans, totaling approximately $157.6 million, had an exit fee.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
dividend distribution to stockholders.  On the other hand, a
significant increase in interest rates could result in a slowdown in real estate
development activity that would reduce the demand for commercial real estate
loans.  As a result, we might encounter greater difficulty in
identifying appropriate borrowers.  We are not in a position to
quantify the potential impact on our operating results from a material change in
interest rates.
 
 The
following table contains information about the investment of real estate loans
in our portfolio as of December 31, 2007.  The presentation aggregates
the investment in real estate loans by their maturity dates for maturities
occurring in each of the years 2008 through 2012 and thereafter and separately
aggregates the information for all maturities arising after 2012.  The
carrying values of these assets approximate their fair value as of December 31,
2007.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at December 31, 2007Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              TotalInvestments
      In Real Estate Loans
              
              $
              276,892,000
              
              
              $
              14,171,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              291,063,000Weighted
      Average Interest Rates
              
              
              12.02%
              
              
              
              11.50%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              12.00%
 
 At
December 31, 2007, we also had approximately $22.8 million invested in cash,
cash equivalents, certificates of deposit, and marketable securities – related
party (VRM I).  Approximately 3% of our assets will be held in such
accounts as a cash reserve; additional deposits in such accounts will be made as
funds are received from investors and repayment of loans pending the deployment
of such funds in new real estate loans.  We believe that these
financial assets do not give rise to significant interest rate risk due to their
short-term nature.
  - 47
-
 Table of Contents
 
 ITEM
      8.
                FINANCIALSTATEMENTS AND SUPPLEMENTARY
      DATA
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
 
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
              49CONSOLIDATED
      FINANCIAL STATEMENTSConsolidated Balance Sheets
              50Consolidated Statements of Income
              51Consolidated Statements of Equity and Other Comprehensive
      Income
              52Consolidated Statements of Cash Flows
              51Notes to the Consolidated Financial
      Statements
              54SUPPLEMENTARY
      INFORMATIONInvestments
      in Real Estate Loans:Real Estate Loan Roll Forward
              83Real Estate Loans by Type of
Property
              84Real Estate Loans by Lien Position
              84Real Estate Loans that Exceed Three Percent of the
      Portfolio
              85
 
  - 48
-
 Table of Contents
  
 
 REPORT
OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM
 
  To Board
of Directors and Stockholders of Vestin Realty Mortgage II, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Vestin Realty Mortgage
II, Inc., (“the Company”) as of December 31, 2007 and 2006 and related
consolidated statements of operations, equity and other comprehensive income and
its cash flows for the year ended December 31, 2007, the twelve months ended
December 31, 2006, the six months ended December 31, 2005, and the year ended
June 30, 2005.  Our audits also included the financial statement
schedules listed in the Index at Item 15. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedules based
on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States).  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Vestin Realty Mortgage II,
Inc. as of December 31, 2007 and 2006 and the results of its operations and its
cash flows for the year ended December 31, 2007, the twelve months ended
December 31, 2006, the six months ended December 31, 2005, and for the year
ended June 30, 2005 in conformity with accounting principles generally accepted
in the United States of America.  Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, the information set forth
therein.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Vestin Realty Mortgage II,
Inc’s. internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 13, 2008, expressed an
unqualified opinion thereon.
 
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 March 13,
2008
 
  
  - 49
-
 Table of Contents
  FINANCIAL
STATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSDecember
      31, 2007
              
              
              December
      31, 2006AssetsCash
              
              $
              20,241,000
              
              
              $
              16,841,000Certificates
      of deposit
              
              
              102,000
              
              
              
              250,000Investment
      in marketable securities - related party
              
              
              2,460,000
              
              
              
              2,087,000Interest
      and other receivables, net of allowance of $160,000 at December 31, 2007
      and December 31, 2006
              
              
              4,162,000
              
              
              
              2,709,000Notes
      receivable, net of allowance of $2,619,000 at December 31, 2007 and
      $2,000,000 at December 31, 2006
              
              
              --
              
              
              
              282,000Real
      estate held for sale
              
              
              28,563,000
              
              
              
              30,079,000Real
      estate held for sale - seller financed
              
              
              --
              
              
              
              14,774,000Investment
      in real estate loans, net of allowance for loan losses of $12,873,000 at
      December 31, 2007 and $9,828,000 at December 31, 2006
              
              
              278,190,000
              
              
              
              221,849,000Due
      from related parties
              
              
              --
              
              
              
              31,000Investment
      in equity affiliate
              
              
              100,000
              
              
              
              --Assets
      under secured borrowings
              
              
              --
              
              
              
              13,796,000Deferred
      financing costs
              
              
              2,213,000
              
              
              
              --Other
      assets
              
              
              137,000
              
              
              
              344,000Total
      assets
              
              $
              336,168,000
              
              
              $
              303,042,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              2,641,000
              
              
              $
              687,000Due
      to related parties
              
              
              122,000
              
              
              
              --Secured
      borrowings
              
              
              --
              
              
              
              13,796,000Junior
      subordinated notes payable
              
              
              60,100,000
              
              
              
              --Note
      payable
              
              
              --
              
              
              
              27,000Deposit
      liability
              
              
              --
              
              
              
              5,514,000Unearned
      revenue
              
              
              --
              
              
              
              454,000Dividend
      payable
              
              
              1,546,000
              
              
              
              4,078,000Total
      liabilities
              
              
              64,409,000
              
              
              
              24,556,000Commitments
      and ContingenciesStockholders'
      equityTreasury
      stock, at cost (109,634 shares)
              
              
              (1,440,000
              )
              
              
              --Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 14,866,219 shares
      issued and outstanding at December 31, 2007 and 14,938,350 shares issued
      and outstanding at December 31, 2006
              
              
              1,000
              
              
              
              4,000Additional
      paid in capital
              
              
              278,367,000
              
              
              
              277,853,000Retained
      earnings (accumulated deficit)
              
              
              (4,198,000
              )
              
              
              1,242,000Accumulated
      other comprehensive loss
              
              
              (971,000
              )
              
              
              (613,000
              )Total
      stockholders' equity
              
              
              271,759,000
              
              
              
              278,486,000Total
      liabilities and stockholders' equity
              
              $
              336,168,000
              
              
              $
              303,042,000
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 50
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF INCOMEFor
      the Year Ended
              
              
              For
      the Twelve
                Months
      Ended
              
              
              For
      the Six Months Ended
              
              
              For
      the Six Months Ended
              
              
              For
      the Year Ended12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005(Unaudited)RevenuesInterest
      income from investment in real estate loans
              
              $
              26,982,000
              
              
              $
              21,718,000
              
              
              $
              11,301,000
              
              
              $
              14,388,000
              
              
              $
              25,301,000Adjustment
      to allowance for loan losses
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              41,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              1,044,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Other
      income
              
              
              984,000
              
              
              
              335,000
              
              
              
              437,000
              
              
              
              1,562,000
              
              
              
              2,207,000Total
      revenues
              
              
              29,010,000
              
              
              
              22,053,000
              
              
              
              11,738,000
              
              
              
              15,950,000
              
              
              
              27,549,000Operating
      expensesManagement
      fees - related party
              
              
              1,097,000
              
              
              
              1,096,000
              
              
              
              546,000
              
              
              
              515,000
              
              
              
              1,060,000Provision
      for loan loss
              
              
              3,116,000
              
              
              
              5,500,000
              
              
              
              --
              
              
              
              167,000
              
              
              
              2,775,000Interest
      expense
              
              
              3,367,000
              
              
              
              1,446,000
              
              
              
              412,000
              
              
              
              2,441,000
              
              
              
              3,526,000Professional
      fees
              
              
              3,004,000
              
              
              
              1,219,000
              
              
              
              116,000
              
              
              
              154,000
              
              
              
              996,000Professional
      fees - related party
              
              
              138,000
              
              
              
              88,000
              
              
              
              127,000
              
              
              
              108,000
              
              
              
              206,000Provision
      for doubtful accounts related to receivable
              
              
              235,000
              
              
              
              329,000
              
              
              
              183,000
              
              
              
              --
              
              
              
              --Other
              
              
              922,000
              
              
              
              946,000
              
              
              
              130,000
              
              
              
              25,000
              
              
              
              167,000Total
      operating expenses
              
              
              11,879,000
              
              
              
              10,624,000
              
              
              
              1,514,000
              
              
              
              3,410,000
              
              
              
              8,730,000Income
      from operations
              
              
              17,131,000
              
              
              
              11,429,000
              
              
              
              10,224,000
              
              
              
              12,540,000
              
              
              
              18,819,000Non-operating
      incomeGain
      on sale of marketable securities
              
              
              --
              
              
              
              21,000
              
              
              
              203,000
              
              
              
              --
              
              
              
              --Dividend
      income - related party
              
              
              308,000
              
              
              
              72,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Interest
      income from banking institutions
              
              
              1,535,000
              
              
              
              1,333,000
              
              
              
              287,000
              
              
              
              249,000
              
              
              
              409,000Total
      other non-operating income
              
              
              1,843,000
              
              
              
              1,426,000
              
              
              
              490,000
              
              
              
              249,000
              
              
              
              409,000Income
      from real estate held for saleRevenue
      related to real estate held for sale
              
              
              86,000
              
              
              
              4,101,000
              
              
              
              2,311,000
              
              
              
              --
              
              
              
              --Net
      gain (loss) on sale of real estate held for sale
              
              
              --
              
              
              
              1,517,000
              
              
              
              47,000
              
              
              
              758,000
              
              
              
              (172,000
              )Gain
      on sale of real estate held for sale - seller financed
              
              
              2,003,000
              
              
              
              2,293,000
              
              
              
              1,079,000
              
              
              
              --
              
              
              
              --Expenses
      related to real estate held for sale
              
              
              (2,869,000
              )
              
              
              (4,915,000
              )
              
              
              (3,607,000
              )
              
              
              (1,538,000
              )
              
              
              (2,784,000
              )Write
      down on real estate held for sale
              
              
              (1,266,000
              )
              
              
              --
              
              
              
              --
              
              
              
              (123,000
              )
              
              
              (7,384,000
              )Total
      income (loss) from real estate held for sale
              
              
              (2,046,000
              )
              
              
              2,996,000
              
              
              
              (170,000
              )
              
              
              (903,000
              )
              
              
              (10,340,000
              )Income
      before provision for income taxes
              
              
              16,928,000
              
              
              
              15,851,000
              
              
              
              10,544,000
              
              
              
              11,886,000
              
              
              
              8,888,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --NET
      INCOME
              
              $
              16,928,000
              
              
              $
              15,851,000
              
              
              $
              10,544,000
              
              
              $
              11,886,000
              
              
              $
              8,888,000Basic
      and diluted earnings per weighted average common share / membership
      unit
              
              $
              1.14
              
              
              $
              1.06
              
              
              $
              0.64
              
              
              $
              0.65
              
              
              $
              0.51Dividends
      declared per common share / cash distribution to members per membership
      unit
              
              $
              1.50
              
              
              $
              1.51
              
              
              $
              0.52
              
              
              $
              0.61
              
              
              $
              1.16Weighted
      average common shares / membership units
              
              
              14,909,651
              
              
              
              14,935,585
              
              
              
              16,500,353
              
              
              
              18,315,693
              
              
              
              17,382,394
  The
accompanying notes are an integral part of these consolidated
statements.
 - 51
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
      THE YEAR ENDED DECEMBER 31, 2007Treasury
      Stock
              
              
              Common
      StockUnits
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Additional
                Paid-in-
                Capital
              
              
              Retained
      Earnings (Accumulated Deficit)
              
              
              Accumulated
                Other
      Comprehensive
                Income
      (Loss)
              
              
              Members'
                Equity
              
              
              TotalMembers'
      Equity at
                June
      30, 2004
              
              
              18,402,085
              
              
              
              
              
              
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              361,069,000
              
              
              $
              361,069,000Comprehensive
      Income:Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,888,000
              
              
              
              8,888,000Unrealized
      Loss on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (804,000
              )
              
              
              
              
              
              
              (804,000
              )Total
      Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,084,000Capital
      Contribution from Manager
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,984,000
              
              
              
              1,984,000Distributions
      to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (20,113,000
              )
              
              
              (20,113,000
              )Reinvestment
      of Distributions
              
              
              198,308
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,966,000
              
              
              
              3,966,000Members'
      Redemptions
              
              
              (2,195,117
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (43,910,000
              )
              
              
              (43,910,000
              )Members'
      Equity at
                June
      30, 2005
              
              
              16,405,276
              
              
              
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              (804,000
              )
              
              $
              311,884,000
              
              
              $
              311,080,000Comprehensive
      Income:Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,544,000
              
              
              
              10,544,000Reversal
      of Unrealized Loss on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              804,000
              
              
              
              
              
              
              
              804,000Unrealized
      Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,000
              
              
              
              
              
              
              
              18,000Total
      Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,366,000Distributions
      to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,586,000
              )
              
              
              (8,586,000
              )Reinvestment
      of Distributions
              
              
              63,357
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,281,000
              
              
              
              1,281,000Members'
      Redemptions
              
              
              (52
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,000
              )
              
              
              (1,000
              )Members'
      Equity at
                December
      31, 2005
              
              
              16,468,581
              
              
              
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              18,000
              
              
              $
              315,122,000
              
              
              $
              315,140,000Comprehensive
      Income:Net
      Income (Loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,561,000
              
              
              
              
              
              
              
              (1,710,000
              )
              
              
              15,851,000Reversal
      of Unrealized Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (18,000
              )
              
              
              
              
              
              
              (18,000
              )Unrealized
      Loss on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (613,000
              )
              
              
              
              
              
              
              (613,000
              )Total
      Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,220,000Distributions
      to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,073,000
              )
              
              
              (6,073,000
              )Reinvestment
      of Distributions
              
              
              37,880
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              742,000
              
              
              
              742,000Members'
      Redemptions
              
              
              (1,587,240
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (30,459,000
              )
              
              
              (30,459,000
              )Reclassify
      members' equity to stockholders' equity
              
              
              (14,919,221
              )
              
              
              
              
              
              
              
              
              
              
              14,919,221
              
              
              
              3,000
              
              
              
              277,619,000
              
              
              
              
              
              
              
              
              
              
              
              (277,622,000
              )
              
              
              --Dividends
      Declared to Stockholder, $1.09 per common share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16,319,000
              )
              
              
              
              
              
              
              
              
              
              
              (16,319,000
              )Reinvestment
      of Dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,129
              
              
              
              1,000
              
              
              
              234,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              235,000Stockholders'
      Equity at
                December
      31, 2006
              
              
              --
              
              
              
              --
              
              
              $
              --
              
              
              
              14,938,350
              
              
              $
              4,000
              
              
              $
              277,853,000
              
              
              $
              1,242,000
              
              
              $
              (613,000
              )
              
              $
              --
              
              
              $
              278,486,000
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 52
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
      THE YEAR ENDED DECEMBER 31, 2007(CONTINUED)Treasury
      Stock
              
              
              Common
      StockUnits
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Additional
                Paid-in-
                Capital
              
              
              Retained
      Earnings (Accumulated Deficit)
              
              
              Accumulated
                Other
      Comprehensive
                Income
      (Loss)
              
              
              Members'
                Equity
              
              
              TotalStockholders'
      Equity at
                December
      31, 2006
              
              
              --
              
              
              
              --
              
              
              $
              --
              
              
              
              14,938,350
              
              
              $
              4,000
              
              
              $
              277,853,000
              
              
              $
              1,242,000
              
              
              $
              (613,000
              )
              
              $
              --
              
              
              $
              278,486,000Comprehensive
      Income:Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16,928,000
              
              
              
              
              
              
              
              
              
              
              
              16,928,000Unrealized
      Loss on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (358,000
              )
              
              
              
              
              
              
              (358,000
              )Comprehensive
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16,570,000Purchase
      of Treasury Stock
              
              
              
              
              
              
              109,634
              
              
              
              (1,440,000
              )
              
              
              (109,634
              )
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,440,000
              )Dividends
      Declared to Stockholder, $1.50 per common share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (22,368,000
              )
              
              
              
              
              
              
              
              
              
              
              (22,368,000
              )Reinvestment
      of Dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              37,503
              
              
              
              (3,000
              )
              
              
              514,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              511,000Stockholders'
      Equity at
                December
      31, 2007
              
              
              --
              
              
              
              109,634
              
              
              $
              (1,440,000
              )
              
              
              14,866,219
              
              
              $
              1,000
              
              
              $
              278,367,000
              
              
              $
              (4,198,000
              )
              
              $
              (971,000
              )
              
              $
              --
              
              
              $
              271,759,000
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 53
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the
                Year
      Ended
              
              
              For
      the Twelve Months Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Year Ended12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005Cash
      flows from operating activities:
              
              
              
              
              
              
              
              
              
              
              (Unaudited)Net
      income
              
              $
              16,928,000
              
              
              $
              15,851,000
              
              
              $
              10,544,000
              
              
              $
              11,886,000
              
              
              $
              8,888,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for doubtful accounts related to receivable
              
              
              235,000
              
              
              
              329,000
              
              
              
              183,000
              
              
              
              167,000
              
              
              
              --Gain
      /loss on sale of marketable securities
              
              
              --
              
              
              
              (21,000
              )
              
              
              (203,000
              )
              
              
              --
              
              
              
              --Impairmentof
      real estate held for sale
              
              
              1,266,000
              
              
              
              --
              
              
              
              --
              
              
              
              123,000
              
              
              
              7,384,000Gain
      on sale of real estate held for sale
              
              
              --
              
              
              
              (2,014,000
              )
              
              
              (47,000
              )
              
              
              (758,000
              )
              
              
              (760,000
              )Loss
      on sale of real estate held for sale
              
              
              --
              
              
              
              497,000
              
              
              
              --
              
              
              
              --
              
              
              
              932,000Gain
      on sale of real estate held for sale - seller financed
              
              
              (2,003,000
              )
              
              
              (2,293,000
              )
              
              
              (1,079,000
              )
              
              
              --
              
              
              
              --Recovery
      of allowance for doubtful notes receivable
              
              
              (594,000
              )
              
              
              (487,000
              )
              
              
              (89,000
              )
              
              
              --
              
              
              
              --Provision
      for loan loss
              
              
              3,116,000
              
              
              
              5,500,000
              
              
              
              --
              
              
              
              --
              
              
              
              2,775,000Adjustment
      to allowance for loan losses
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (41,000
              )Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              (1,044,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Amortized
      interest income
              
              
              (1,323,000
              )
              
              
              (1,328,000
              )
              
              
              (272,000
              )
              
              
              --
              
              
              
              402,000Amortized
      financing costs, included in interest expense
              
              
              88,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Interest
      income accrued to loan balance
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              280,000
              
              
              
              --Change
      in operating assets and liabilities:Interest
      and other receivables
              
              
              (1,330,000
              )
              
              
              273,000
              
              
              
              420,000
              
              
              
              680,000
              
              
              
              216,000Due
      to/from related parties
              
              
              153,000
              
              
              
              294,000
              
              
              
              1,020,000
              
              
              
              930,000
              
              
              
              754,000Note
      receivable from VRM I
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              4,278,000
              
              
              
              4,278,000Other
      assets
              
              
              207,000
              
              
              
              343,000
              
              
              
              (667,000
              )
              
              
              --
              
              
              
              (20,000
              )Accounts
      payable and accrued liabilities
              
              
              2,354,000
              
              
              
              381,000
              
              
              
              (842,000
              )
              
              
              143,000
              
              
              
              811,000Net
      cash provided by operating activities
              
              
              18,053,000
              
              
              
              17,325,000
              
              
              
              8,968,000
              
              
              
              17,729,000
              
              
              
              25,619,000Cash
      flows from investing activities:Investments
      in real estate loans
              
              
              (142,832,000
              )
              
              
              (202,748,000
              )
              
              
              (104,346,000
              )
              
              
              (42,380,000
              )
              
              
              (77,218,000
              )Purchase
      of investments in real estate loans including interest
      receivable
              
              
              --
              
              
              
              --
              
              
              
              (10,065,000
              )
              
              
              --
              
              
              
              --Purchase
      of investments in real estate loans from:VRM
      I
              
              
              --
              
              
              
              (1,350,000
              )
              
              
              (7,600,000
              )
              
              
              --
              
              
              
              --Fund
      III
              
              
              (1,300,000
              )
              
              
              (4,900,000
              )
              
              
              (500,000
              )
              
              
              (5,000,000
              )
              
              
              (10,000,000
              )Other
      related parties
              
              
              (661,000
              )
              
              
              (2,556,000
              )
              
              
              (11,824,000
              )
              
              
              --
              
              
              
              (2,700,000
              )Third
      parties
              
              
              (12,798,000
              )
              
              
              (23,000,000
              )
              
              
              (1,334,000
              )
              
              
              (11,000,000
              )
              
              
              (27,058,000
              )Proceeds
      from loan payoffs
              
              
              90,712,000
              
              
              
              203,106,000
              
              
              
              103,858,000
              
              
              
              105,546,000
              
              
              
              136,158,000Sale
      of investments in real estate loans to:VRM
      I
              
              
              4,434,000
              
              
              
              500,000
              
              
              
              --
              
              
              
              --
              
              
              
              600,000Fund
      III
              
              
              1,153,000
              
              
              
              6,000,000
              
              
              
              --
              
              
              
              --
              
              
              
              5,000,000Other
      related parties
              
              
              --
              
              
              
              2,000,000
              
              
              
              7,000,000
              
              
              
              --
              
              
              
              4,000,000Third
      party
              
              
              3,319,000
              
              
              
              175,000
              
              
              
              10,000,000
              
              
              
              4,533,000
              
              
              
              17,033,000Proceeds
      related to investment in real estate held for sale
              
              
              250,000
              
              
              
              35,553,000
              
              
              
              4,767,000
              
              
              
              12,542,000
              
              
              
              16,397,000Principal
      payments on real estate held for sale-seller financed
              
              
              10,598,000
              
              
              
              8,113,000
              
              
              
              9,635,000
              
              
              
              --
              
              
              
              --Legal
      expenses paid and applied against loan allowance
              
              
              (94,000
              )
              
              
              (906,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --Proceeds
      from note receivable
              
              
              641,000
              
              
              
              686,000
              
              
              
              89,000
              
              
              
              --
              
              
              
              --Notes
      receivable
              
              
              --
              
              
              
              --
              
              
              
              (154,000
              )
              
              
              --
              
              
              
              --Purchase
      of marketable securities
              
              
              --
              
              
              
              --
              
              
              
              (14,827,000
              )
              
              
              (25,993,000
              )
              
              
              (31,942,000
              )Purchase
      of marketable securities - related parties
              
              
              (731,000
              )
              
              
              (2,700,000
              )
              
              
              --
              
              
              
              --
              
              
              
              565,000Proceeds
      from sale of marketable securities
              
              
              --
              
              
              
              7,263,000
              
              
              
              16,354,000
              
              
              
              --
              
              
              
              --Purchase
      of fixed asset
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (7,000
              )Purchase
      of investments in certificates of deposit
              
              
              (1,027,000
              )
              
              
              (17,061,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --Proceeds
      from investments in certificates of deposit
              
              
              1,175,000
              
              
              
              17,811,000
              
              
              
              --
              
              
              
              1,425,000
              
              
              
              1,425,000Cash
      outlays for real estate held for sale
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (177,000
              )
              
              
              (177,000
              )Unearned
      revenue proceeds related to loan restructuring
              
              
              --
              
              
              
              608,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Deposit
      liability
              
              
              665,000
              
              
              
              6,942,000
              
              
              
              468,000
              
              
              
              432,000
              
              
              
              991,000Net
      cash (used) provided by investing activities
              
              $
              (46,496,000
              )
              
              $
              33,536,000
              
              
              $
              1,521,000
              
              
              $
              39,928,000
              
              
              $
              33,067,000
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 54
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the
                Year
      Ended
              
              
              For
      the Twelve Months Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Year Ended12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005Cash
      flows from financing activities:
              
              
              
              
              
              
              
              
              
              
              (Unaudited)Principal
      payments on notes payable
              
              $
              (256,000
              )
              
              $
              (25,857,000
              )
              
              $
              --
              
              
              $
              --
              
              
              $
              --Proceeds
      from issuance of notes payable
              
              
              229,000
              
              
              
              --
              
              
              
              25,884,000
              
              
              
              --
              
              
              
              --Proceeds
      from issuance of junior subordinated notes payable
              
              
              60,000,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Deferred
      financing costs
              
              
              (2,301,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Dividends
      to stockholders, net of reinvestments
              
              
              (23,776,000
              )
              
              
              (11,906,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --Dividends
      to stockholders - related party
              
              
              (613,000
              )
              
              
              (100,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --Purchase
      of treasury stock at cost
              
              
              (1,440,000
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Members'
      distributions, net of reinvestments
              
              
              --
              
              
              
              (5,315,000
              )
              
              
              (7,276,000
              )
              
              
              (8,722,000
              )
              
              
              (16,086,000
              )Members'
      distributions - related party
              
              
              --
              
              
              
              (16,000
              )
              
              
              (29,000
              )
              
              
              (15,000
              )
              
              
              (61,000
              )Members'
      redemptions
              
              
              --
              
              
              
              (30,459,000
              )
              
              
              (1,000
              )
              
              
              (8,090,000
              )
              
              
              (43,910,000
              )Net
      cash provided (used) in financing activities
              
              
              31,843,000
              
              
              
              (73,653,000
              )
              
              
              18,578,000
              
              
              
              (16,827,000
              )
              
              
              (60,057,000
              )NET
      CHANGE IN CASH
              
              
              3,400,000
              
              
              
              (22,792,000
              )
              
              
              29,067,000
              
              
              
              40,830,000
              
              
              
              (1,371,000
              )Cash,
      beginning of period
              
              
              16,841,000
              
              
              
              39,633,000
              
              
              
              10,566,000
              
              
              
              11,937,000
              
              
              
              11,937,000Cash,
      end of period
              
              $
              20,241,000
              
              
              $
              16,841,000
              
              
              $
              39,633,000
              
              
              $
              52,767,000
              
              
              $
              10,566,000
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 55
-
 Table of Contents
  
 
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the
                Year
      Ended
              
              
              For
      the Twelve Months Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Six
                Months
      Ended
              
              
              For
      the Year Ended12/31/2007
              
              
              12/31/2006
              
              
              12/31/2005
              
              
              12/31/2004
              
              
              6/30/2005Supplemental
      disclosures of cash flows information:
              
              
              
              
              
              
              
              
              
              
              (Unaudited)Income
      taxes paid
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Interest
      paid
              
              $
              3,367,000
              
              
              $
              1,446,000
              
              
              $
              412,000
              
              
              $
              2,441,000
              
              
              $
              3,526,000Non-cash
      investing and financing activities:Dividend
      payable
              
              $
              1,546,000
              
              
              $
              4,078,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Reinvestment
      of dividends
              
              $
              514,000
              
              
              $
              235,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Reinvestment
      of member distributions
              
              $
              --
              
              
              $
              742,000
              
              
              $
              1,281,000
              
              
              $
              2,423,000
              
              
              $
              3,966,000Capital
      contribution from Manager related to sale of rights to receive proceeds of
      guarantee
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              1,984,000
              
              
              $
              1,984,000Investment
      in real estate held for sale reclassified from interest
      receivable
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              9,000Loan
      payoffs of loans funded through secured borrowings
              
              $
              13,796,000
              
              
              $
              23,518,000
              
              
              $
              22,037,000
              
              
              $
              42,294,000
              
              
              $
              14,837,000Loans
      funded through secured borrowing
              
              $
              --
              
              
              $
              17,560,000
              
              
              $
              16,136,000
              
              
              $
              6,058,000
              
              
              $
              51,106,000Note
      receivable from Vestin Mortgage paid off through relief of Due to
      Manager
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              1,000,000
              
              
              $
              1,000,000Note
      receivable received from guarantor in exchange from release of
      guarantee
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              328,000
              
              
              $
              328,000Other
      receivable related to local agency bond liquidation
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              446,000Ownership
      of real estate held for sale assigned from Fund I
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              7,424,000
              
              
              $
              7,424,000Real
      estate held for sale acquired through foreclosure
              
              $
              --
              
              
              $
              25,476,000
              
              
              $
              7,939,000
              
              
              $
              27,638,000
              
              
              $
              37,627,000Loan
      rewritten with same or similar collateral
              
              $
              30,918,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Purchase
      of equity investment related to junior subordinated notes
      payable
              
              $
              100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Receivable
      related to loan rewritten with same or similar property, net of allowance,
      as collateral applied to unearned income
              
              $
              --
              
              
              $
              127,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Sale
      of real estate held for sale where we provided the
    financing
              
              $
              --
              
              
              $
              --
              
              
              $
              15,464,000
              
              
              $
              --
              
              
              $
              --Unearned
      revenue from loans rewritten with same or similar property as
      collateral
              
              $
              454,000
              
              
              $
              27,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Decrease
      in deposit liability related to pay off of real estate held for sale -
      seller financed
              
              $
              6,179,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Adjustment
      to note receivable and related allowance
              
              $
              978,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Settlement
      for reimbursement of legal fees, including amount applied towards related
      loan loss
              
              $
              523,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Unrealized
      gain (loss) on marketable securities
              
              $
              --
              
              
              $
              --
              
              
              $
              822,000
              
              
              $
              (123,000
              )
              
              $
              (804,000
              )Unrealized
      gain on marketable securities - related party
              
              $
              (358,000
              )
              
              $
              (613,000
              )
              
              $
              --
              
              
              $
              --
              
              
              $
              --
 
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 56
-
 Table of Contents
  
 VESTIN
REALTY MORTGAGEII, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2007
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
liability company for the purpose of investing in commercial real estate loans
(hereafter referred to as “real estate loans”).  Vestin Realty
Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
corporation for the sole purpose of effecting a merger with Fund
II.  On March 31, 2006, Fund II merged into VRM II and the members of
Fund II received one share of VRM II’s common stock for each membership unit of
Fund II.  References in this report to the “Company”, “we”, “us” or
“our” refer to Fund II with respect to the period prior to April 1, 2006 and to
VRM II with respect to the period commencing on April 1,
2006.  Because we were a limited liability company (“LLC”) during the
prior periods reflected in this report, we make reference to Fund II’s “members”
rather than “stockholders” in reporting our financial results.
 
 We invest
in loans secured by real estate through deeds of trust or mortgages (hereafter
referred to collectively as “deeds of trust” and as defined in our Management
Agreement as “Mortgage Assets”).  We commenced operations in June
2001.
 
 We
operate as a real estate investment trust (“REIT”).  We are not a
mutual fund or an investment company within the meaning of the Investment
Company Act of 1940, nor are we subject to any regulation
thereunder.  As a REIT, we are required to have a December 31 fiscal
year end.
 
 Our
manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
Group”), a Delaware corporation.  Michael Shustek, the CEO and
director of our manager and CEO, President and a director of us, wholly owns
Vestin Group, Inc., which is engaged in asset management, real estate lending
and other financial services through its subsidiaries.  Our manager,
prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and
was generally engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property.  On July 1, 2006, the
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. that has continued the business of brokerage, placement and
servicing of real estate loans.  Vestin Originations, Inc. is a wholly
owned subsidiary of Vestin Group.  On September 1, 2007, the servicing
of real estate loans was assumed by our manager.
 
 Pursuant
to our management agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us, and provides similar
services to our subsidiaries.  Without limiting the foregoing, our
manager performs other services as may be required from time to time for
management and other activities relating to our assets, as our manager shall
deem appropriate.  Consequently, our operating results are dependent
upon our manager’s ability and performance in managing our operations and
servicing our assets.
 
 Vestin
Mortgage, Inc. is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”),
as the successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III,
LLC (“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned
by our manager’s CEO.  These entities also invest in real estate
loans.
 
 The
consolidated financial statements include the accounts of us and our wholly
owned taxable REIT subsidiary, TRS II, Inc.  All significant
inter-company transactions and balances have been eliminated in
consolidation.
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through Vestin II Capital Trust I (“VCT I), a special
purpose business trust.  VCT I, is a Delaware statutory
trust.  Our interest in VCT I is accounted for using the equity method
and the assets and liabilities are not consolidated into our financial
statements due to our determination that VCT I is a variable interest entity in
which we are not the primary beneficiary under Financial Accounting Standards
Board Interpretation No. 46R (“FIN 46R”).
  - 57
-
 Table of Contents
  
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Management
Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 Revenue
Recognition
 
 Interest
is recognized as revenue when earned according to the terms of the loans, using
the effective interest method.  We do not accrue 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 we 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.  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 our investment in the loan is fully
recoverable.
 
 Investments in Real Estate
Loans
 
 We may
from time to time acquire or sell investments in real estate loans from or to
our manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  The primary purpose is to either free up
capital to provide liquidity for various reasons, such as loan diversification,
or place excess capital in investments to maximize the use of our
capital.  Selling or buying loans allows us to diversify our loan
portfolio within these parameters.  Due to the short-term nature of
the loans we make and the similarity of interest rates in loans we normally
would invest in, the fair value of a loan typically approximates its carrying
value.  Accordingly, discounts or premiums typically do not apply upon
sales of loans and therefore, generally no gain or loss is recorded on these
transactions, regardless of whether to a related or unrelated
party.
 
 Investments
in real estate loans are secured by deeds of trust or
mortgages.  Generally, our real estate loans require interest only
payments with a balloon payment of the principal at maturity.  We have
both the intent and ability to hold real estate loans until maturity and
therefore, real estate loans are classified and accounted for as held for
investment and are carried at amortized cost.  Loans sold to or
purchased from affiliates are accounted for at the principal balance and no gain
or loss is recognized by us or any affiliate.  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 and may be
commissioned by the borrower.
 
 The
appraisals may be for the current estimate of the “as-if developed” value of the
property, 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 and
timely successful development by the purchaser.  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
funded.  If there is less security and a default occurs, we may not
recover the full amount of the loan.
 
  - 58
-
 Table of Contents
  Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment.  Our manager’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, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Generally, subsequent recoveries of amounts previously
charged off are added back to the allowance and included as income.
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the real estate lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 Additional
facts and circumstances are discovered as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions, which can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 Real Estate Held For
Sale
 
 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, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or
Disposal of Long Lived Assets(“FAS 144”),we seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  The carrying values of real estate held for sale are assessed
on a regular basis from updated appraisals, comparable sales values or purchase
offers.
 
  - 59
-
 Table of Contents
  Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
initial and continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sale agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sale
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sale agreements are recorded under the deposit method or cost recovery method as
defined in FAS 66.  Under the deposit method, no profit is recognized
and any cash received from the buyer is reported as a deposit liability on the
balance sheet.  Under the cost recovery method, no profit is
recognized until payments by the buyer exceed the carrying basis of the property
sold.  Principal payments received will reduce the related receivable,
and interest collections will be recorded as unrecognized gross profit on the
balance sheet.  The carrying values of these properties are included
in real estate held for sale on the accompanying consolidated balance
sheets.
 
 In cases
where the investment by the buyer is significant (generally 20% or more) and the
buyer has an adequate continuing investment, the purchase money debt is not
subject to future subordination, and a full transfer of risks and rewards has
occurred, we will use the full accrual method.  Under the full accrual
method, a sale is recorded and the balance remaining to be paid is recorded as a
normal note.  Interest is recorded as income when
received.
 
 Classification of Operating
Results from Real Estate Held for Sale
 
 FAS 144 –
Accounting for the Impairment
or Disposal of Long-Lived Assets ("FAS 144'') generally requires
operating results from long lived assets held for sale to be classified as
discontinued operations as a separately stated component of net
income.  Our operations related to real estate held for sale are
separately identified in the accompanying consolidated statements of
income.
 
  - 60
-
 Table of Contents
  Secured
Borrowings
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue for any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).
 
 The
Inter-creditor Agreements provide us additional funding sources for real estate
loans whereby an unaffiliated investor (the “Investor”) may participate on a
non-pari passu basis in certain real estate loans with us and/or VRM I and/or
Fund III (collectively, the “Lead Lenders”).  In the event of borrower
non- performance, the Inter-creditor Agreements generally provide that the Lead
Lenders must repay the Investor’s loan amount either by (i) continuing to remit
to the Investor the interest due on the participated loan amount; (ii)
substituting an alternative loan acceptable to the Investor; or (iii)
repurchasing the participation from the Investor for the outstanding balance
plus accrued interest.
 
 Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowing arrangements.
 
 Investment in Marketable
Securities – Related Party
 
 Investment
in marketable securities – related party consists of stock in VRM
I.  The securities are stated at fair value as determined by the
market price as of December 31, 2007.  All securities are classified
as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities.
 
 Fair Value of Financial
Instruments
 
 FAS 107 –
Disclosures about Fair Value
of Financial Instruments(“FAS 107”), requires the determination of fair
value of our financial assets.  The following methods and assumptions
were used to estimate the fair value of financial instruments included in the
following categories:
 
 (a)
              Certificate
      of Deposits and Short-Term Investments:  The carrying amounts of
      these instruments are at amortized cost, which approximates fair
      value.
 
 (b)
              Investment
      in Real Estate 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 determined by underlying collateral
      securing the loans.
 
 (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.
 
 At
December 31, 2007 and 2006, the estimated fair values of the real estate loans,
including seller financed loans, were approximately $273.1 million and $227.9
million, respectively.  These estimates were based upon the present
value of expected cash flows discounted at rates currently available for similar
loans.  Fair value estimates are made at a specific point in time;
based on relevant market information; are subjective in nature; and involve
uncertainties and matters of significant judgment.  Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
would be collected upon maturity or disposition of the loans.
 
  - 61
-
 Table of Contents
  Basic and Diluted Earnings
Per Common Share
 
 Basic
earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share (“FAS
128”), by dividing net income available to common stockholders by the weighted
average number of common shares outstanding.  Diluted EPS is similar
to basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
exercised.  We had no outstanding common share equivalents during the
year ended December 31, 2007.  The following is a computation of the
EPS data for the year ended December 31, 2007:
 
 For
      the
                Year
      Ended
                December
      31, 2007Net
      income available to common stockholders
              
              $
              16,928,000Weighted
      average number of common shares outstanding during the
    period
              
              
              14,909,651Basic
      and diluted earnings per weighted average common share
              
              $
              1.14
 
 Net Income Allocated to
Members Per Weighted Average Membership Unit
 
 Fund II
was an LLC prior to the merger, which stated net income allocated to members per
weighted average membership unit that is computed by dividing net income
calculated in accordance with GAAP by the weighted average number of membership
units outstanding for the period.  We had no outstanding common shares
equivalents during the twelve months ended December 31, 2006.  The
following is a computation of the net income per weighted average membership
unit for the three months ended March 31, 2006, basic earnings per share for the
nine months ended December 31, 2006 and total earnings per weighted average
share/membership unit for the twelve months ended December 31,
2006:
 
 For
      the Three
                Months
      Ended
                March
      31, 2006
              
              
              For
      the Nine
                Months
      Ended
                December
      31, 2006
              
              
              For
      theTwelve
                Months
      Ended
                December
      31, 2006Net
      income available to common stockholders / members
              
              $
              (1,710,000
              )
              
              $
              17,561,000
              
              
              $
              15,851,000Weighted
      average number of common shares / units outstanding during the
      period
              
              
              14,967,788
              
              
              
              14,933,838
              
              
              
              14,935,585Basic
      and diluted earnings per common share / membership unit
              
              $
              (0.11
              )
              
              $
              1.18
              
              
              $
              1.06
 
 Common Stock
Dividends
 
 On
December 15, 2006, the Company paid a stock dividend of .30 shares for every
1.00 outstanding share to stockholders of record as of November 30,
2006.
 
 On
December 31, 2007, a 1-for-2.6 reverse stock split became effective, thereby
decreasing the number of outstanding common shares from 38,653,315 to 14,866,219
and increasing the market price per share from $3.75 to $9.75.  All
share, per share, membership unit and per membership unit information in this
Report has been retroactively adjusted to reflect the reverse stock
split.
 
  - 62
-
 Table of Contents
  During
the year ended December 31, 2007, cash dividends declared totaled approximately
$1.50 per common share, representing ordinary income.
 
 On
January 16, 2008, the board of directors declared a monthly cash dividend of
$0.106 per share for the month of January 2008, that will be paid on February
28, 2008, to the stockholders of record as of February 8, 2008.
 
 On
February 21, 2008, our board of directors declared a cash dividend of $0.106 per
common share for the month of February 2008, payable on March 28, 2008 to
stockholders of record as of March 7, 2008.
 
 Treasury
Stock
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws, including
SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.  During the year ended December 31,
2007, we had purchased 109,634 shares (post reverse stock split on December 31,
2007) of treasury stock through the repurchase program noted
above.  These shares are carried on our books at a cost totaling
approximately $1.4 million.
 
 Segments
 
 We
operate as one business segment.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary.  All significant intercompany balances and transactions
have been eliminated in consolidation.  Our interest in VCT I (see
Note K – Junior Subordinated Notes) is accounted for using the equity method and
the assets and liabilities are not consolidated into our financial statements
due to our determination that VCT I is a variable interest entity in which we
are not the primary beneficiary under FIN 46R.
 
 Income
Taxes
 
 We are
organized and conduct our operations to qualify as a real estate investment
trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the “Code”) and to comply with the provisions of the Internal
Revenue Code with respect thereto.  A REIT is generally not subject to
federal income tax on that portion of its REIT taxable income (“Taxable Income”)
which is distributed to its stockholders, provided that at least 90% of Taxable
Income is distributed and provided that certain other requirements are
met.  Our taxable income may substantially exceed or be less than our
net income as determined based on GAAP, because, differences in GAAP and taxable
net income consist primarily of allowances for loan losses or doubtful account,
write downs on real estate held for sale, amortization of deferred financing
cost, capital gains and losses, and deferred income.
 
 Certain
assets of ours are held in a taxable REIT subsidiary (“TRS”).  The
income of a TRS is subject to federal and state income taxes.  The net
income tax provision for the year ended December 31, 2007, was approximately
zero.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ consolidated financial
statements to conform to the current period presentation.
 
  - 63
-
 Table of Contents
  NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash and loans
secured by deeds of trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits.  As of December 31, 2007 and 2006, we had
approximately $19.7 million and $17.0 million, respectively, in excess of the
federally insured limits.
 
 As of
December 31, 2007, 45%, 16% and 15% of our loans were in Nevada, Oregon and
Arizona, respectively, compared to 26%, 18% and 11%, at December 31, 2006,
respectively.  As a result of this geographical concentration of our
real estate loans, a downturn in the local real estate markets in these states
could have a material adverse effect on us.
 
 At
December 31, 2007, the aggregate amount of loans to our three largest borrowers
represented approximately 22% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in Hawaii and Oregon with first lien positions, interest rates between 10.5% and
14.0%, with an aggregate outstanding balance of approximately $63.9 million and
maturing through September 2008.  At December 31, 2006, the aggregate
amount of loans to our three largest borrowers represented 26.29% of our total
investment in real estate loans, including loans related to real estate held for
sale – seller financed.  These real estate loans consisted of
commercial and construction loans, located in Oregon, New York and Washington
with a first lien position, interest rates between 9% and 13%, with an aggregate
outstanding balance of approximately $63.7 million.  The loans in
Hawaii described above referred to the RightStar loans discussed in Note D –
Investments in Real Estate
Loans.  We have a significant concentration of credit risk with
our largest borrowers, any additional defaults by such borrowers could have a
material adverse effect on us.
 
 The
success of a borrower’s ability to repay its real estate 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 loan rate applicable at origination of the
loan may have an adverse effect on the borrower’s ability to
refinance.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
December 31, 2007, all of our loans provided for payments of interest only with
a “balloon” payment of principal payable in full at the end of the
term.
 
 In
addition, we may invest in real estate loans that require borrowers to maintain
interest reserves funded from the principal amount of the loan for a period of
time.  At December 31, 2007, we had approximately $108.8 million in
investments in real estate loans that had interest reserves where the total
outstanding principal due to our co-lenders and us was approximately $128.6
million.  These loans had interest reserves of approximately $10.4
million, of which our portion was approximately $8.8 million.  At
December 31, 2006, we had approximately $71.5 million in investments in real
estate loans that had interest reserves where the total outstanding principal
due to our co-lenders and us was approximately $120.3 million.  These
loans had interest reserves of approximately $5.6 million, of which our portion
was approximately $4.3 million.
 
 During
December 2007, we funded a construction loan secured by a first lien on a
mixed-use multi-family condominium project (the "Project") located in Las Vegas,
Nevada of approximately $18.5 million.  Proceeds from this loan were
used by the borrower to pay off $5.0 million of an inVestin note as
consideration for inVestin subordinating its position to us with the remaining
proceeds being used for the remaining construction and upgrades to the
Project.
 
 As of
December 31, 2007, we had five real estate loan products consisting of
commercial, construction, acquisition and development, land and
residential.  The effective interest rates on all product categories
range from 8.65% to 15%.  Revenue by product will fluctuate based upon
relative balances during the period.
 
  - 64
-
 Table of Contents
  Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.30%
              
              
              
              49.42%Commercial
              
              
              19
              
              
              
              131,257,000
              
              
              
              12.12%
              
              
              
              45.10%
              
              
              
              81.43%Construction
              
              
              9
              
              
              
              45,883,000
              
              
              
              11.04%
              
              
              
              15.76%
              
              
              
              73.84%Land
              
              
              14
              
              
              
              95,585,000
              
              
              
              12.12%
              
              
              
              32.84%
              
              
              
              64.43%46
              
              
              $
              291,063,000
              
              
              
              12.00%
              
              
              
              100.00%
              
              
              
              72.64%
 
 Investments
in real estate loans, including loans related to real estate held for sale –
seller financed, as of December 31, 2006 were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              4
              
              
              $
              8,569,000
              
              
              
              12.54%
              
              
              
              3.54%
              
              
              
              54.58%Commercial
              
              
              17
              
              
              
              138,556,000
              
              
              
              10.31%
              
              
              
              57.16%
              
              
              
              76.87%Construction
              
              
              6
              
              
              
              43,319,000
              
              
              
              11.48%
              
              
              
              17.87%
              
              
              
              67.24%Land
              
              
              10
              
              
              
              51,951,000
              
              
              
              11.92%
              
              
              
              21.43%
              
              
              
              56.38%37
              
              
              $
              242,395,000
              
              
              
              10.94%
              
              
              
              100.00%
              
              
              
              69.97%
 
 (1)
              Loan-to-value
      ratios are based on the most recent appraisals and may not reflect
      subsequent changes in value and are prior to allowances for loan
      losses.  Such appraisals, which may be commissioned by the
      borrower, are generally dated no greater than 12 months prior to the date
      of loan origination.  The appraisals may be for the current
      estimate of the “as-if developed” value of the property, 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, 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 completion of the development 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 the loan.
 
 (2)
              The
      following table reconciles the balance of the loan portfolio to the amount
      shown on the accompanying Consolidated Balance Sheets.  The
      contra accounts represent the amount of real estate held for sale sold to
      third parties where we provided financing.  GAAP requires the
      borrower to have a certain percentage of equity ownership (ranging from
      10% to 25%) to allow us to record the sale of a property.  In
      addition, the borrower must maintain a minimum commitment in the property
      on a continuing basis.  Therefore, until the borrower meets this
      requirement, the investment in the new loan is reduced by the amount
      originally invested in the real estate held for
  sale.
 
 December
      31, 2007 Balance
              
              
              December
      31, 2006 BalanceBalance
      per loan portfolio
              
              $
              291,063,000
              
              
              $
              242,395,000Less:Seller
      financed loans included in real estate held for sale
              
              
              --
              
              
              
              (14,774,000
              )Proceeds
      of principal on seller financed loans included in deposit
      liability
              
              
              --
              
              
              
              4,056,000Allowance
      for loan losses **
              
              
              (12,873,000
              )
              
              
              (9,828,000
              )Balance
      per consolidated balance sheet
              
              $
              278,190,000
              
              
              $
              221,849,000
 
  - 65
-
 Table of Contents
  The
following is a schedule of priority of real estate loans, including loans
related to real estate held for sale – seller financed, as of December 31, 2007
and 2006:
 
 Loan
      Type
              
              Number
      of Loans
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2006 Balance*
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              44
              
              
              $
              288,665,000
              
              
              
              99.18%
              
              
              
              35
              
              
              $
              239,748,000
              
              
              
              98.91%Second
      deeds of trust
              
              
              2
              
              
              
              2,398,000
              
              
              
              0.82%
              
              
              
              2
              
              
              
              2,647,000
              
              
              
              1.09%46
              
              
              $
              291,063,000
              
              
              
              100.00%
              
              
              
              37
              
              
              $
              242,395,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 **  Please
refer to (3) Specific Reserve
Allowance below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of December 31, 2007:
 
 January
      2008 - March 2008 (a)
              
              $
              135,904,000April
      2008 - June 2008
              
              
              47,280,000July
      2008 - September 2008
              
              
              82,572,000October
      2008 - December 2008
              
              
              11,136,000Thereafter
              
              
              14,171,000Total
              
              $
              291,063,000
 
 (a)
              Amount
      includes the balance of non-performing loans and loans that have been
      subsequently extended as of December 31,
2007.
 
 The
following is a schedule by geographic location of investments in real estate
loans, including loans related to real estate held for sale – seller financed,
as of December 31, 2007 and 2006:
 
 December
      31, 2007 Balance*
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2006 Balance*
              
              
              Portfolio
      PercentageArizona
              
              $
              43,865,000
              
              
              
              15.07%
              
              
              $
              27,827,000
              
              
              
              11.48%California
              
              
              19,673,000
              
              
              
              6.76%
              
              
              
              24,167,000
              
              
              
              9.97%Hawaii
              
              
              17,291,000
              
              
              
              5.94%
              
              
              
              17,291,000
              
              
              
              7.13%Nevada
              
              
              132,000,000
              
              
              
              45.35%
              
              
              
              62,215,000
              
              
              
              25.67%New
      York
              
              
              16,981,000
              
              
              
              5.83%
              
              
              
              19,554,000
              
              
              
              8.07%Oklahoma
              
              
              5,051,000
              
              
              
              1.74%
              
              
              
              5,237,000
              
              
              
              2.16%Oregon
              
              
              46,620,000
              
              
              
              16.02%
              
              
              
              44,423,000
              
              
              
              18.33%Texas
              
              
              7,924,000
              
              
              
              2.72%
              
              
              
              22,812,000
              
              
              
              9.41%Washington
              
              
              1,658,000
              
              
              
              0.57%
              
              
              
              18,869,000
              
              
              
              7.78%Total
              
              $
              291,063,000
              
              
              
              100.00%
              
              
              $
              242,395,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 
 At
December 31, 2007, the following loans were non-performing (based on current
information and events, it is probable that we 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); RightStar, Inc. (Part I & Part
II), Monterrey Associates LP, Forest Development LLC, Pirates Lake, Ltd,
Jeffrey's Court, LLC, V & M Homes at the Palms, Inc. and Brawley CA 122,
LLC.  These loans are currently carried on our books at a value of
approximately $19.4 million, net of allowance for loan losses of approximately
$11.2 million, which does not include the allowances of approximately $1.7
million relating to the decrease in the property value for performing loans as
of December 31, 2007.  These loans have been placed on non-accrual of
interest status and are the subject of pending foreclosure
proceedings.
  - 66
-
 Table of Contents
  
 ·
              RightStar,
      Inc. (Part I & Part II), are loans secured by a lien on the business
      and virtually all of the property of RightStar, which includes 4
      cemeteries and 8 mortuaries in Hawaii with an outstanding balance of
      approximately $32.3 million of which our portion is approximately $17.3
      million ($8.2 million for Part I and $9.1 million for Part
      II).  The lenders have commenced a judicial foreclosure on the
      loans, Part I and Part II.
 
 ·
              Monterrey
      Associates, L.P. is a non-performing loan, which was originally secured by
      various real estate collateral, including a 248 unit apartment complex in
      Oklahoma City, Oklahoma.  The outstanding balance on the loan is
      approximately $4.4 million, of which our portion is approximately $2.2
      million.  As of December 31, 2007, this loan has been considered
      non-performing for the last sixteen months.  Our manager brought
      foreclosure and other legal proceedings to protect our interest in the
      collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of legal
      actions commenced on our behalf with respect to other collateral securing
      the non-performing loan, of which our portion is approximately $1.0
      million net of allowance for loan loss.  We are vigorously
      contesting their position; however, we cannot determine at this time the
      outcome of these legal proceedings.  Our manager has evaluated
      this loan and based on an appraisal obtained during January 2008, a
      specific allowance of approximately $2.4 million, of which our portion was
      approximately $1.2 million, was
recorded.
 
 ·
              Forest
      Development, LLC, is a loan secured by two 4,000 square foot single family
      residences, together with the four remaining lots in a subdivision,
      located on Mt. Charleston, NV with an outstanding balance of approximately
      $2.6 million of which our portion is approximately $1.7
      million.  As of December 31, 2007, this loan has been considered
      non-performing for the last fourteen months.  We commenced
      foreclosure proceedings and filed litigation to enforce the personal
      guarantee on the loan.  Forest Development subsequently
      counterclaimed and also filed a separate lawsuit against us, VRM I, Fund
      I, Fund II, Fund III, Vestin Mortgage, Inc. and Vestin Originations, Inc.
      (the “Defendants”).  In April 2007, the borrower filed for
      protection under Chapter 11 of the United States Bankruptcy
      Code.  In September 2007, Forest Development filed a lawsuit in
      the United States Bankruptcy Court for the District of Nevada, against us,
      VRM I, Fund I, Fund II, Fund III, Vestin Mortgage, Inc. and Vestin
      Originations, Inc. (the “Defendants”) alleging breach of contract, breach
      of the implied covenant of good faith and fair dealing, and unjust
      enrichment, which claims are substantially the same as was filed in the
      State Court action.  On December 10, 2007, the United States
      Bankruptcy Court for the District of Nevada granted a motion approving
      settlement between the parties. The settlement provides for the mutual
      dismissal with prejudice of all litigation between the parties, and
      approves the sale of the property to a third party, the proceeds of which
      shall provide for the repayment of all principal, together with the
      payment of interest at the note rate from October 25, 2007.  In
      addition, the settlement lifted the automatic stay, and on March 7, 2008,
      we, VRM I and Fund III foreclosed upon Forest Development LLC and
      classified it as real estate held for sale.  Our manager has
      evaluated this loan and concluded that the value of the underlying
      collateral is sufficient to protect us from loss of
      principal.  No specific allowance was deemed
      necessary.
 
 ·
              Pirates
      Lake, Ltd., is a loan to provide bridge financing for approximately 46.75
      acres of land in Galveston, TX, with an outstanding balance of
      approximately $8.5 million of which our portion is approximately $4.1
      million.  The loan is secured by a first lien on the property
      and guaranteed by the borrower.  Additionally, the loan is
      secured by a second position lien on approximately 0.5 acres of land
      located in Houston, Texas.  As of December 31, 2007, this loan
      has been considered non-performing for the last seven
      months.  On August 7, 2007, we, VRM I and Fund III entered into
      a settlement agreement with the borrower whereby the foreclosure was
      postponed.  Principal, accrued interest and $75,000 for expenses
      incurred by us, VRM I and Fund III relating to the loan were due on
      October 1, 2007.  On October 2, 2007, the borrower was in
      default of the settlement and loan agreements. Subsequently the borrower
      filed for protection under Chapter 11 of the Bankruptcy Code in the United
      States Bankruptcy Court for the Southern District of Texas. On November 7,
      2007, our legal counsel was successful in seeking the dismissal, with
      prejudice, of the subject bankruptcy, together with the lifting of the
      automatic stay from foreclosure.  On February 5, 2008, we, VRM I
      and Fund III foreclosed upon Pirates Lake, Ltd. and classified it as real
      estate held for sale.  Our manager has evaluated this loan and
      concluded that the value of the underlying collateral is sufficient to
      protect us from loss of principal.  No specific allowance was
      deemed necessary.
  - 67
-
 Table of Contents
  
 ·
              Jeffrey's
      Court, LLC, is a loan to provide financing for the development of 4.92
      acres of land into 119 condominium units in Las Vegas, NV, with an
      outstanding balance of approximately $5.1 million of which our portion is
      $3.1 million and is secured by a first lien on the property and guaranteed
      by the borrower.  As of December 31, 2007, this loan has been
      considered non-performing for the last five months.  Our manager
      commenced foreclosure proceedings, and on December 6, 2007, the borrower
      filed for protection under Chapter 11 of the Bankruptcy Code in the United
      States Bankruptcy Court for the District of Nevada.  Our manager
      has instructed legal counsel to seek relief from the automatic
      stay.  In addition, we have filed a complaint in State Court,
      against the guarantors of the loan, in order to enforce the personal
      guarantees.  Our manager has evaluated this loan and concluded
      that the value of the underlying collateral is sufficient to protect us
      from loss of principal.  No specific allowance was deemed
      necessary.
 
 ·
              V
      & M Homes at the Palms, Inc., is a loan, with a variable interest
      rate, to provide acquisition financing for an 80 acre parcel of land in
      Florence, AZ, with an outstanding balance of approximately $3.9 million of
      which our portion is approximately $1.5 million and is secured by a first
      lien on the property and guaranteed by the principals of the
      borrower.  As of December 31, 2007, this loan has been
      considered non-performing for the last four months.  Our manager
      commenced foreclosure proceedings, and on December 24, 2007, the borrower
      filed for protection under Chapter 11 of the Bankruptcy Code in the United
      States Bankruptcy Court for the District of Arizona.  Our legal
      counsel is seeking relief from the automatic stay.  We are in
      the process of bringing legal action against the guarantors of this
      loan.  Our manager has evaluated this loan and concluded that
      the value of the underlying collateral is sufficient to protect us from
      loss of principal.  No specific allowance was deemed
      necessary.
 
 ·
              Brawley
      CA 122, LLC, is a loan to provide acquisition and development financing
      for a 25 acre proposed 122 single-family subdivision to be known as River
      Drive Subdivision in Brawley, CA, with an outstanding balance of
      approximately $2.3 million of which our portion is $755,000 and is secured
      by a first lien on the property and guaranteed by the
      borrower.  As of December 31, 2007, this loan has been
      considered non-performing for the last two months.  Our manager
      has commenced both foreclosure proceedings and litigation against the
      personal guarantors in order to enforce the personal
      guarantees.  Our manager has evaluated this loan and based on an
      appraisal obtained during January 2008, a specific allowance of $766,000,
      of which our portion was $256,000, was
recorded.
 
 The
following schedule summarizes the non-performing loans as of December 31,
2007:
 
 Description
      of Collateral
                
                Balance
      at
                  December
      31, 2007
                
                Maturity
      Date
                
                Number
      of Months Non-Performing
                
                
                Percentage
      of Total Loan Balance4
      cemeteries and 8 mortuaries in Hawaii Part I**
                
                $
                8,183,000
                
                3/31/2004
                
                
                45
                
                
                
                45%
      of Part I4
      cemeteries and 8 mortuaries in Hawaii Part II**
                
                
                9,108,000
                
                3/31/2004
                
                
                45
                
                
                
                65
      % of Part II248-unit
      apartment complex in Oklahoma City, OK
                
                
                2,155,000
                
                9/1/2006
                
                
                16
                
                
                
                49%2
      single family residences and 4 lots in Mt. Charleston, NV
                
                
                1,681,000
                
                10/27/2006
                
                
                14
                
                
                
                64%46.75
      acres of land located in Galveston, TX
                
                
                4,100,000
                
                6/30/2007
                
                
                7
                
                
                
                48%4.92
      acres of land in Las Vegas, NV
                
                
                3,073,000
                
                7/17/2007
                
                
                5
                
                
                
                61%80
      acre parcel of land in Florence, AZ
                
                
                1,510,000
                
                8/16/2007
                
                
                4
                
                
                
                39%25
      acres for proposed 122 single-family subdivision  in Brawley,
      CA
                
                
                755,000
                
                8/1/2007
                
                
                2
                
                
                
                33%$
                30,565,000
  **  Please
refer to (3) Specific Reserve
Allowancebelow.
 
  - 68
-
 Table of Contents
  Our
manager periodically reviews and makes a determination 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 or included as
income when the asset is disposed.  As of December 31, 2007, we have
provided specific reserves, related to three non-performing loans and two
performing loans, of approximately $12.8 million.  Our manager
evaluated the loans and concluded that the remaining underlying collateral was
sufficient to protect us against further losses of principal.  Our
manager will continue to evaluate these loans in order to determine if any other
allowance for loan losses should be recorded in future periods.
 
 Because
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 stockholders.
 
 The
following is a roll-forward of the allowance for loan losses for the year ended
December 31, 2007:
 
 Description
              
              Balance
      at
                December
      31, 2006
              
              
              Specific
      Reserve Allocation
              
              
              Reduction
      of Reserve
              
              
              Balance
      at
                December
      31, 2007RightStar,
      Inc. (Part I & Part II)
              
              $
              9,234,000
              
              
              $
              523,000
              
              
              $
              --
              
              
              $
              9,757,000RightStar
      Legal Reserve
              
              
              94,000
              
              
              
              --
              
              
              
              (94,000
              )
              
              
              --Monterrey
      Associates, L.P.
              
              
              --
              
              
              
              1,174,000
              
              
              
              --
              
              
              
              1,174,000Brawley
      CA 122, LLC
              
              
              --
              
              
              
              256,000
              
              
              
              --
              
              
              
              256,000Peoria
      180, LLC
              
              
              --
              
              
              
              1,309,000
              
              
              
              --
              
              
              
              1,309,000Terravita,
      LLC
              
              
              --
              
              
              
              377,000
              
              
              
              --
              
              
              
              377,000Impairment
      on Restructured Loan
              
              
              500,000
              
              
              
              --
              
              
              
              (500,000
              )
              
              
              --Total
      (3)
              
              $
              9,828,000
              
              
              $
              3,639,000
              
              
              $
              (594,000
              )
              
              $
              12,873,000
 
 (3)
              Specific
      Reserve Allowances
 
 RightStar Loan Allowance –
RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of
2004.  The lenders commenced a judicial foreclosure on the loans, part
I and part II, which is secured by a lien on the business and virtually all of
the property of RightStar, which includes 4 cemeteries and 8 mortuaries in
Hawaii.  The aggregate principal balance of the loan is approximately
$32.3 million.  The loans, part I and part II, are owned as
follows:
 
 Senior
      Principal Amount (Part II)
              
              
              Junior
      Principal Amount (Part I)
              
              
              TotalVRM
      I
              
              $
              4,892,000
              
              
              $
              4,415,000
              
              
              $
              9,307,000VRM
      II
              
              
              9,108,000
              
              
              
              8,183,000
              
              
              
              17,291,000Vestin
      Mortgage
              
              
              --
              
              
              
              5,657,000
              
              
              
              5,657,000Total
              
              $
              14,000,000
              
              
              $
              18,255,000
              
              
              $
              32,255,000
 
 The loans
are subject to an inter-creditor agreement which states the order of priority
for any payments received are disbursed as follows:
 
 ·
              First
      to reimburse collection and foreclosure expenses advanced by the
      lenders;
 
 ·
              Second
      to pay past due interest on the Senior Principal Amount (Part II)
      (including default rate
interest);
  - 69
-
 Table of Contents
  
 ·
              Third
      to pay past due interest on the Junior Principal Amount (Part I)
      (including default rate interest);
 
 ·
              Fourth
      to pay Senior Principal; and
 
 ·
              Fifth
      to pay Junior Principal.
 
 We and
VRM I acquired the senior portion of the loan on July 14, 2005 for approximately
$15.5 million of which our portion was approximately $10.1 million (including
accrued interest of approximately $1.0 million).  We and VRM I
acquired this balance to expedite the foreclosure process and remove the prior
senior lender from its priority position, which had the potential to impair the
value we may receive at the time the property is sold.  In exchange
for assistance in expediting the foreclosure process, the lenders jointly agreed
to release the guarantors from their guaranty of the loan.  In March
2007, Vestin Mortgage purchased the junior principal amount owned by the
unrelated third party for $500,000.  Vestin Mortgage has agreed that
any monies it receives as a result of payment of the notes or proceeds from a
foreclosure sale are limited to its $500,000 investment in the notes plus
expenses.
 
 RightStar
is currently being operated by a court appointed receiver however the lenders
are working with the State of Hawaii to appoint a management group to continue
to improve the operations of the property.
 
 In early
2006, the State of Hawaii notified the lenders of a potential statutory trust
fund deficiency, estimated to be between $20 million and $30 million and claimed
that this balance has priority over all lenders.  The State of Hawaii
is pursuing approximately $30 million in recoveries from the former trustees,
prior owners of the property and other parties. The proceeds from these
recoveries, if any, will be used to fund the potential deficiency in the
statutory trust. The lenders dispute the amount and priority of this
deficit.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage, Inc. and us alleging that these Vestin
entities improperly influenced the former RightStar trustees to transfer trust
funds to us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM II, Vestin Mortgage and us and in part to fund the
trusts statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The outcome of this auction cannot be determined at this
time.
 
 During
December 2007, we, VRM I, and the statutory trust fund received a settlement
totaling $2.8 million, of which approximately $2.0 million was applied against
outstanding trust obligations. Approximately $0.8 million, of which our portion
totaling approximately $0.5 million, was applied towards the allowance for
doubtful accounts on this loan and was recorded as a reimbursement of legal fees
totaling approximately $0.4 million.
 
  - 70
-
 Table of Contents
  We have
evaluated the estimated value of the underlying collateral and the expected cost
and length of litigation.  Based on this estimate we have maintained
our total specific reserve allowance for loss. The reserve allowance includes
approximately $1.0 million for estimated litigation fees and expenses that we
have incurred in enforcing our rights against the underlying collateral, which
have been fully consumed as of December 31, 2007.  We will continue to
evaluate our position in the RightStar loan as the situation
progresses.  As of December 31, 2007, our specific reserve allowance
on the RightStar loans totaled approximately $9.7 million.
 
 Peoria 180, LLC Loan
Allowance – During the year ended December 31, 2007, our manager provided
a specific reserve allowance, related to a land loan on property located in
Glendale, AZ, of approximately $1.6 million, of which our portion was
approximately $1.3 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during October
2007.  As of December 31, 2007, and March 10, 2008, the loan was
performing as required.  Our manager will continue to evaluate our
position in the loan.
 
 Monterrey Associates, L.P. –
During the year ended December 31, 2007, our manager provided a specific reserve
allowance, related to a commercial loan on a 248-unit apartment complex in
Oklahoma City, OK, of approximately $2.4 million, of which our portion was
approximately $1.2 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during January 2008.  As of December 31, 2007, the loan
was considered non-performing.  Our manager will continue to evaluate
our position in the loan.
 
 Brawley CA 122, LLC – During
the year ended December 31, 2007, our manager provided a specific reserve
allowance, related to an acquisition and development loan on 25 acres for
proposed 122 single-family subdivision in Brawley, CA, of $766,000, of which our
portion was $256,000.  This specific reserve allowance was based on an
updated appraisal of the underlying collateral for this loan, obtained by our
manager during January 2008.  As of December 31, 2007, the loan was
considered non-performing.  Our manager will continue to evaluate our
position in the loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100 unit condominium/apartment project in
North Las Vegas, Nevada, totaling $720,000, of which our portion was
$377,000.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan and evaluation of the
borrower, obtained by our manager during January 2008.  As of December
31, 2007, and March 10, 2008, the loan was performing as
required.  Our manager will continue to evaluate our position in the
loan.
 
 Impairment on Restructured
Loan – As of December 31, 2006, included in the specific reserve
allowance was an impairment of $500,000 on a restructured loan.  In
May 2007, this loan was paid in full, reducing our specific reserve allowance by
$500,000.
 
 In
addition, as of December 31, 2007, our manager granted extensions on 19 loans,
totaling approximately $212.8 million of which our portion was approximately
$151.7 million, 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.  However, our manager only grants
extensions when a borrower is in compliance with the material terms of the loan,
including, but not limited to the borrower’s obligation to make interest
payments on the loan.  Included in the 19 extended loans was the
Mid-State Raceway loan, which was extended from March 31, 2007 to March 31,
2008.  As part of the extension agreement, the borrower made a
principal payment of approximately $3.0 million, of which our portion was
approximately $2.6 million, and the loan interest rate increased from 9% to
12%.  Our manager concluded that no allowance for loan loss was
necessary with respect to these loans, except for the Terravita, LLC, Peoria
180, LLC, Monterrey Associates, LP and Brawley CA 122, LLC loans referred to
above, as of December 31, 2007.
 
  - 71
-
 Table of Contents
  Asset Quality and Loan
Reserves
 
 Losses
may occur from investing in real estate loans.  The amount of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate 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.  As of December 31, 2007 and 2006, approximately $10.4 million
and $11.5 million, respectively, in non-performing loans had no specific
allowance for loan losses.  As of December 31, 2007 and 2006,
approximately $20.2 million and $17.3 million, respectively, in non-performing
loans had a specific allowance for loan losses of approximately $11.2 million
and $9.3 million, respectively, which does not include the allowances of
approximately $1.7 million relating to the decrease in property value for
performing loans at December 31, 2007.  At December 31, 2007, the
following loans were non-performing (based on current information and events, it
is probable that we 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); RightStar, Inc. (Part I & Part II), Monterrey Associates LP,
Forest Development LLC, Pirates Lake, Ltd, Jeffrey's Court, LLC, V & M Homes
at the Palms, Inc. and Brawley CA 122, LLC.  These loans have been
placed on non-accrual of interest status and are the subject of pending
foreclosure proceedings.  Our manager evaluated the loans and
concluded that the underlying collateral was sufficient to protect us against
further losses of principal or interest.  Our manager will continue to
evaluate these loans in order to determine if any other allowance for loan
losses should be recorded.
 
 NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
December 31, 2007, we owned 533,675 shares of VRM I’s common stock, representing
approximately 7.76% of their total outstanding common stock.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At
December 31, 2007, we held two properties with a total carrying value of
approximately $28.6 million, which were acquired through foreclosure and
recorded as investments in real estate held for sale.  The summary
below includes our percentage ownership in each property.  Our
investments in real estate held for sale are accounted for at the lower of cost
or fair value less costs to sell with fair value based on appraisals and
knowledge of local market conditions.  It is not our intent to invest
in or own real estate as a long-term investment.  We seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  The following is a roll-forward of investments in real estate
held for sale during the year ended December 31, 2007:
  - 72
-
 Table of Contents
  
 Description
              Date
      Acquired
              
              Percentage
      of Ownership
              
              
              Balance
      at
                December
      31, 2006
              
              
              Acquisitions
      (Reductions)
              
              
              Seller
      Financed Sales
              
              
              Balance
      at
                December
      31, 2007Partially
      completed golf course on 570 acres of land near Austin, TX (1)
              8/3/2004
              
              
              100%
              
              
              $
              4,688,000
              
              
              $
              (250,000
              )
              
              $
              --
              
              
              $
              4,438,000480
      residential building lots & 2 single family dwellings in Rio Vista
      Village Subdivision in Cathedral City, CA (2)
              12/21/2006
              
              
              86%
              
              
              
              25,391,000
              
              
              
              (1,266,000
              )
              
              
              --
              
              
              
              24,125,000$
              30,079,000
              
              
              $
              (1,516,000
              )
              
              $
              --
              
              
              $
              28,563,000
 
 (1)
              During
      the year ended December 31, 2007, we entered into a sales contract for the
      sale of a partially completed golf course near Austin, Texas at a price
      that would not result in a material gain or loss.  The sale
      contract required that the buyer complete the purchase on or before June
      29, 2007; however, the buyer has chosen to extend the closing date
      multiple times by paying a non-refundable extension fee that has been
      applied to the value recorded for such loan on our books.  The
      first extension was in June 2007, at which time we received a $100,000
      non-refundable extension fee from the buyer to extend the closing date to
      October 2007.  Since then the buyer has elected to extend the
      closing date to May 2008, by paying a non-refundable extension fee of
      $50,000 every 30 days until closing.  As of December 31, 2007,
      we had received a total of $250,000 in extension
      fees.  Subsequently, the buyer has paid $150,000 to extend the
      closing date through the end of March 2008.  There can be no
      assurance that the sale will be
completed.
 
 (2)
              During
      November 2006, we, VRM I and Fund III acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the year ended December 31, 2007, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s estimate, we have written
      down the value of the property by approximately $1.3
      million.  We also recognized expenses related to real estate
      held for sale for this property of approximately $2.8
    million.
 
 NOTE
G — REAL ESTATE HELD FOR SALE – SELLER FINANCED
 
 As of
December 31, 2007, we sold our interest in the twoseller-financed
properties we held at December 31, 2006.  GAAP requires us to include
these properties in real estate held for sale until the borrower has met and
maintained certain requirements.  We may share ownership of such
properties with VRM I, Fund III, our manager, or other related and/or unrelated
parties.  The summary below includes our percentage of ownership in
each property held during the year ended December 31, 2007.  These
investments in real estate held for sale are accounted for at the lower of cost
or fair value less costs to sell with fair value based on appraisals and
knowledge of local market conditions.  The following is a roll-forward
of real estate held for sale – seller financed for the year ended December 31,
2007:
  - 73
-
 Table of Contents
  
 Description
              Date
      Acquired
              
              Percentage
      of Ownership
              
              
              Balance
      at
                December
      31, 2006
              
              
              Sales
              
              
              Gain
                on
      Sale
              
              
              Balance
      at
                December
      31, 200774
      unit (90 bed) assisted living facility in San Bernardino, CA (1)
              4/6/2004
              
              
              100%
              
              
              $
              7,350,000
              
              
              $
              (8,158,000
              )
              
              $
              808,000
              
              
              $
              --Assisted
      living facility in Las Vegas, Nevada (2)
              9/23/2004
              
              
              48%
              
              
              
              7,424,000
              
              
              
              (8,619,000
              )
              
              
              1,195,000
              
              
              
              --$
              14,774,000
              
              
              $
              (16,777,000
              )
              
              $
              2,003,000
              
              
              $
              --
 
 (1)
              During
      October 2005, we sold the 74 unit (90 bed) assisted living facility in San
      Bernardino, CA and financed 97% of the purchased price of approximately
      $7.6 million maturing in November 2006.  During March 2007, the
      borrower paid the loan in full, which resulted in a gain of approximately
      $0.8 million.
 
 (2)
              During
      September 2004, we and VRM I sold an assisted living facility in Las
      Vegas, NV and financed 100% of the purchase price of approximately $15.3
      million maturing in September 2007.  During November 2007, the
      loan was paid in full resulting in a gain of approximately $1.2
      million.
 
 Until
borrowers have met the minimum equity ownership requirement to allow us to
record a sale, we will record payments received under the deposit method or the
cost recovery method, which ever is applicable in accordance with FAS
66.
 
 NOTE
H — RELATED PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us an annual management fee of up to 0.25%
of our aggregate capital contributions received by us and Fund II from the sale
of shares or membership units, paid monthly.  The amount of management
fees paid to our manager for the year ended December 31, 2007 and the twelve
months ended December 31, 2006, were approximately $1.1 million, for each
period.
 
 As of
December 31, 2007, our manager owned 92,699 of our common shares.  For
the year ended December 31, 2007, we declared $139,000, in dividends payable to
our manager based on the number of shares our manager held on the dividend
record dates.  During the three months ended March 31, 2006, we
recorded pro-rata distributions owed to our manager of $16,000.  For
the nine months ended December 31, 2006, we declared $92,000 in dividends
payable to our manager based on the number of shares our manager held on the
dividend record dates
 
 As of
December 31, 2007, we had receivables from our manager of $1,000.  As
of December 31, 2006, we had no receivables from our manager and did not owe our
manager.
 
 Transactions with Other
Related Parties
 
 As of
December 31, 2007, we owned 533,675 common shares of VRM I, representing
approximately 7.76% of their total outstanding common stock.  For the
year ended December 31, 2007 and the twelve months ended December 31, 2006, we
recognized $308,000 and $72,000, respectively, in dividend income from VRM I
based on the number of shares we held on the dividend record
dates.
  - 74
-
 Table of Contents
  
 As of
December 31, 2007, VRM I owned 225,134 of our common shares, representing
approximately 1.51% of our total outstanding common stock.  For the
year ended December 31, 2007 and the twelve months ended December 31, 2006, we
declared $294,000 and $154,000, respectively, in dividends payable to VRM I
based on the number of shares VRM I held on the dividend record
dates.
 
 During
the year ended December 31, 2007 we sold approximately $4.4 million in real
estate loans to VRM I.  During the twelve months ended December 31,
2006 we bought approximately $1.4 million in real estate loans from VRM I and
sold $0.5 million in real estate loans to VRM I.  No gain or loss
resulted from these transactions.
 
 As of
December 31, 2007, Fund III owned 114,117 of our common shares, representing
approximately 0.77% of our total outstanding common stock.  For the
year ended December 31, 2007 and the twelve months ended December 31, 2006, we
declared $143,000 and $47,000, respectively, in dividends payable to Fund III
based on the number of shares Fund III held on the dividend record
dates.
 
 During
the year ended December 31, 2007, we purchased $1.3 million in real estate loans
from Fund III and sold approximately $1.2 million in real estate loans to Fund
III.  During the twelve months ended December 31, 2006, we purchased
$4.9 million in real estate loans from Fund III and sold $6.0 million in real
estate loans to Fund III.  No gain or loss resulted from this
transaction.
 
 During
the year ended December 31, 2007, we purchased $0.7 million in real estate loans
from inVestin.  No gain or loss resulted from this
transaction.  No similar transactions occurred during the twelve
months ended December 31, 2006.
 
 During
January 2006, Michael V. Shustek, our CEO, purchased a $2.0 million deed of
trust investment from us, of which, the total balance of $2.0 million was
repurchased by us.  No gain or loss resulted from these
transactions.  No similar transactions occurred during the year ended
December 31, 2007.
 
 During
the twelve months ended December 31, 2006, we purchased $556,000 in performing
real estate loans from LTD, a company wholly owned by our CEO Michael V.
Shustek.  No gain or loss resulted from these
transactions.  No similar transactions occurred during the year ended
December 31, 2007.
 
 As of
December 31, 2007, we owed VRM I $123,000.  As of December 31, 2006,
we had receivable form Vestin Originations of $31,000.
 
 During
the year ended December 31, 2007 and the twelve months ended December 31, 2006,
we incurred $138,000 and $88,000, respectively, for legal fees to the law firm
of Levine, Garfinkel & Katz in which the Secretary of Vestin Group has an
equity ownership interest in the law firm.
 
 NOTE
I — NOTES RECEIVABLE
 
 During
October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada
of which our portion of the net cash proceeds was approximately $5.8
million.  We originally sold this property under a 100% seller
financing arrangement.  The borrowers then sold the property to an
unrelated third party that resulted in a payoff of the note and also allowed us
to record the sale and remove the asset from real estate held for sale – seller
financed.  In addition, during September 2004, we received a
promissory note from the guarantors of the loan in the amount of $440,000 in
exchange for a release of their personal guarantees.  Since payments
on the note did not begin for 18 months from the date of the note, we discounted
the face value of the note to $328,000, which is based on a discount rate of 8%
as of that date.  As of December 31, 2007, we have received $93,000 in
principal payments.  During the year ended December 31, 2007, the
balance of $347,000 was fully reserved.
 
  - 75
-
 Table of Contents
  During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
$5,473,000 of which our share of the proceeds were approximately $3.8 million,
which resulted in a loss of $829,000.  In addition, during June 2005,
we and VRM I entered into a settlement agreement with the guarantors of the loan
in the amount of $2,000,000 in exchange for a release of their personal
guarantees, of which our share was $1,350,000.  The balance is secured
by a second deed of trust, with a first installment of $100,000 due in July 2005
and monthly interest only payments of 5% on $1,100,000 from July 2005 through
July 2008, at which time the entire balance is due.  As of December
31, 2007, we have received $616,000 in principal payments.  Payments
will be recognized as income when received.  The balance of $745,000
is fully reserved as of December 31, 2007.
 
 During
November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa,
Arizona of which our portion of the consideration received totaled
$6,043,000.  We and VRM I received a promissory note from the original
guarantor in the amount of $478,000 of which our portion was
$409,000.  The promissory note is payable in interest only payments of
8% on the principal balance outstanding.  From June 25, 2005 through
May 25, 2006, monthly payments increased to $15,000 and were applied to
principal and accrued interest.  From June 25, 2006 through May 25,
2009, payments increase to $20,000 monthly.  Due to the uncertainty of
collectibility, we have provided a valuation allowance for the entire remaining
balance of the promissory note.  Income will be recognized when
payments are received.  On August 7, 2007, we and VRM I filed a
complaint against the guarantor in the U.S. District Court of the District of
Nevada, seeking to recover the amounts due pursuant to the promissory
note.  The guarantor did not answer or otherwise respond to the
lawsuit.  We and VRM I will seek a default judgment for all the
amounts due.  If granted, we and VRM I will seek to enforce the
Complaint against the guarantor; however, there can be no assurance that we and
VRM I will recover the amounts.  As of December 31, 2007, we received
$234,000 in principal payments.  The balance of $184,000 is fully
reserved as of December 31, 2007.
 
 During
December 2005, we and VRM I sold the 460 acre residential subdivision in Lake
Travis, TX for approximately $5.5 million, of which our portion was
approximately $3.5 million.  The purchase price included cash proceeds
of $5 million and a $500,000 note receivable, with an imputed interest rate of
8% in July 2006.  A net gain of $71,000 resulted from this
transaction, of which our portion was $47,000.  The purchaser
defaulted on the note and our manager pursued litigation.  During the
year ended December 31, 2007, we and VRM I entered into a settlement agreement,
which reduced the note to $175,000, of which our portion is
$115,000.  As of December 31, 2007, we had received $33,000 in
principal payments.  The balance of $82,000 is fully reserved as of
December 31, 2007.
 
 During
2006, we and VRM I entered into a settlement agreement in the amount of $1.5
million with the guarantors of a loan, we had foreclosed on.  Our
portion was approximately $1.3 million.  The promissory note is
payable in seven annual installments of $100,000 with an accruing interest rate
of 7%, with the remaining note balance due in April 2013.  The balance
of approximately $1.3 million is fully reserved as of December 31,
2007.
 
 NOTE
J— SECURED BORROWINGS
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue for any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In
the event of borrower non-performance, the Inter-creditor Agreements generally
provide that the Lead Lenders must repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on the participated
loan amount; (ii) substituting an alternative loan acceptable to the Investor;
or (iii) repurchasing the participation from the Investor for the outstanding
balance plus accrued interest.
 
  - 76
-
 Table of Contents
  Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowings arrangements.
 
 During
October 2006, we, our manager, Vestin Originations, Inc., VRM I and Fund III
entered into an intercreditor agreement with an unrelated third party related to
the funding of a construction real estate loan.  The secured borrowing
was recognized pro rata between us, VRM I and Fund III for the amount each
entity has funded for the loan.  During May 2007, the secured
borrowings were paid in full.  As of December 31, 2007, we did not
have any funds used under Inter-creditor Agreements as compared to approximately
$13.8 million used under Inter-creditor Agreements as of December 31,
2006.
 
 NOTE
K — JUNIOR SUBORDINATED NOTES
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through the special purpose business trust, VCT I to
Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly.  The securities mature on
July 30, 2020 and may be called at par by us any time after July 30,
2012.  We incurred approximately $2.3 million in financing costs
relating to the notes.  These costs are being amortized to interest
expense over the term of the notes.  We are obligated to pay the trust
preferred securities with respect to distributions and amounts payable upon
liquidation, redemption or repayment.
 
 VCT I
issued $100,000 of common securities, representing 100% of the voting common
stock of VCT I to us.  VCT I used the proceeds from the sale of the
trust preferred securities and the common securities to purchase our junior
subordinated notes.  The terms of the junior subordinated notes
matches the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
junior subordinated notes require quarterly interest distributions beginning
July 31, 2007.  For the year ended December 31, 2007, interest expense
on the junior subordinated notes totaled approximately $2.7 million
 
 Our
interest in VCT I is accounted for using the equity method and the assets and
liabilities of VCT I are not consolidated into our financial statements, in
accordance with FIN 46R.  Interest on the junior subordinated notes is
included in interest expense on our consolidated income statement while the
junior subordinated notes are presented as a separate item on our consolidated
balance sheet.  We were in compliance with all debt covenants related
to the junior subordinated notes as of December 31, 2007.
 
 NOTE
L — NOTES PAYABLE
 
 In May
2007, we financed a 12-month insurance policy for Directors and Officers
liability, with an annual interest rate of 7.25%.  The agreement
required a down payment of $40,000 and nine monthly payments of $26,000
beginning on May 27, 2007.  During August 2007, the note was paid in
full.
 
 NOTE
M — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, Financial Accounting Standards Board (“FASB”) issued FAS 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  FAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled, and presented in the consolidated financial
statements within equity, but separate from the parent’s equity. It also
requires once a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value.
Sufficient disclosures are required to clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling
owners.  In addition to the amendments to ARB 51, this Statement
amends FAS 128, Earnings per
Share; so that earnings-per-share data will continue to be calculated the
same way those data were calculated before this Statement was
issued.
  - 77
-
 Table of Contents
  
 This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  This Statement shall be applied prospectively as of the
beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements.  The
presentation and disclosure requirements shall be applied retrospectively for
all periods presented.  FAS 160 will be effective for us beginning
January 1, 2009.  We are evaluating FAS 160 and have not yet
determined the impact the adoption will have on our consolidated financial
statements, but it is not expected to be significant.
 
 In
December 2007, the FASB issued FAS 141R, Business
Combinations.  This Statement replaces FAS No.
141.  FAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree.  FAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  We are evaluating FAS 141 Rand have not yet determined the
impact the adoption will have on our consolidated financial statements, but it
is not expected to be significant.
 
 In
February 2007, the FASB issued FAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  FAS 159 permits entities to
choose to measure financial assets and liabilities (except for those that are
specifically scoped out of the Statement) at fair value.  The election
to measure a financial asset or liability at fair value can be made on an
instrument-by-instrument basis and is irrevocable.  The difference
between carrying value and fair value at the election date is recorded as a
transition adjustment to opening retained earnings.  Subsequent
changes in fair value are recognized in earnings.  The effective date
for FAS 159 is as of the beginning of an entity's first fiscal year that begins
after November 15, 2007.  We are evaluating FAS 159 and have not yet
determined the impact the adoption will have on our consolidated financial
statements, but it is not expected to be significant.
 
 NOTE
N — LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and Fund III.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
 In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of units in Fund III and in our
predecessor, Vestin Fund II, LLC.  The Respondents consented to the
entry of a cease and desist order, the payment by Mr. Shustek of a fine of
$100,000 and Mr. Shustek’s suspension from association with any broker or dealer
for a period of six months, which expired in March 2007.  In addition,
the Respondents agreed to implement certain undertakings with respect to future
sales of securities.  We are not a party to the Order and we do not
expect that the sanctions imposed upon the Respondents will have any material
affect upon our operations.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
Ninth Circuit United Court of Appeals, which dismissal was upheld when the
United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, prior to the formation of Fund II.  On March
6, 2006, Desert Land amended the state court complaint to name VRM
I.  Desert Land alleges that one or more of the defendants have
transferred assets to other entities without receiving reasonable value
therefore; alleges plaintiffs are informed and believe that defendants have made
such transfers with the actual intent to hinder, delay or defraud Desert Land;
that such transfers made the transferor insolvent and that sometime between
February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I
for that purpose.
  - 78
-
 Table of Contents
  
 The state
court complaint further alleges that Desert Land is entitled to void such
transfers and that pursuant to NRS 112.20, Desert Land is entitled to an
injunction to enjoin defendants from further disposition of
assets.  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.  The
Defendants believe that the allegations are without merit and that they have
adequate defenses.  The Defendants intend to undertake a vigorous
defense.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
action filed in San Diego Superior Court by certain plaintiffs who allege, among
other things, that they were wrongfully denied appraisal rights in connection
with the merger of Fund I into Vestin Realty Mortgage I, Inc.  The
action is being brought as a purported class action on behalf of all members of
Vestin Fund I who did not vote in favor of the merger.  The Defendants
believe that the allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of our management agreement and Fund I’s Operating
Agreement contain indemnity provisions whereby, Vestin Mortgage and Michael V.
Shustek may be eligible for indemnification by VRM I with respect to the above
actions.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages and a
rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM I’s management agreement and Fund I’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM I with respect to
the above actions.
 
 In
addition to the matters described above, our manager is involved in a number of
other legal proceedings concerning matters arising in connection with the
conduct of its business activities.  Our manager believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously.  Other than the matters described above, our manager
believes that it is not a party to any pending legal or arbitration proceedings
that would have a material adverse effect on our manager’s financial condition
or results of operations or cash flows, although it is possible that the outcome
of any such proceedings could have a material impact on our manager’s net income
in any particular period.
 
 NOTE
O — LEGAL MATTERS INVOLVING THE COMPANY
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage, Inc. and us alleging that these Vestin
entities improperly influenced the former RightStar trustees to transfer trust
funds to us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trusts statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The outcome of this auction cannot be determined at this
time.
 
  - 79
-
 Table of Contents
  We and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
action filed in San Diego Superior Court by certain plaintiffs who allege, among
other things, that they were wrongfully denied appraisal rights in connection
with the merger of Fund II into Vestin Realty Mortgage II, Inc.  The
action is being brought as a purported class action on behalf of all members of
Vestin Fund II who did not vote in favor of the merger.  The
Defendants believe that the allegations are without merit and that they have
adequate defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of our management agreement and Fund II’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by us with respect to the
above actions.
 
 We,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
a rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM II’s management agreement and Fund II’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by us with respect to the
above actions.
 
 In
addition to the matters described above, we are involved in a number of other
legal proceedings concerning matters arising in connection with the conduct of
our business activities.  We believe we have meritorious defenses to
each of these actions and intend to defend them vigorously.  Other
than the matters described above, we believe that we are not a party to any
pending legal or arbitration proceedings that would have a material adverse
effect on our financial condition or results of operations or cash flows,
although it is possible that the outcome of any such proceedings could have a
material impact on our net income in any particular period.
 
 NOTE
P — DIVIDEND REQUIREMENT
 
 To
maintain our status as a REIT, we are required to make dividend distributions,
other than capital gain dividends, to our stockholders each year in an amount at
least equal to (1) the sum of (a) 90% of our taxable income, computed without
regards to the dividends paid deduction and our net capital gain, and (b) 90% of
the net income, after tax, from foreclosure property, minus (2) the sum of
certain specified items of non-cash income over 5% of our REIT taxable
income.  All dividend distributions will be made at the discretion of
our board of directors and will depend on our earnings, both tax and GAAP,
financial condition, maintenance of REIT status and such other factors as the
board of directors deems relevant.
 
 NOTE
Q — SUBSEQUENT EVENT
 
 On
January 16, 2008, 2008, the board of directors declared a monthly cash dividend
of $0.106 per share for the month of January 2008, that will be paid on February
28, 2008, to the stockholders of record as of February 8, 2008.
 
 On
February 5, 2008, we, VRM I and Fund III foreclosed upon Pirates Lake, Ltd. and
classified it as real estate held for sale.
 
 On
February 21, 2008, our board of directors declared a cash dividend of $0.106 per
common share for the month of February 2008, payable on March 28, 2008 to
stockholders of record as of March 7, 2008.
 
 On March
7, 2008, we, VRM I and Fund III foreclosed upon Forest Development LLC and
classified it as real estate held for sale.
 
 NOTE
R — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following schedule is a selected quarterly financial data for the year ended
December 31, 2007 and the twelve months ended December 31, 2006:
 
  - 80
-
 Table of Contents
  
 For
      the Year Ended December 31, 20071st
      Quarter
              
              
              2nd
      Quarter
              
              
              3rd
      Quarter
              
              
              4th
      Quarter
              
              
              YearTotal
      revenues
              
              $
              6,653,000
              
              
              $
              8,269,000
              
              
              $
              6,939,000
              
              
              $
              7,149,000
              
              
              $
              29,010,000Total
      operating expenses
              
              
              1,158,000
              
              
              
              1,461,000
              
              
              
              5,162,000
              
              
              
              4,098,000
              
              
              
              11,879,000Total
      non-operating income
              
              
              182,000
              
              
              
              313,000
              
              
              
              793,000
              
              
              
              555,000
              
              
              
              1,843,000Total
      income (loss) from real estate held for sale
              
              
              706,000
              
              
              
              (2,729,000
              )
              
              
              (1,029,000
              )
              
              
              1,006,000
              
              
              
              (2,046,000
              )Income
      before provision for income taxes
              
              
              6,383,000
              
              
              
              4,392,000
              
              
              
              1,541,000
              
              
              
              4,612,000
              
              
              
              16,928,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --NET
      INCOME
              
              $
              6,383,000
              
              
              $
              4,392,000
              
              
              $
              1,541,000
              
              
              $
              4,612,000
              
              
              $
              16,928,000Basic
      and diluted earnings per weighted average common share
              
              $
              0.43
              
              
              $
              0.29
              
              
              $
              0.10
              
              
              $
              0.31
              
              
              $
              1.14Dividends
      declared per common share
              
              $
              0.39
              
              
              $
              0.41
              
              
              $
              0.38
              
              
              $
              0.33
              
              
              $
              1.50Weighted
      average common shares
              
              
              14,943,760
              
              
              
              14,940,865
              
              
              
              14,894,003
              
              
              
              14,861,056
              
              
              
              14,909,651Weighted
      average term of outstanding loans, including extensions
              
              20
      months
              
              
              17
      months
              
              
              18
      months
              
              
              19
      months
              
              
              19
      months
 
  - 81
-
 Table of Contents
  
 For
      the 12 Months Ended December 31, 20061st
      Quarter
              
              
              2nd
      Quarter
              
              
              3rd
      Quarter
              
              
              4th
      Quarter
              
              
              YearTotal
      revenues
              
              $
              5,944,000
              
              
              $
              4,689,000
              
              
              $
              5,188,000
              
              
              $
              6,232,000
              
              
              $
              22,053,000Total
      operating expenses
              
              
              7,233,000
              
              
              
              922,000
              
              
              
              806,000
              
              
              
              1,663,000
              
              
              
              10,624,000Total
      non-operating income
              
              
              167,000
              
              
              
              617,000
              
              
              
              457,000
              
              
              
              185,000
              
              
              
              1,426,000Total
      income (loss) from real estate held for sale
              
              
              (588,000
              )
              
              
              354,000
              
              
              
              1,561,000
              
              
              
              1,669,000
              
              
              
              2,996,000Income
      (loss) before provision for income taxes
              
              
              (1,710,000
              )
              
              
              4,738,000
              
              
              
              6,400,000
              
              
              
              6,423,000
              
              
              
              15,851,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              452,000
              
              
              
              (452,000
              )
              
              
              --NET
      INCOME (LOSS)
              
              $
              (1,710,000
              )
              
              $
              4,738,000
              
              
              $
              5,948,000
              
              
              $
              6,875,000
              
              
              $
              15,851,000Basic
      and diluted earnings (loss) per weighted average share / membership
      unit
              
              $
              (0.11
              )
              
              $
              0.32
              
              
              $
              0.40
              
              
              $
              0.46
              
              
              $
              1.06Dividends
      declared per common share / cash distributions per membership
      unit
              
              $
              0.42
              
              
              $
              --
              
              
              $
              0.56
              
              
              $
              0.53
              
              
              $
              1.51Weighted
      average common shares / membership units
              
              
              14,967,788
              
              
              
              14,919,221
              
              
              
              14,922,904
              
              
              
              14,932,950
              
              
              
              14,935,585Weighted
      average term of outstanding loans, including extensions
              
              23
      months
              
              
              25
      months
              
              
              22
      months
              
              
              19
      months
              
              
              19
      months
 
 
  - 82
-
 Table of Contents
  
 SUPPLEMENTARY
INFORMATION
 
 ScheduleIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOAN ROLL FORWARDBalance,
      June 30, 2005 *
              
              $
              235,418,000Additions
      during the periodNew
      real estate loans and additions
              
              
              121,406,000Real
      estate loans bought
              
              
              30,365,000Deductions
      during the periodCollections
      of principal and reductions
              
              
              113,739,000Foreclosed
      loans (Real estate held for sale)
              
              
              --Real
      estate loans sold
              
              
              17,000,000Net
      Change in 2005
              
              
              21,032,000Balance,
      December 31, 2005 *
              
              $
              256,450,000Additions
      during the periodNew
      real estate loans and additions
              
              
              204,497,000Real
      estate loans bought
              
              
              31,806,000Deductions
      during the periodCollections
      of principal and reductions
              
              
              216,207,000Foreclosed
      loans (Real estate held for sale)
              
              
              25,476,000Real
      estate loans sold
              
              
              8,675,000Net
      Change in 2006
              
              
              (14,055,000
              )Balance,
      December 31, 2006 *
              
              $
              242,395,000Additions
      during the periodNew
      real estate loans and additions
              
              
              146,245,000Real
      estate loans bought
              
              
              14,760,000Deductions
      during the periodCollections
      of principal and reductions
              
              
              103,430,000Foreclosed
      loans (Real estate held for sale)
              
              
              --Real
      estate loans sold
              
              
              8,907,000Net
      Change in 2007
              
              
              48,668,000Balance,
      December 31, 2007
              
              $
              291,063,000
 
 *  Includes
loans related to real estate held for sale – seller financed.
  - 83
-
 Table of Contents
  
 ScheduleIIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOANS BY TYPE OF PROPERTYAs
      of December 31, 2007:Type
      of Property
              
              Interest
      Rate
              
              
              Face
                Amount
      of Loan
              
              
              Carrying
                Amount
      of Loan
              
              Maturity
      Date
              
              Amount
      Subject to DelinquencyAcquisition
      and Development
              
              
              12%-13.75%
              
              
              $
              24,270,000
              
              
              $
              18,338,000
              
              07/07-06/08
              
              $
              5,338,000Commercial
              
              
              8.65%-15%
              
              
              $
              202,690,000
              
              
              $
              131,257,000
              
              03/04-12/08
              
              $
              19,446,000Construction
              
              
              9.53%-12.5%
              
              
              $
              73,841,000
              
              
              $
              45,883,000
              
              10/06-12/08
              
              $
              1,681,000Land
              
              
              10%-14%
              
              
              $
              132,250,000
              
              
              $
              95,585,000
              
              06/07-12/09
              
              $
              4,100,000$
              433,051,000
              
              
              $
              291,063,000
              
              
              
              $
              30,565,000As
      of December 31, 2006 *:Type
      of Property
              
              Interest
      Rate
              
              
              Face
                Amount
      of Loan
              
              
              Carrying
                Amount
      of Loan
              
              Maturity
      Date
              
              Amount
      Subject to DelinquencyAcquisition
      and Development
              
              
              12%-13%
              
              
              $
              18,932,000
              
              
              $
              8,569,000
              
              01/07-07/07
              
              $
              --Commercial
              
              
              5%-14%
              
              
              $
              204,285,000
              
              
              $
              138,556,000
              
              03/04-12/07
              
              $
              19,446,000Construction
              
              
              10%-12%
              
              
              $
              100,466,000
              
              
              $
              43,319,000
              
              10/06-11/07
              
              $
              1,681,000Land
              
              
              10%-13%
              
              
              $
              82,475,000
              
              
              $
              51,951,000
              
              03/07-12/07
              
              $
              7,707,000$
              406,158,000
              
              
              $
              242,395,000
              
              
              
              $
              28,834,000
 
 
 
 ScheduleIIIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOANS BY LIEN POSITIONAs
      of December 31, 2007:Lien
      Position
              
              Face
      Amount of Loan
              
              
              Interest
      Rate
              
              
              Carrying
      Amount of Loan
              
              Maturity
      Date
              
              Amount
      Subject to Delinquency1st
              
              $
              432,051,000
              
              
              
              8.65%-15%
              
              
              $
              288,665,000
              
              03/04-12/09
              
              $
              30,565,0002nd
              
              $
              1,000,000
              
              
              
              10.5%-12%
              
              
              $
              2,398,000
              
              06/08
              
              $
              --$
              433,051,000
              
              
              
              
              
              
              $
              291,063,000
              
              
              
              $
              30,565,000As
      of December 31, 2006 *:Lien
      Position
              
              Face
      Amount of Loan
              
              
              Interest
      Rate
              
              
              Carrying
      Amount of Loan
              
              Maturity
      Date
              
              Amount
      Subject to Delinquency1st
              
              $
              397,496,000
              
              
              
              5%-14%
              
              
              $
              239,748,000
              
              03/04-12/07
              
              $
              28,834,0002nd
              
              $
              8,662,000
              
              
              
              10.5%-13%
              
              
              $
              2,647,000
              
              01/07-12/07
              
              $
              --$
              406,158,000
              
              
              
              
              
              
              $
              242,395,000
              
              
              
              $
              28,834,000
 
 *  Includes
loans related to real estate held for sale – seller financed.
 
  - 84
-
 Table of Contents
  
 ScheduleIVVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOANS THAT EXCEED THREE PERCENT OF THE PORTFOLIOAs
      of December 31, 2007:Description
      of Loan
              
              Interest
      Rate
              
              Final
      Maturity Date
              Periodic
      Payment Terms
              Lien
      Position
              
              Face
      Amount of Loan
              
              
              Carrying
      Amount of Loan
              
              
              Amount
      Subject to DelinquencyA/D
              
              
              13.00%
              
              06/29/08
              Fixed
      Interest only, Balloon Payment $13,000,000
              1st
              
              $
              13,000,000
              
              
              $
              13,000,000
              
              
              $
              --Commercial
              
              
              14.00%
              
              03/31/04
              Fixed
      Interest only, Balloon Payment $17,290,000
              1st
              
              $
              34,000,000
              
              
              $
              17,291,000
              
              
              $
              17,290,644Commercial
              
              
              12.00%
              
              09/30/06
              Fixed
      Interest only, Balloon Payment $16,981,000
              1st
              
              $
              24,500,000
              
              
              $
              16,981,000
              
              
              $
              --Commercial
              
              
              11.50%
              
              10/05/07
              Fixed
      Interest only, Balloon Payment $11,387,000
              1st
              
              $
              18,000,000
              
              
              $
              11,388,000
              
              
              $
              --Commercial
              
              
              10.00%
              
              06/30/07
              Fixed
      Interest only, Balloon Payment $11,600,000
              1st
              
              $
              16,000,000
              
              
              $
              11,600,000
              
              
              $
              --Commercial
              
              
              10.50%
              
              07/12/07
              Fixed
      Interest only, Balloon Payment $20,869,000
              1st
              
              $
              25,588,000
              
              
              $
              20,870,000
              
              
              $
              --Commercial
              
              
              14.00%
              
              06/28/07
              Fixed
      Interest only, Balloon Payment $25,703,000
              1st
              
              $
              26,800,000
              
              
              $
              25,704,000
              
              
              $
              --Construction
              
              
              12.00%
              
              07/16/07
              Fixed
      Interest only, Balloon Payment $16,117,000
              1st
              
              $
              31,250,000
              
              
              $
              16,117,000
              
              
              $
              --Land
              
              
              11.00%
              
              12/30/07
              Variable
      Interest only, Balloon Payment $14,797,000
              1st
              
              $
              18,000,000
              
              
              $
              14,798,000
              
              
              $
              --Land
              
              
              14.00%
              
              01/27/08
              Fixed
      Interest only, Balloon Payment $12,037,000
              1st
              
              $
              17,000,000
              
              
              $
              12,038,000
              
              
              $
              --Land
              
              
              11.50%
              
              12/11/09
              Fixed
      Interest only, Balloon Payment $14,171,000
              1st
              
              $
              22,300,000
              
              
              $
              14,171,000
              
              
              $
              --$
              246,438,000
              
              
              $
              173,958,000
              
              
              $
              17,290,644
 
  - 85
-
 Table of Contents
  
 
 As
      of December 31, 2006:Description
      of Loan
              
              Interest
      Rate
              
              Final
      Maturity Date
              Periodic
      Payment Terms
              Lien
      Position
              
              Face
      Amount of Loan
              
              
              Carrying
      Amount of Loan
              
              
              Amount
      Subject to DelinquencyCommercial
              
              
              11.50
              %
              10/05/07
              Fixed
      Interest only, Balloon Payment $10,760,000
              1st
              
              $
              18,000,000
              
              
              $
              10,760,000
              
              
              $
              --Commercial
              
              
              10.00
              %
              06/30/07
              Fixed
      Interest only, Balloon Payment $11,549,000
              1st
              
              $
              16,000,000
              
              
              $
              11,549,000
              
              
              $
              --Commercial
              
              
              9.00
              %
              07/12/07
              Fixed
      Interest only, Balloon Payment $17,177,000
              1st
              
              $
              23,900,000
              
              
              $
              17,177,000
              
              
              $
              --Commercial
              
              
              13.00
              %
              06/28/07
              Fixed
      Interest only, Balloon Payment $25,304,000
              1st
              
              $
              26,400,000
              
              
              $
              25,304,000
              
              
              $
              --Commercial
              
              
              6.25
              %
              12/25/07
              Fixed
      Interest and Principal, Balloon Payment $11,404,000
              1st
              
              $
              12,500,000
              
              
              $
              11,404,000
              
              
              $
              --Commercial
              
              
              14.00
              %
              03/31/04
              Fixed
      Interest only, Balloon Payment $17,291,000
              1st
              
              $
              34,000,000
              
              
              $
              17,291,000
              
              
              $
              17,291,000Commercial
              
              
              9.00
              %
              03/31/07
              Fixed
      Interest only, Balloon Payment $19,554,000
              1st
              
              $
              24,500,000
              
              
              $
              19,554,000
              
              
              $
              --Construction
              
              
              12.00
              %
              05/16/07
              Fixed
      Interest only, Balloon Payment $18,869,000
              1st
              
              $
              26,000,000
              
              
              $
              18,869,000
              
              
              $
              --Construction
              
              
              10.00
              %
              05/28/07
              Fixed
      Interest only, Balloon Payment $10,529,000
              1st
              
              $
              21,166,000
              
              
              $
              10,529,000
              
              
              $
              --Land
              
              
              12.00
              %
              03/17/07
              Fixed
      Interest only, Balloon Payment $7,707,000
              1st
              
              $
              9,500,000
              
              
              $
              7,707,000
              
              
              $
              7,707,000Land
              
              
              10.00
              %
              12/30/07
              Variable
      Interest only, Balloon Payment $12,945,000
              1st
              
              $
              18,000,000
              
              
              $
              12,945,000
              
              
              $
              --Land
              
              
              13.00
              %
              07/28/07
              Fixed
      Interest only, Balloon Payment $9,771,000
              1st
              
              $
              15,000,000
              
              
              $
              9,771,000
              
              
              $
              --$
              244,966,000
              
              
              $
              172,860,000
              
              
              $
              24,998,000
 
  
 
 ITEM
      9.
              CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None.
 
  - 86
-
 Table of Contents
  ITEM
      9A.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
regarding required financial disclosure.  In connection with the
preparation of this Report on Form 10-K, our management carried out an
evaluation, under the supervision and with the participation of our management,
including the CEO and CFO, as of December 31, 2007, of the effectiveness of the
design and operation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Exchange Act.  Based upon our
evaluation, our CEO and CFO concluded that, as of December 31, 2007, our
disclosure controls and procedures are designed at a reasonable assurance level
and are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure.
 
 Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been or will be detected.  Even effective internal control over
financial reporting can only provide reasonable assurance with respect to
financial statement preparation.  Furthermore, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.  Our management, including our Chief Executive Officer
and Chief Financial Officer, does not expect that our controls and procedures
will prevent all errors.
 
 Management's Report on
Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for our Company, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act.  Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United
States.  Internal control over financial reporting includes those
policies and procedures that: pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of our Company; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States, and that receipts and expenditures of our Company are being made
only in accordance with authorizations of management and directors of our
Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our Company's
assets that could have a material effect on our financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
 
 Management
has conducted an assessment, including testing, of the effectiveness of our
internal control over financial reporting as of December 31, 2007.  In
making its assessment of internal control over financial reporting, management
used the criteria inInternal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  Based on this
assessment, management, with the participation of the Chief Executive and Chief
Financial Officers, believes that, as of December 31, 2007, the Company’s
internal control over financial reporting is effective based on those
criteria.
 
 Our
internal control over financial reporting as of December 31, 2007 have been
audited by Moore Stephens Wurth Frazer and Torbet, LLP, our independent
registered public accounting firm, as stated in its report, which appears below
in this Item 9A.
  - 87
-
 Table of Contents
  
 Changes in Internal Control
Over Financial Reporting
 
 Our
management has not identified any changes in our internal controls over
financial reporting during the Quarter ended December 31, 2007.
 
 
  - 88
-
 Table of Contents
  
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 Vestin
Realty Mortgage II, Inc.
 
 We have
audited Vestin Realty Mortgage II, Inc’s., (the Company) internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria).  Vestin Realty Mortgage II’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying “Management's
Report on Internal Control over Financial Reporting”.  Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of the effectiveness to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 In our
opinion, the Company maintained in all material respects, effective internal
control over financial reporting as of December 31, 2007 based on the COSO
criteria.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Vestin Realty
Mortgage II, Inc., as of December 31, 2007 and 2006, and the related
consolidated statements of income, equity and other comprehensive income (loss)
and its cash flows for the year ended December 31, 2007, the twelve months ended
December 31, 2006, the six months ended December 31, 2005, and the year ended
June 30, 2005 and our report dated March 13, 2008 expressed an unqualified
opinion on those consolidated financial statements.
 
 /s/Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 March 13,
2008
 
  - 89
-
 Table of Contents
  ITEM
      9A(T).
                CONTROLSAND
PROCEDURES
 Not
applicable.
 
 ITEM
      9B.
              OTHER
      INFORMATION
 
 None.
 
 PARTIII
 ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERSAND CORPORATE
    GOVERNANCE
 We are
managed on a day to day basis by Vestin Mortgage, a privately held company
wholly owned by Vestin Group.
 
 Directors
and Executive Officers
 
 The
following table sets forth the names, ages as of December 31, 2007 and positions
of the individuals who serve as our directors and executive
officers:
 
 Name
              Age
              TitleMichael
      V. Shustek
              49
              President,
      Chief Executive Officer and DirectorRocio
      Revollo
              46
              Chief
      Financial OfficerJohn
      E. Dawson
              50
              DirectorRobert
      J. Aalberts(1)(2)(3)
              56
              DirectorFredrick
      J. Zaffarese Leavitt(1)(2)(3)
              37
              DirectorRoland
      M. Sansone(1)(2)(3)
              52
              Director
 
 (1)
              Member
      of the audit committee.
 
 (2)
              Member
      of the nominating committee.
 
 (3)
              Member
      of the compensation committee.
 
 The
following table sets forth the names, ages as of January 31, 2008 and positions
of the individuals who serve as directors, executive officers and certain
significant employees of Vestin Mortgage (our manager), Vestin Group, Vestin
Originations or our affiliates:
 
 Name
              Age
              TitleMichael
      V. Shustek
              49
              President,
      Chief Executive Officer and ChairmanRocio
      Revollo
              46
              Chief
      Financial OfficerJames
      M. Townsend
              38
              Chief
      Operating Officer of Vestin GroupMichael
      J. Whiteaker
              58
              Vice
      President of Regulatory Affairs of Vestin GroupDaniel
      B. Stubbs
              46
              Senior
      Vice President of Vestin GroupEdwin
      H. Bentzen IV
              31
              Corporate
      Controller of Vestin Group
 
 Directors,
Executive Officers and certain significant employees of Vestin Realty Mortgage
II, Vestin Mortgage (our manager), Vestin Group, Vestin Originations or our
affiliates
 
  - 90
-
 Table of Contents
  Michael V. Shustek has been a
director of our manager and Chairman of the board of directors, Chief Executive
Officer and a director of Vestin Group since April 1999 and a Director and CEO
of us and Vestin Realty Mortgage I, Inc. (“VRM I”) since January
2006.  In February 2004, Mr. Shustek became the President of Vestin
Group.  Mr. Shustek also serves on the loan committee of our manager
and its affiliates.  In 2003, Mr. Shustek became the Chief Executive
Officer of our manager.  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.  Mr. Shustek has co-authored two books, entitled “Trust Deed
Investments,” on the topic of private mortgage lending, and “If I Can Do It, So
Can You.”  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.  See Note N Legal Matters Involving The
Manager in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for information
regarding legal matters involving our manager and Mr. Shustek.
 
 Rocio Revollowas appointed as our
Chief Financial Officer on March 21, 2007.  In addition, Ms. Revollo
was appointed the CFO of VRM I and Vestin Group on March 21,
2007.  Prior to being appointed as the CFO of us, VRM I and Vestin
Group, Ms. Revollo served as the Corporate Controller of Vestin Group since June
2005.  Ms. Revollo previously served as Corporate Controller for Sobel
Westex from January 2002 through May 2005.  From April 1999 to
December 2001, Ms. Revollo was a financial consultant for Re:Source
Connections.  Ms. Revollo is a Certified Public Accountant and worked
for the accounting firm of KPMG LLP.  She received a Bachelor of
Business Administration degree in Accounting and a Bachelor of Arts degree in
Communication Studies from the University of Nevada, Las Vegas.
 
 James M. Townsendhas served
as the Chief Operating Officer of Vestin Group since January
2007.  Mr. Townsend has over 15 years of experience in the securities
industry.  From February 2004 to September 2006, Mr. Townsend was the
National Sales Manager of Samco Financial Services, Inc.  From
November 2003 to February 2004, Mr. Townsend was employed by Vestin Group as
Manager of the Wholesale Division.  From September 2002 to October of
2003, Mr. Townsend was National Sales Manager of Samco Financial Services,
Inc.  From February 1997 to July 2002, Mr. Townsend was employed by
Donald & Co. Securities, Inc., as both a Sales Manager and the National
Sales Manager.  Mr. Townsend received a Bachelor of Science degree in
Business Administration from The University of Texas at Dallas.
 
 Michael J. Whiteaker has been
Vice President of Regulatory Affairs of our manager and Vestin Group since May
1999.  Mr. Whiteaker is experienced in the banking and finance
regulatory fields, having 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.  Mr.
Whiteaker has previously served on the Nevada Association of Mortgage Brokers,
Legislative Committee and is a past member of the State of Nevada, Mortgage
Advisory Council. He currently is a director of the Private Lenders Group, an
organization devoted to creating and maintaining the highest professional
standards possible among licensed Nevada Mortgage brokers.
 
 Daniel B. Stubbs has been the
Senior Vice President of Underwriting and Secretary of our manager since January
2000.  Mr. Stubbs heads the loan department for our manager and its
affiliates and is responsible for reviewing loan requests and performs due
diligence necessary for risk analysis in connection with the underwriting
process.  In addition, Mr. Stubbs serves on the loan committee and
acts as liaison for our manager and its affiliates with the various commercial
loan participants.  Mr. Stubbs has 15 years experience in the title
insurance industry and has received a Bachelor of Arts degree in Communication
Studies from the University of Nevada, Las Vegas.
  - 91
-
 Table of Contents
  
 Edwin H. Bentzen IVhas been
the Corporate Controller of Vestin Group since April 2007.  Prior to
being Corporate Controller of Vestin Group, Mr. Bentzen served as a Financial
Reporting Analyst for Vestin Group since January 2006.  Mr. Bentzen
served at Ameristar Casinos Inc. as Senior Internal Auditor from June 2005
through January 2006 and an Internal Auditor from June 2003 to June
2005.  Prior to June 2003, Mr. Bentzen was engaged in public tax
accounting at a local firm in Las Vegas.  Mr. Bentzen is a Certified
Internal Auditor and received a Masters of Science in Accountancy and a Bachelor
of Science degree in Hotel Administration, with an emphasis in gaming, from the
University of Nevada, Las Vegas.
 
 Unaffiliated
Directors of Vestin Realty Mortgage II
 
 The
principal occupation and business experience for the independent and
unaffiliated directors of Vestin Realty Mortgage II are as follows:
 
 Robert J. Aalberts was a
director of Vestin Group from April 1999 to December 2005.  He has
been a director of us since January 2006 and was a director for VRM I from
January 2006 to January 2008.  Since 1991, Professor Aalberts has held
the Ernst Lied Professor of Legal Studies professorship in the College of
Business at the University of Nevada, Las Vegas.  From 1984 to 1991,
Professor 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.  Professor Aalberts has
co-authored a book relating to the regulatory environment, law and business of
real estate; including Real Estate Law (7th Ed. (2009) 6th Ed. (2006)) published
by the Thomson/West Company.  He is also the author of numerous legal
articles, dealing with various aspects of real estate, business and the practice
of law.  Since 1992, Professor Aalberts has been the Editor-in-chief
of the Real Estate Law Journal.  Professor Aalberts received his Juris
Doctor degree from Loyola University, in New Orleans, Louisiana, a Masters of
Arts from the University of Missouri, Columbia, and received a Bachelor of Arts
degree in Social Sciences, Geography from the Bemidji State University in
Bemidji, Minnesota.  He was admitted to the State Bar of Louisiana in
1982 (currently inactive status).
 
 Fredrick J. Zaffarese Leavitt
was a director for Vestin Group from November 2004 to December
2005.  He has been a director of us since January 2006 and was a
director for VRM I from January 2006 to January 2008.  Since August of
1993 Mr. Zaffarese Leavitt has been an accountant for the United States
Department of the Interior where his responsibilities include the review and
audit of various states, local and municipality governments for compliance with
federal laws and regulations as well as preparation of financial statements for
Executive Branch and Congressional review.  Additionally, Mr.
Zaffarese Leavitt sits on various audit committees involving the utility
industry.  Mr. Zaffarese Leavitt is a CPA and a graduate of University
of Nevada Las Vegas.
 
 Roland M. Sansone was a
director for Vestin Group from December 2004 to December 2005.  He has
been a director of us since January 2006 and was a director for VRM I from
January 2006 to January 2008.  In additions, has served as President
of Sansone Development, Inc. since 2002.  Sansone Development, Inc. is
a real estate development company.  Mr. Sansone has been self-employed
as a Manager and developer of real estate since 1980.  Mr. Sansone is
currently the president of several companies that develop, own and manage
commercial and residential property.  Mr. Sansone attended Mt. San
Antonio College.
 
 John E. Dawson was previously
a director of Vestin Group from March 2000 to December 2005.  He has
been a director of us since March 2007 and was a director for VRM I from March
2007 to January 2008. Since 2005 Mr. Dawson has been a partner of the Las
Vegas law firm of Lionel Sawyer & Collins.  Previous to that, from
1995 to 2005, Mr. Dawson was a partner at the law firm of Marquis &
Aurbach.  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.
 
  - 92
-
 Table of Contents
  Board
Composition
 
 Our board
of directors is authorized to have up to 15 directors.  Our board of
directors is currently comprised of five directors.  In accordance
with our articles of charter and bylaws, our board of directors is divided into
three classes, class I, class II and class III, with each class serving
staggered three-year terms.  The members of the classes are divided as
follows:
 
 ·
              The
      class I director is Mr. Zaffarese Leavitt, and his term will expire at the
      2010 annual meeting of
stockholders;
 
 ·
              The
      class II directors are Messrs, Dawson and Sansone, and their terms will
      expire at the 2008 annual meeting of stockholders;
  and
 
 ·
              The
      class III directors are Messrs, Aalberts and Shustek, and their terms will
      expire at the 2009 annual meeting of
  stockholders.
 
 The
authorized number of directors may be changed only by resolution of the board of
directors.  Any additional directors resulting from an increase in the
number of directors will be distributed between the three classes so that, as
nearly as possible, each class will consist of one third of the
directors.  This classification of our board of directors may have the
effect of delaying or preventing changes in our control or
management.  Our directors will hold office until their successors
have been elected and qualified or until their earlier death, resignation,
disqualification or removal for cause by the affirmative vote of the holders of
at least a majority of our outstanding stock entitled to vote on election of
directors.
 
 During
the year ended December 31, 2007, the Board held 22 meetings. Each current
director attended at least 75% of the aggregate of all Board and applicable
standing committee meetings.  Directors are encouraged to attend
annual meetings of our stockholders.  At the last annual meeting of
stockholders, 3 of the 5 then-current directors attended.
 
 Board
Committees
 
 Our board
of directors has appointed an audit committee, a nominating committee and a
compensation committee.  There are no family relationships among any
of our directors or executive officers.
 
 Audit committee– The Audit
Committee is responsible for the appointment, compensation, retention and
oversight of the Company’s independent accountants.  In addition, the
Audit Committee reviews with the Company’s management and its independent
accountants financial information that will be provided to stockholders and
others, the systems of internal controls which management and our board of
directors have established and our audit and financial reporting
processes.  The Audit Committee operates under a written Audit
Committee Charter adopted by our board of directors which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx.  Our
Audit Committee, consisting of Mr. Zaffarese Leavitt (chair), Mr. Aalberts and
Mr. Sansone, met in March 2008 in connection with the audit of our 2007
financial statements, and held a total of four meetings in fiscal 2007.Our Audit Committee
oversees our accounting and financial reporting processes, internal systems of
control, independent auditor relationships and the audits of our financial
statements.  This committee’s responsibilities include, among other
things:
 
 ·
              Selecting
      and hiring our independent
auditors;
 
 ·
              Evaluating
      the qualifications, independence and performance of our independent
      auditors;
 
 ·
              Approving
      the audit and nonaudit services to be performed by our independent
      auditors;
 
 ·
              Reviewing
      the design, implementation, adequacy and effectiveness of our internal
      controls and our critical accounting
policies;
  - 93
-
 Table of Contents
  
 ·
              Overseeing
      and monitoring the integrity of our financial statements and our
      compliance with legal and regulatory requirements as they relate to
      financial statements or accounting matters;
and
 
 ·
              Reviewing
      with management and our auditors any earnings announcements and other
      public announcements regarding our results of
  operations.
 
 Our
independent auditors and internal financial personnel regularly meet privately
with our audit committee and have unrestricted access to this
committee.  Our Audit Committee currently consists of Mr. Zaffarese
Leavitt, Mr. Aalberts and Mr. Sansone.  Our board of directors has
determined that each of these directors meet the independence standards for
audit committee members and that Mr. Zaffarese Leavitt meets the financial
expertise requirements set forth in Section 407 of the Sarbanes Oxley Act of
2002.
 
 Nominating Committee– Our
Nominating Committee’s was formed to assist our board of directors by
identifying individuals qualified to become directors.  During fiscal
2007, the Nominating Committee, consisting of Mr. Sansone (chair), Mr. Zaffarese
Leavitt and Mr. Aalberts, held one meeting.  Our nominating committee
currently consists of Mr. Sansone, Mr. Zaffarese Leavitt and Mr.
Aalberts.
 
 The
Nominating Committee operates under a charter adopted by our board of directors
which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx.  Responsibilities
of the Nominating Committee include, among other things:
 
 ·
              Evaluating
      the composition, size, operations and governance of our board of directors
      and making recommendations regarding future planning and the appointment
      of directors;
 
 ·
              Evaluating
      the independence of our directors and candidates for election to the
      Board; and
 
 ·
              Evaluating
      and recommending candidates for election to our board of
      directors.
 
 In
evaluating candidates, the Nominating Committee will consider an individual’s
business and professional experience, the potential contributions they could
make to our Board and their familiarity with our business.  The
Nominating Committee will consider candidates recommended by our directors,
members of our management team and third parties.  The Nominating
Committee will also consider candidates suggested by our
stockholders.  We do not have a formal process established for this
purpose.  Stockholders are encouraged to contact the Chair of the
Nominating Committee if they wish the Committee to consider a proposed
candidate.  Stockholders should submit the names of any candidates in
writing, together with background information about the candidate, and send the
materials to the attention of Mr. Ronald Sansone at the following address: 6149
South Rainbow Boulevard, Las Vegas, NV 89118.  Stockholders wishing to
directly nominate candidates for election to the Board must provide timely
notice in accordance with the requirements of our Bylaws, between the 150th and
120th days
prior to the anniversary of the date of mailing of the notice for the preceding
year’s annual meeting of stockholders.
 
 Compensation Committee– Our
Compensation Committee operates under a charter adopted by our board of
directors which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx.  It
was established to assist our board of directors relating to compensation of the
Company’s directors and its sole manager, Vestin Mortgage, Inc. and to produce
as may be required an annual report on executive officer
compensation.  Subject to applicable provisions of our bylaws and the
Management Agreement with our manager, the compensation committee is responsible
for reviewing and approving compensation paid by us to our
manager.  During fiscal 2007 the Compensation Committee, consisting of
Mr. Aalberts, Mr. Zaffarese Leavitt and Mr. Sansone, held one
meeting.  Our compensation committee currently consists of Mr.
Aalberts (chair), Mr. Zaffarese Leavitt and Mr. Sansone.  No member of
the Compensation Committee had a relationship that requires disclosure as a
compensation committee interlock.
 
 Our board
of directors may establish other committees to facilitate the management of our
business.
 
  - 94
-
 Table of Contents
  Code
of Ethics
 
 Our board
of directors has adopted a Code of Business Conduct and Ethics that applies to
all of our directors, officers and employees of our manager.  The Code
of Business Conduct and Ethics may be found on our web site at http://www.vestinrealtymortgage2.com/VRT_About/GovernanceDocuments.aspx.
 
 ITEM
      11.
              EXECUTIVECOMPENSATION
 
 We do not
pay any compensation to our executive officers.  We pay a management
fee of up to 0.25% of the amounts raised by us and Fund II through the sale of
shares or units.  Payment of the management fee is reviewed by and
subject to approval of our Compensation Committee.  For the year ended
December 31, 2007, we paid our manager approximately $1.1 million for its
management services, which represented less than 10% of the revenues received by
our manager and its affiliates in 2007.
 
 Our
independent directors receive $500 for each board meeting and committee meeting
they attend, whether in person or by phone, and are reimbursed for travel
expenses and other out-of-pocket costs of attending board and committee
meetings.
 
 ITEM
      12.
              SECURITY
      OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
 
 As of
January 31, 2008, no one entity owned more than 5% or the outstanding shares of
our common stock.
 
 The
following table sets forth the total number and percentage of our common stock
beneficially owned as of January 31, 2008, by:
 
 ·
              Each
      director;
 
 ·
              Our
      chief executive officer, chief financial officer and the officers of our
      manager who function as the equivalent of our executive officers;
      and
 
 ·
              All
      executive officers and directors as a
group.
 
 Unless
otherwise noted, the percentage ownership is calculated based on 14,869,461
shares of our total outstanding common stock as of January 31,
2008.
 
 Common
      Shares Beneficially OwnedBeneficial
      Owner
              
              Number
              
              
              PercentMichael
      V. Shustek(1)
              
              
              388,469
              
              
              
              2.58%Rocio
      Revollo
              
              
              384
              
              
              
              **James
      M. Townsend (2) (4)
              
              
              120,017
              
              
              
              **John
      E. Dawson (3) (4)
              
              
              5,894
              
              
              
              **Robert
      J. Aalberts (4)
              
              
              189
              
              
              
              **Frederick
      J. Zaffarese Leavitt
              
              
              --
              
              
              
              --Roland
      M. Sansone
              
              
              --
              
              
              
              --All
      directors and executive officers as a group
              
              
              514,953
              
              
              
              3.46%
 
 **  Less
than one percent of our total outstanding common stock.
  - 95
-
 Table of Contents
  
 (1)
              Includes
      92,699 shares held by our manager and 295,770 shares held by Michael
      Shustek.  Mr. Shustek is the Chairman, President and Chief
      Executive Officer of Vestin Mortgage and indirectly owns all of the
      capital stock of our manager through Vestin Group.  Mr. Shustek
      has sole voting and investment power in all these shares.  In
      April 2007, Mr. Shustek adopted a 10b5-1 trading plan (the “Plan”)
      pursuant to Rule 10b5-1 promulgated under the Securities Exchange Act of
      1934.  Pursuant to the Plan, Mr. Shustek may spend up to $2
      million to acquire shares of our common stock at prevailing market prices
      over a 13 month period.  All purchases have been and will
      continue to be executed by independent broker-dealers on specified dates
      in accordance with the requirements of Rule 10b5-1.  The Plan is
      scheduled to expire on June 6, 2008.  As of January 31, 2008,
      Mr. Shustek had purchased 110,189 under this plan for a total of
      approximately $1.3 million.
 
 (2)
              Mr.
      Townsend became an officer of Vestin Group in January 2007.  Mr.
      Townsend directly owns 55,216 shares and indirectly owns 64,801 shares
      through FMR Holdings, Inc., which is wholly owned by Mr. Townsend whom has
      sole voting and investment power in all these
  shares.
 
 (3)
              Includes
      5,416 shares held by the 12557 Limited Partnership, which Mr. Dawson is
      the controlling general partner.
 
 (4)
              Except
      as otherwise indicated, and subject to applicable community property and
      similar laws, the persons listed as beneficial owners of the shares have
      sole voting and investment power with respect to such
    shares.
 
 ITEM
      13.
              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.
 
 Please
refer to Note H Related Party
Transactions in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K, for information
regarding our related party transactions, which are incorporated herein by
reference.
 
 ITEM
      14.
              PRINCIPAL
      ACCOUNTINGFEES AND
SERVICES
 
 During
the year ended December 31, 2007 and the twelve months ended December 31, 2006,
Moore Stephens Wurth Frazer and Torbet, LLP (“Moore Stephens”) provided various
audit, audit related and non-audit services to us as follows:
 
 December
      31, 2007
              
              
              December
      31, 2006Audit
      Fees
              
              $
              335,000
              
              
              $
              412,000Audit
      Related Fees
              
              $
              --
              
              
              $
              --Tax
      Fees
              
              $
              --
              
              
              $
              --All
      Other Fees
              
              $
              --
              
              
              $
              --
 
 Our Audit
Committee has considered whether provision of the services described regarding
audit related fees, tax fees and all other fees above were compatible with
maintaining the independent accountant’s independence and has determined that
such services did not adversely affect Moore Stephens’
independence.
 
  - 96
-
 Table of Contents
  The Audit
Committee has direct responsibility to review and approve the engagement of the
independent auditors to perform audit services or any permissible non-audit
services.  All audit and non-audit services to be provided by the
independent auditors must be approved in advance by the Audit
Committee.  The Audit Committee may not engage the independent
auditors to perform specific non-audit services proscribed by law or
regulation.  All services performed by our independent auditors under
engagements entered into from May 6, 2003 to April 1, 2006, were approved by the
Audit Committee of Vestin Group, all services performed after April 1, 2006,
were approved by our Audit Committee, pursuant to our pre-approval policy, and
none was approved pursuant to the de minimusexception to the
rules and regulations of the Securities Exchange Act of 1934, Section
10A(i)(1)(B), on pre-approval.
 
 PARTIV
 
 ITEM
      15.
              EXHIBITS,
      FINANCIALSTATEMENT
SCHEDULES
 
 The
following are filed as part of this Report:
 
 (a)
1.  Financial
Statements
 
 The list
of the financial statements contained herein are contained in Part II, Item 8
Financial Statements and
Supplementary Data on this Annual Report on Form 10-K, which is hereby
incorporated by reference.
 
 (a)
2.  Financial Statement
Schedules
 
 The list
of the financial statements schedules contained herein are contained in Part II,
Item 8 Financial Statements
and Supplementary Data on this Annual Report on Form 10-K, which is
hereby incorporated by reference.
 
 (a)
3.  Exhibits
  - 97
-
 Table of Contents
  
 EXHIBITINDEX
 
 Exhibit
      No.
              
              Description
      of Exhibits2.1(2)
              
              Agreement
      and Plan of Merger between Vestin Fund II, LLC and the
      Registrant3.1(1)
              
              Articles
      of Incorporation of the Registrant3.2(1)
              
              Bylaws
      of the Registrant3.3(1)
              
              Form
      of Articles Supplementary of the Registrant3.4(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.5(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.6
              
              Amended Articles of Incorporation of the
      Registrant4.1(1)
              
              Reference
      is made to Exhibits 3.1, 3.2 and 3.34.2(2)
              
              Specimen
      Common Stock Certificate4.3(1)
              
              Form
      of Rights Certificate4.4(4)
              
              Junior
      Subordinated Indenture10.1(1)
              
              Form
      of Management Agreement between Vestin Mortgage, Inc. and the
      Registrant10.2(1)
              
              Form
      of Rights Agreement between the Registrant and the rights
      agent10.9(4)
              
              Form
      of Purchase Agreement10.10(4)
              
              Amended
      and Restated Trust Agreement21.1(2)
              
              List
      of subsidiaries of the Registrant31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      135099.2R(3)
              
              Vestin
      Realty Mortgage II, Inc. Code of Business Conduct and
    Ethics
 
 (1)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 6 to our Form S-4
      Registration Statement filed on January 4, 2006 (File No.
      333-125121).(2)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 7 to our Form S-4
      Registration Statement filed on January 13, 2006 (File No.
      333-125121).(3)
              
              Incorporated
      herein by reference to the Transition Report on Form 10-K for the nine
      month transition period ended March 31, 2006 filed on September 7, 2006
      (File No. 000-51892)(7)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on June 27,
      2007 (File No. 000-51892)(5)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on January 4,
      2008 (File No. 000-51892)
 
 
  - 98
-
 Table of Contents
  
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Realty Mortgage II, Inc.By:
              /s/
      Michael V. ShustekMichael
      V. ShustekPresident
      and Chief Executive OfficerDate:
              March
      13, 2008
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
              
              Capacity
              
              Date/s/
      Michael V. Shustek
              
              President
      and Chief Executive Officer and Director
              
              March
      13, 2008Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer and Director
              
              March
      13, 2008Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              March
      13, 2008John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              March
      13, 2008Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              March
      13, 2008Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              March
      13, 2008Roland
      M. Sansone
 
  - 99
-
 Table of Contents