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 THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
fiscal year ended December 31,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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:
 
 Common
      Stock, $0.0001 Par Value
              
              Nasdaq
      Global Select Market(Title
      of each class)
              
              (Name
      of each exchange on which
registered)
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 None(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 [   ]Non-accelerated
      filer [X]
                (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, 2008Common
      Stock, $0.0001 Par Value
              
              $
              44,663,186
 
 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 4, 2009Common
      Stock, $0.0001 Par Value
              
              
              13,785,040
 
  
  
 TABLEOF CONTENTS
 
 PagePART IITEM 1.
              BUSINESS
              1ITEM 1A.
              RISK FACTORS
              12ITEM 1B.
              UNRESOLVED STAFF COMMENTS
              25ITEM 2.
              PROPERTIES
              25ITEM 3.
              LEGAL PROCEEDINGS
              25ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              25PART IIITEM 5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
              26ITEM 6.
              SELECTED FINANCIAL DATA
              30ITEM 7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              31ITEM 7A.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              48ITEM 8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA
              49ITEM 9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
              100ITEM 9A.
              CONTROLS AND PROCEDURES
              100ITEM 9A(T).
              CONTROLS AND PROCEDURES
              103ITEM 9B.
              OTHER INFORMATION
              103PART IIIITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
              103ITEM 11.
              EXECUTIVE COMPENSATION
              108ITEM 12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              108ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
              110ITEM 14.
              PRINCIPAL ACCOUNTING FEES AND SERVICES
              110PART IVITEM 15.
              EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              110EXHIBIT INDEX
              111SIGNATURES
              112
 
 
 
 
  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, 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, a
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. (“Vestin Originations”) that has continued the business of
brokerage, placement and servicing of real estate loans.  Vestin
Originations 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.
 
  - 1
-
 Table of Contents
  Vestin
Mortgage 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 have been formed to 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”).
 
 Segments
 
 We
operate as one business segment.
 
 Real
Estate Loan Objectives
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, 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 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 dividends 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, 2008, approximately 74% 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, along with a guarantee of the main principal of the
borrower, 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.
 
  - 2
-
 Table of Contents
  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:
 
 ·
              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, 2008, approximately 84% 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 it believes 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.
  - 3
-
 Table of Contents
  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, 2008, our actual
loan-to-value ratio for our loan portfolio as a whole, including allowances for
loan losses based on the most recent updated appraisals obtained and our
manager’s analysis was 84.01% on a weighted average basis.
 
 Loan-to-value
ratios are initially based on appraisals obtained at the time of loan
origination.  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.  Current loan-to-value ratios are generally based on the
most recent appraisals and include allowances for loan
losses.  Recognition of allowance for loan losses will result in a
maximum loan-to-value ratio of 100% per loan.
 
 Appraisals
may not reflect subsequent changes in value and 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 outstanding balance 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, 2008, had original terms
of 2 months to 24 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.  However, our manager generally 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.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  The weighted average term of outstanding loans, including
extensions, at December 31, 2008, was 20 months.
 
 As of
December 31, 2008, 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, 2008, we had approximately
$52.7 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 $60.0 million.  These loans had interest reserves of
approximately $5.7 million, of which our portion was approximately $4.9
million.  As of December 31, 2008, two of these loans, totaling
approximately $18.8 million, which had interest reserves, were considered
non-performing.  These loans’ interest reserves, totaling
approximately $3.2 million, have been suspended as of December 31, 2008 and we
no longer draw monthly interest income from them.  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.
  - 4
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 Table of Contents
  
 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.
 
 5.  Purchase of Real Estate Investments
from Affiliates.We may acquire real estate loans from our
affiliates, including our manager, that are accounted for at the principal
balance and no gain or loss is recognized by us or any
affiliate.  These purchases may include allowable fees and expenses,
but no other compensation for the loans.  Excluding the compensation
paid to our manager, all income generated and expense associated with the loans
so acquired shall be treated as belonging to us.
 
 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 by providing funds for or purchasing an
undivided interest in a loan meeting our investment guidelines described
above.  We participate in loans with our affiliates, subject to our
voluntary compliance with the guidelines of the North American Securities
Administrators Association (“NASAA Guidelines”).  The independent
directors on our Board may authorize a departure from NASAA
Guidelines.  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.
  - 5
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 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 fees for entering into secured borrowing
arrangements; however, we may receive revenue in any differential of the
interest spread, if applicable.
 
 As of
December 31, 2008, 68% 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 the
independent members of 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, 2008, our single largest loan, accounted for approximately 9.9% of our
stockholders’ equity.  The loan’s interest was at 12% per annum and as
of December 31, 2008, our portion of the outstanding balance of the loan was
approximately $16.0 million.  As of March 4, 2009, this loan was
non-performing.  For additional information regarding the above
non-performing loan see “Non-Performing Loans” 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 Report Form 10-K.
 
 As of
December 31, 2008, we had loans with common guarantors.  For
additional information regarding loans with common guarantors see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Consolidated Financial
Statements included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 9.  Reserve Fund.We
have established contingency working capital reserves of approximately 3% of our
capital to cover our unexpected cash needs.
 
 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.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 believe that the loans will be marketable or that a secondary market will
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 the independent members of our board of
directors.
 
  - 6
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  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,
due to, but not limited to, investment opportunities and subsequent sales and
foreclosures.
 
 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 initial 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, 2008,
approximately 34% 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 an initial 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, 2008, approximately 6% of our loans were in
this category.
 
 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 initial
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, 2008, approximately 12% 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
initial property appraisal and generally invest in loans for up to 75% of such
appraised value of the property.  As of December 31, 2008,
approximately 48% of our loans were in this category
 
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  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 initial value of the
property.  As of December 31, 2008, 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, 2008, approximately 84% of our loans
were secured by first deeds of trust.
 
 Second
Deed of Trust
 
 Up to 10%
of our loan portfolio may be secured by second deeds of trust; however, a higher
percentage of loans secured by second deeds of trust may be approved by our
board.  During September 2008, the board authorized us to allow loans
secured by second deeds of trust to constitute up to 15% of our loans, due to
loan restructuring and current business opportunities.  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, 2008, approximately 16% of our
loans were secured by a second deed of trust.  When funded, such loans
constituted less then 15% or our loans.  Subsequent decreases in the
value of loans secured by first deeds of trust, due to sales and foreclosures,
resulted in an increase in the percentage of our portfolio secured by second
deeds 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
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, 2008, none of our loans
had a prepayment penalty, although 25 of our loans, totaling approximately
$129.0 million, had an exit fee.  Out of the 25 loans with an exit
fee, 12 loans, totaling approximately $65.1 million, were considered
non-performing as of December 31, 2008.  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.
 
 Extensions
to Term of Loan
 
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  Our
original loan agreements generally permit extensions to the term of the loan by
mutual consent.  Such extensions are generally provided on loans where
the original term was 12 months or less and where a borrower requires additional
time to complete a construction project or negotiate take-out
financing.  However, our manager generally 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.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  As of December 31, 2008, our manager had granted
extensions on 18 loans, totaling approximately $157.1 million, of which our
portion was approximately $114.0 million.  Subsequent to their
extension, 9 of the 18 loans have become non-performing.  The loans,
which became non-performing after their extension, had a total principal amount
at December 31, 2008 of approximately $104.0 million, of which our portion is
approximately $79.4 million.
 
 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, 2008, we
had approximately $52.7 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 $60.0 million.  These loans had interest
reserves of approximately $5.7 million, of which our portion was approximately
$4.9 million.  As of December 31, 2008, two of these loans, totaling
approximately $18.8 million, which had interest reserves, were considered
non-performing.  These loans’ interest reserves, totaling
approximately $3.2 million, have been suspended as of December 31, 2008 and we
no longer draw monthly interest income from them.
 
 Balloon
Payment
 
 As of
December 31, 2008, 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, 2008, all of the loans in our real estate
loan portfolio were fixed rate loans, with the exception of one loan with a
variable interest rate, totaling approximately $14.8 million.  This
loan was non-performing as of December 31, 2008, see Peoria 180, LLC under
“Non-Performing Loans” in 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.
 
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  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.
 
 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:
 
 ·
              Declare
      dividends 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 should 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.
 
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  On
November 7, 2008, we entered into an agreement with Taberna Capital Management,
LLC (“Taberna”), in its capacity as collateral manager for certain collateral
debt obligation vehicles that are the holders of the junior subordinated notes,
providing for an amendment of the tangible net worth covenant (the “First
Supplemental Indenture”).  On December 31, 2008, we were not in
compliance with the revised tangible net worth covenant and the debt to tangible
net worth covenant in the First Supplemental Indenture.  On March 25,
2009, we entered into a letter agreement with Taberna providing for a waiver of
all financial covenants effective December 31, 2008 through June 30,
2009.  In addition, pursuant to the letter agreement we will exchange
$20 million of the junior subordinated notes for certain replacement securities,
which we expect to acquire for approximately $10 million of
cash.  This will reduce our obligation on the junior subordinated
notes to approximately $36.3 million, which should facilitate future compliance
with financial covenants set forth in the First Supplemental
Indenture.  This transaction would result in a net gain of
approximately $9 million including transaction costs.  In addition, we
are to pay additional interest equal to $250,000 per year, payable quarterly on
the same payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  For additional information regarding the First
Supplemental Indenture see Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part II, Item 8
Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 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.
 
 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.
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 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 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, 2008,
those entities had a total of 21 full-time and no part-time
employees.  Except as hereinafter noted, all employees are at-will
employees and none are covered by collective bargaining
agreements.  John Alderfer, our former CFO, is a party to an
employment, non-competition, confidentiality and consulting contract with Vestin
Group, Inc., the parent company of our manager, through December 31,
2016.
 
 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.
 
 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 our dividends to
shareholders.  Current economic conditions increase the risk of
defaults on our loans.
 
 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.
 
 As of
December 31, 2008, our non-performing assets were approximately $98.1 million,
representing approximately 75% of our stockholders’
equity.  Non-performing assets included approximately $73.7 million in
non-performing loans, net of allowance for non-performing loan losses of
approximately $71.2 million, and approximately $24.4 million of real estate held
for sale.  We believe that the level of non-performing assets is
largely attributable to difficulties in the real estate and credit
markets.  At this time, we are not able to predict how long such
difficult economic conditions will continue.
 
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  As of
December 31, 2008 and 2007, we had approximately $78.2 million and $12.9 million
in allowances for loan losses, respectively, resulting in net weighted average
loan-to-value ratios of 84.01% and 68.52%, respectively.  Not
including allowance for loan losses, our weighted average loan-to-value ratio,
as of December 31, 2008 and 2007, was 175.12%, and 72.64%, respectively,
primarily as a result of declining real estate values that have eroded the
market value of our collateral.  As a result, we may not be able to
recover the full amount of our loans if the borrower
defaults.  Moreover, any failure of a borrower to pay interest on
loans will reduce our revenues, the dividends we pay to stockholders and, most
likely, the value of our 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.
 
 The
current recession and constraints in the credit markets are adversely affecting
our operating results and financial condition.
 
 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,
2008, we conducted updated appraisals on 29 properties securing our loans,
representing approximately 81% of our total loan portfolio value as of December
31, 2008, which negatively impacted our weighted average loan to value
ratio.  Based on these updated appraisals and our manager’s analysis,
we recognized in 2008 approximately $83.7 million in provisions for loan
losses.  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.  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 in many cases to pay
back our loans.  Thus, an extended period of illiquidity in the credit
markets has resulted in a material increase in the number of our loans that are
not paid back on time.  Any sustained period of increased
delinquencies, defaults or foreclosures will 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.
 
 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
declare timely dividends 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.  This 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
are currently experiencing a trend of declining real estate values, which
increases the risk that our collateral will prove insufficient to protect our
loans.
 
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  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.  During the past 12 months, there has been
a significant decline in real estate values in many of the markets where we
operate, resulting in a decline in the estimated value of the real estate
securing our loans.
 
 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, 2008, 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, 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.
 
 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.
 
 We
may not be able to maintain compliance with all of the financial covenants
contained in the indenture governing our junior subordinated
notes.  Failure to comply could result in acceleration of all amounts
due under such notes, resulting in severe disruption of our
operations.
 
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  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.  The amount currently due on such notes
is approximately $56.4 million.  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.  The First Supplemental Indenture
governing the junior subordinated notes sets forth a number of financial
covenants.  On December 31, 2008, we were not in compliance with the
revised tangible net worth covenant and the debt to tangible net worth covenant
in the First Supplemental Indenture.  On March 25, 2009, we entered
into a letter agreement with Taberna providing for a waiver of all financial
covenants effective December 31, 2008 through June 30, 2009.  In
addition, pursuant to the letter agreement we will exchange $20 million of the
junior subordinated notes for certain replacement securities, which we expect to
acquire for approximately $10 million of cash.  This will reduce our
obligation on the junior subordinated notes to approximately $36.3 million,
which should facilitate future compliance with financial covenants set forth in
the First Supplemental Indenture.  In addition, we are to pay
additional interest equal to $250,000 per year, payable quarterly on the same
payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  This transaction would result in a net gain of
approximately $9 million including transaction costs.  If we fail to
perform our obligations under the letter agreement or if we are unable to comply
with the financial covenants after July 1, 2009, then, absent another waiver
from the note holders, the lenders could declare an event of default and could
seek to accelerate all amounts due under the junior subordinated
notes.  We might not have cash resources sufficient to pay the amounts
due in the event of acceleration.  As a result, our business
operations would suffer severe disruption if the lenders sought to accelerate
payment of the junior subordinated notes.  In addition, an unresolved
event of default under the indenture would prevent us from paying any dividends
or other dividends to our shareholders.
 
 The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
 We may
borrow up to 70% of the fair market value of our outstanding real estate loans
at any time.  We currently have outstanding approximately $56.4
million of trust preferred securities bearing interest at
8.75%.  These borrowings will require us to carefully manage our cost
of funds.  In order to benefit from the trust preferred securities, 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 making 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 financial covenants in the indenture governing the junior
subordinated notes 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 may 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.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part IV, Item 15 of
this Report Form 10-K).  The participation interest is at 11% on the
outstanding balance.  We incurred approximately $0.9 million in
finance costs related to the secured borrowings, these costs are being amortized
to interest expense over the term of the agreements.  As of December
31, 2008, we had $10.6 million in funds, including approximately $0.7 million in
interest reserves, used under Inter-creditor Agreements as compared to none as
of December 31, 2007.
 
 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 declare dividends.
  - 15
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 There
is a substantial risk that we would be unable to raise additional funding if
needed to meet our obligations or expand our loan portfolio.
 
 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.
 
 Our
ability to borrow funds for this purpose, or to expand our loan portfolio, is
doubtful in light of current market conditions.  In addition, our
ability to raise funds through an equity financing would be hindered by the
current price of our stock.  If we raise capital through an equity
offering, this may result in substantial dilution to our current
stockholders.  Any debt financing may be expensive and might include
restrictive covenants that would constrain our ability to declare dividends to
our shareholders.  We may not be able to raise capital on reasonable
terms, if at all, in the current market environment.
 
 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.
 
 ·
              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.
 
  - 16
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  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.  See Note F – Real Estate Held for Sale 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.
 
 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.
 
 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
dividends to stockholders.  As a result of the current economic
recession, our revenues and dividends have been reduced.
 
 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 dividends 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,
      2008, none of our loans had a prepayment penalty, although 25 of our
      loans, totaling approximately $129.0 million, had an exit
      fee.  Out of the 25 loans with an exit fee, 12 loans, totaling
      approximately $65.1 million, were considered non-performing as of December
      31, 2008  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.
 
 Investments
in second deeds of trust and wraparound loans are subject to the rights of the
first deed of trust.
 
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  We invest
in second deeds of trust and, in rare instances, wraparound, or all-inclusive,
real estate loans.  Our board is required to approve our investing
more than 10% of our assets in second deeds of trust.  During
September 2008, the board authorized us to allow loans secured by second deeds
of trust to constitute up to 15% of our loans, due to loan restructuring and
current business opportunities.  In a second deed of trust, our rights
as a lender, including our rights to receive payment on foreclosure, will be
subject to the rights of the first deed of trust.  In a wraparound
real estate loan, our rights will be similarly subject to the rights of a first
deed of trust, but the aggregate indebtedness evidenced by our loan
documentation will be the first deed of trust plus the new funds we
invest.  We would receive all payments from the borrower and forward
to the senior lender its portion of the payments we receive.  Because
both of these types of loans are subject to the first deed of trust’s right to
payment on foreclosure, we incur a greater risk when we invest in each of these
types of loans.  As of December 31, 2008, approximately 16% of our
loans were secured by a second deed of trust.  When funded, such loans
constituted less then 15% or our loans.  Subsequent decreases in the
value of loans secured by first deeds of trust, due to sales and foreclosures,
resulted in an increase in the percentage of our portfolio secured by second
deeds of trust.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington, with approximately 40%
of our loans in Nevada.  Depending on the market and on our company’s
performance, we may expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southwestern 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 are a
party 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.  The increased legal costs
have adversely impacted our operating results.  As of December 31,
2008, we have incurred legal expenses of approximately $2.7 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
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 the independent members of 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.
 
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  Our
ability to achieve our investment objectives and to declare dividends 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, 2008, our loans were in the following states:  Arizona,
California, Hawaii, Nevada, Oklahoma, Oregon, Texas and
Washington.  Depending on the market and on our company’s performance,
we may expand our investments throughout the United States.  However,
our manager has limited experience outside of the Western and Southwestern
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.
 
 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), 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 individuals were to
cease their employment with our manager, our operating results could
suffer.  None of the key personnel of our manager is 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.
 
  - 19
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  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 in our management agreement 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.
 
 We paid
our manager a management fee of approximately $1.1 million for the year ended
December 31, 2008.  We paid our manager approximately $0.6 million for
unpaid fees owed to our manager from our borrowers.  These unpaid fees
became due and payable on demand from us.  In addition, Vestin
Mortgage and Vestin Originations received a total of approximately $4.1 million
and $5.2 million, respectively, in fees directly from borrowers for the year
ended December 31, 2008.  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 75% of the
assets managed by Vestin Mortgage as of December 31, 2008.
 
 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.
 
 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.
 
  - 20
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  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
dividends 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 declare dividends 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.
 
 Dividends
from a REIT are currently taxed at a higher rate than corporate
dividends.
 
 Under the
Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax
rate on both dividends 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 dividends
generally will not apply to our dividends (except those dividends identified by
the company as “capital gain dividends” which are taxable as long-term capital
gain) and therefore such dividends 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 dividends may cause the market to devalue our common stock relative to
stock of those corporations whose dividends qualify for the lower rate of
taxation.  Please note that, as a general matter, dividends 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, 2008, we held 11 properties with a total carrying value of
approximately $24.4 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 12% of our assets as of December 31,
2008.
 
 Taxable
REIT subsidiaries are subject to corporate-level tax, which may devalue our
common stock relative to other companies.
 
  - 21
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  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.
 
 We
may endanger our REIT status if the dividends 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 dividends 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 dividends from a taxable REIT subsidiary.  If, for
any taxable year, the dividends 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, 2008, 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 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.
  - 22
-
 Table of Contents
  
 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
      dividends;
 
 ·
              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;
 
 ·
              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).
  - 23
-
 Table of Contents
  
 ·
              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.
 
 ·
              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
  - 24
-
 Table of Contents
  
 ·
              “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:
 
 ·
              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.
              UNRESOLVEDSTAFF
COMMENTS
 
 None.
 
 ITEM
      2.
              PROPERTIES
 
 Our
manager shares office facilities, in Las Vegas, Nevada, with its parent
corporation, Vestin Group, in a building that 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.
  - 25
-
 Table of Contents
  
 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
 
 2008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    13.50
                    
                    
                    $
                    7.23Second
      Quarter
                    
                    $
                    8.94
                    
                    
                    $
                    2.78Third
      Quarter
                    
                    $
                    5.27
                    
                    
                    $
                    2.55Fourth
      Quarter
                    
                    $
                    5.05
                    
                    
                    $
                    2.06
 
 Holders
 
 As of
March 4, 2009, there were approximately 1,470 holders of record of 13,785,040
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
dividends 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
dividends 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.  During June 2008, our Board of Directors decided to
suspend the payment of dividends.  We will continue to comply with the
REIT requirements and will distribute at least ninety percent (90%) of our
annual taxable income.  Our Board of Directors will closely monitor
our operating results in order to determine when dividends should be
reinstated.  Dividends declared per share for the year ended December
31, 2008 and December 31, 2007, are listed below:
  - 26
-
 Table of Contents
  
 Date
      of Declaration
                    Record
      Date
                    Date
      Paid
                    
                    Dividend
      Per Share **January
      16, 2008
                    February
      8, 2008
                    February
      28, 2008
                    
                    $
                    0.11February
      21, 2008
                    March
      7, 2008
                    March
      28, 2008
                    
                    
                    0.11March
      19, 2008
                    April
      4, 2008
                    April
      25, 2008
                    
                    
                    0.11April
      24, 2008
                    May
      12, 2008
                    May
      30, 2008
                    
                    
                    0.09May
      22, 2008
                    June
      9, 2008
                    June
      27, 2008
                    
                    
                    0.08Dividends
      declared per common share for year ended December 31, 2008
                    
                    $
                    0.49
 
 Date
      of Declaration
                    Record
      Date
                    Date
      Paid
                    
                    Dividend
      Per Share **January
      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
 
 *
Thedividend per share prices
have been adjusted to reflect the 1-for-2.6 reverse stock split issued on
December 31, 2007.
 
 **
Dividendsare rounded to two
decimal places.
 
 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, 2008 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.
  - 27
-
 Table of Contents
  
 
 
 Date
                    
                    Vestin
      Realty Mortgage II, Inc
                    
                    
                    NASDAQ
      Composite
                    
                    
                    FTSE
      NAREIT MortgageMay
      1, 2006
                    
                    $
                    100.00
                    
                    
                    $
                    100.00
                    
                    
                    $
                    100.00June
      30, 2006
                    
                    $
                    95.04
                    
                    
                    $
                    93.78
                    
                    
                    $
                    101.54September
      30, 2006
                    
                    $
                    116.50
                    
                    
                    $
                    97.82
                    
                    
                    $
                    101.47December
      31, 2006
                    
                    $
                    121.83
                    
                    
                    $
                    105.28
                    
                    
                    $
                    108.32March
      31, 2007
                    
                    $
                    124.59
                    
                    
                    $
                    105.76
                    
                    
                    $
                    92.87June
      30, 2007
                    
                    $
                    140.55
                    
                    
                    $
                    113.22
                    
                    
                    $
                    86.69September
      30, 2007
                    
                    $
                    123.49
                    
                    
                    $
                    117.98
                    
                    
                    $
                    62.29December
      31, 2007
                    
                    $
                    97.92
                    
                    
                    $
                    114.95
                    
                    
                    $
                    62.45March
      31, 2008
                    
                    $
                    91.00
                    
                    
                    $
                    98.79
                    
                    
                    $
                    49.12June
      30, 2008
                    
                    $
                    31.87
                    
                    
                    $
                    99.80
                    
                    
                    $
                    46.88September
      30, 2008
                    
                    $
                    41.33
                    
                    
                    $
                    88.56
                    
                    
                    $
                    43.09December
      31, 2008
                    
                    $
                    33.46
                    
                    
                    $
                    66.97
                    
                    
                    $
                    38.86
 
 Recent Sales of Unregistered
Securities
 
  - 28
-
 Table of Contents
  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 dividends 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.
 
 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 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 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, 2008, we had
purchased 1,198,573 shares as treasury stock through the repurchase program
noted above.  These shares are carried on our books at cost totaling
approximately $5.7 million.
 
 The
following is a summary of our stock purchases during the three months ended
December 31, 2008, as required by Regulation S-K, Item 703.
 
 Period
                      
                      (a)
      Total Number of Shares Purchased
                      
                      
                      (b)
      Average Price Paid per Share
                      
                      
                      (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                      
                      
                      (d)
      Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be
      Purchase Under the Plans or ProgramsOctober
      1 – October 31, 2008
                      
                      
                      --
                      
                      
                      $
                      --
                      
                      
                      
                      --
                      
                      
                      $
                      6,996,000November
      1 – November 30, 2008
                      
                      
                      556,507
                      
                      
                      
                      3.09
                      
                      
                      
                      556,507
                      
                      
                      
                      5,278,000December
      1 – December 31, 2008
                      
                      
                      214,655
                      
                      
                      
                      4.52
                      
                      
                      
                      214,655
                      
                      
                      
                      4,308,000Total
                      
                      
                      771,162
                      
                      
                      $
                      7.38
                      
                      
                      
                      771,162
                      
                      
                      $
                      4,308,000
 
  - 29
-
 Table of Contents
  
 ITEM
      6.
              SELECTED
      FINANCIALDATA
 
 Balance
      atVestin
      Realty Mortgage II, Inc.
                  
                  12/31/2008
                  
                  
                  12/31/2007
                  
                  
                  12/31/2006
                  
                  
                  12/31/2005
                  
                  
                  12/31/2004
                  
                  
                  6/30/2005(Unaudited)Balance
      Sheet Data:Investments
      in real estate loans (net of allowance)
                  
                  $
                  146,834,000
                  
                  
                  $
                  278,190,000
                  
                  
                  $
                  221,849,000
                  
                  
                  $
                  227,875,000
                  
                  
                  $
                  222,716,000
                  
                  
                  $
                  217,553,000Cash,
      cash equivalents, certificates of deposits and marketable securities –
      related party
                  
                  $
                  13,522,000
                  
                  
                  $
                  22,803,000
                  
                  
                  $
                  19,178,000
                  
                  
                  $
                  47,893,000
                  
                  
                  $
                  78,690,000
                  
                  
                  $
                  11,566,000Real
      estate held for sale
                  
                  $
                  24,433,000
                  
                  
                  $
                  28,563,000
                  
                  
                  $
                  30,079,000
                  
                  
                  $
                  38,639,000
                  
                  
                  $
                  39,805,000
                  
                  
                  $
                  51,215,000Real
      estate held for sale-seller financed
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  14,774,000
                  
                  
                  $
                  22,887,000
                  
                  
                  $
                  13,131,000
                  
                  
                  $
                  12,631,000Assets
      under secured borrowing
                  
                  $
                  10,600,000
                  
                  
                  $
                  --
                  
                  
                  $
                  13,796,000
                  
                  
                  $
                  19,754,000
                  
                  
                  $
                  25,689,000
                  
                  
                  $
                  25,655,000Total
      assets
                  
                  $
                  199,482,000
                  
                  
                  $
                  336,168,000
                  
                  
                  $
                  303,042,000
                  
                  
                  $
                  361,949,000
                  
                  
                  $
                  385,358,000
                  
                  
                  $
                  339,470,000Long
      term liabilities
                  
                  $
                  56,350,000
                  
                  
                  $
                  60,100,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --Total
      liabilities
                  
                  $
                  68,957,000
                  
                  
                  $
                  64,409,000
                  
                  
                  $
                  24,556,000
                  
                  
                  $
                  46,809,000
                  
                  
                  $
                  28,316,000
                  
                  
                  $
                  28,390,000Stockholders'
      equity
                  
                  $
                  130,525,000
                  
                  
                  $
                  271,759,000
                  
                  
                  $
                  278,486,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --Members’
      equity
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  315,140,000
                  
                  
                  $
                  357,042,000
                  
                  
                  $
                  311,080,000
 
 
 For
      the Year Ended
                  
                  
                  For
      the Year Ended
                  
                  
                  For
      the Twelve Months Ended
                  
                  
                  For
      the Six
                    Months
      Ended
                  
                  
                  For
      the Six
                    Months
      Ended
                  
                  
                  For
      the Year Ended12/31/2008
                  
                  
                  12/31/2007
                  
                  
                  12/31/2006
                  
                  
                  12/31/2005
                  
                  
                  12/31/2004
                  
                  
                  6/30/2005(Unaudited)Income
      Statement Data:Revenues
                  
                  $
                  19,307,000
                  
                  
                  $
                  29,010,000
                  
                  
                  $
                  22,053,000
                  
                  
                  
                  11,738,000
                  
                  
                  $
                  15,950,000
                  
                  
                  $
                  27,549,000Operating
      expenses
                  
                  
                  97,652,000
                  
                  
                  
                  11,879,000
                  
                  
                  
                  10,624,000
                  
                  
                  
                  1,514,000
                  
                  
                  
                  3,410,000
                  
                  
                  
                  8,730,000Operating
      income (loss)
                  
                  
                  (78,345,000
                  )
                  
                  
                  17,131,000
                  
                  
                  
                  11,429,000
                  
                  
                  
                  10,224,000
                  
                  
                  
                  12,540,000
                  
                  
                  
                  18,819,000Non-operating
      income (loss)
                  
                  
                  (2,970,000
                  )
                  
                  
                  1,843,000
                  
                  
                  
                  1,426,000
                  
                  
                  
                  490,000
                  
                  
                  
                  249,000
                  
                  
                  
                  409,000Income
      (loss) from real estate held for sale
                  
                  
                  (48,854,000
                  )
                  
                  
                  (2,046,000
                  )
                  
                  
                  2,996,000
                  
                  
                  
                  (170,000
                  )
                  
                  
                  (903,000
                  )
                  
                  
                  (10,340,000
                  )Net
      income (loss)
                  
                  $
                  (130,169,000
                  )
                  
                  $
                  16,928,000
                  
                  
                  $
                  15,851,000
                  
                  
                  
                  10,544,000
                  
                  
                  $
                  11,886,000
                  
                  
                  $
                  8,888,000Income
      (loss) from operations per common share / membership unit
                  
                  $
                  (5.33
                  )
                  
                  $
                  1.15
                  
                  
                  $
                  0.77
                  
                  
                  $
                  0.62
                  
                  
                  $
                  0.68
                  
                  
                  $
                  1.08Basic
      and diluted earnings (loss) per common share / membership
    unit
                  
                  $
                  (8.86
                  )
                  
                  $
                  1.14
                  
                  
                  $
                  1.06
                  
                  
                  
                  0.64
                  
                  
                  $
                  0.65
                  
                  
                  $
                  0.51Cash
      dividends declared per common share / cash distributions per membership
      unit
                  
                  $
                  0.49
                  
                  
                  $
                  1.50
                  
                  
                  $
                  1.51
                  
                  
                  $
                  0.52
                  
                  
                  $
                  0.61
                  
                  
                  $
                  1.16Weighted
      average common shares / membership units
                  
                  
                  14,695,756
                  
                  
                  
                  14,909,651
                  
                  
                  
                  14,935,585
                  
                  
                  
                  16,441,433
                  
                  
                  
                  18,370,442
                  
                  
                  
                  17,382,394
 
 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.
  - 30
-
 Table of Contents
  
 ITEM
      7.
              MANAGEMENT’S
      DISCUSSIONAND 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, 2008, December 31, 2007,
and the twelve months ended December 31, 2006.  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, 2008, June 30, 2008 and September 30, 2008.
 
 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.  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.  Our estimates of
the value of collateral securing our loans may change, or the value of the
underlying property could decline subsequent to the date of our
evaluation.  As a result, such estimates are not guarantees of the
future value of the collateral.  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.
  - 31
-
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 Our
recent operating results have been adversely affected by increases in allowances
for loan losses and increases in non-performing assets.  This negative
trend accelerated sharply during the year ended December 31, 2008.  We
recognized a provision for loan losses of approximately $83.7 million for the
year ended December 31, 2008.  Recognition of this provision was
driven largely by the increase in non-performing assets, coupled with the
deteriorating economic situation that has driven down real estate values and
limited the availability of credit to our borrowers who had anticipated securing
take-out financing to repay our loan.  As of December 31, 2008, we had
20 loans considered non-performing (i.e., 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).  These loans are currently carried on
our books at a value of approximately $73.7 million, net of allowance for loan
losses of approximately $71.2 million.  These loans have been placed
on non-accrual of interest status and are the subject of pending foreclosure
proceedings.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $98.1 million or
49% of our total assets as of December 31, 2008, as compared to approximately
$48.0 million or 14% of our total assets as of December 31, 2007.  At
December 31, 2008, non-performing assets consisted of approximately $24.4
million of real estate held for sale and approximately $73.7 million of
non-performing loans, net of allowance for loan losses.  None of the
real estate held for sale as of December 31, 2008 was generating any income from
rentals or other sources.  See Note F – Real Estate Held for Sale and
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.
 
 We
believe that the significant increase in the level of our non-performing assets
is a direct result of the deterioration of the economy and credit
markets.  As the economy has weakened and credit has become more
difficult to obtain, many of our borrowers who develop and sell commercial real
estate projects have been unable to complete their projects, obtain takeout
financing or have been otherwise adversely impacted.  Our exposure to
the negative developments in the credit markets and general economy has likely
been increased by our business strategy, which entails more lenient underwriting
standards and expedited loan approval procedures.  Moreover, declining
real estate values in the principal markets in which we operate has in many
cases eroded the current value of the security underlying our
loans.
 
 We expect
that the weakness in the credit markets and the weakness in lending will
continue to have an adverse impact upon our markets for the foreseeable
future.  This may result in a further increase in defaults on our
loans and we might be required to record additional reserves based on decreases
in market values or we may be required to restructure loans.  This
increase in loan defaults has materially harmed our operating results and led to
the suspension of dividends to our stockholders.  For additional
information regarding our non-performing loans see “Non-Performing Loans” 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 Report Form 10-K.
 
 As of
December 31, 2008, we had loans with common guarantors.  For
additional information regarding loans with common guarantors see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Consolidated Financial
Statements included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 As of
March 4, 2009, one performing loan, totaling $12.6 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 As of
December 31, 2008, our loan-to-value ratio was 84.01%, net of 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.  Additional marked increases in loan defaults accompanied
by a rapid decline in real estate values, as evidenced by updated appraisals
generally prepared on an “as-is-basis,” will have a material adverse effect upon
our financial condition and operating results.  The current
loan-to-value ratio is primarily a result of declining real estate values, which
have eroded the market value of our collateral.
  - 32
-
 Table of Contents
  
 As of
December 31, 2008, we have provided a specific reserve allowance for 17
non-performing loans and 7 performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager.  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.
 
 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 and through our secured borrowing agreements, to materially increase the
funds we will have available to invest from any other sources.  See
discussion under – “Capital and Liquidity.”
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington.
 
 SUMMARY
OF FINANCIAL RESULTS
 
 The
Year Ended December 31, 2008
 
 Total
Revenues:  For the year ended December 31, 2008, total revenues
were approximately, $19.3 million compared to approximately $29.0 million during
the year ended December 31, 2007, a decrease of approximately $9.7 million or
33%.  Revenues were primarily affected by the following
factors:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $18.6 million during the year ended December 31, 2008, compared to
      approximately $27.0 million during the same period in 2007, primarily due
      to the increase in non-performing loans referred to above.  Our
      revenue is also dependent upon the balance of our investment in real
      estate loans and the interest earned on these loans.  As of
      December 31, 2008, our investment in real estate loans was approximately
      $225.0 million compared to our investment in real estate loans of
      approximately $291.1 million as of December 31, 2007.  This
      decline is largely attributable to the increase in non-performing assets,
      which has reduced the amount of cash available for investment in new loans
      and the increase of real estate owned properties acquired through the
      foreclosures of our investments in real estate loans.  For
      additional information see 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 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.  We had no comparable gain during the same period in
      2008.
 
 ·
              During
      the year ended December 31, 2007, we earned $0.6 million in other income
      from principal payments on notes receivable that were fully reserved,
      compared to $0.1 million during the same period in
  2008.
 
 Total Operating
Expenses:  For the year ended December 31, 2008, total
operating expenses were approximately $97.7 million compared to approximately
$11.9 million during the year ended December 31, 2007, an increase of
approximately $85.8 million or 722%.  Expenses were primarily affected
by the following factors:
  - 33
-
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 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the year ended December 31, 2008, we
      recognized provisions for loan losses totaling approximately $83.7
      million, compared to $3.1 million for the same period in
      2007.  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 Report Form 10-K.  During the
      year ended December 31, 2008, we foreclosed upon ten loans, totaling
      approximately $44.9 million with expenses of approximately $0.3 million,
      and classified the collateralized properties as real estate held for
      sale.  See 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 Report Form
  10-K.
 
 ·
              We
      recognized approximately $5.3 million of interest expense during the year
      ended December 31, 2008 related to the junior subordinated notes issued,
      during June 2007, in connection with the trust preferred financing,
      compared to approximately $2.7 million during the same period in
      2007.  During the year ended December 31, 2008, we recognized
      approximately $1.1 million of interest expenses related to secured
      borrowings held during the period compared to approximately $0.5 million
      of the same period in 2007.
 
 ·
              Professional
      fees increased approximately $0.8 million during the year ended December
      31, 2008 compared to the same period in 2007, primarily due to the legal
      fees relating to the legal actions that have been filed against us in
      connection with the REIT conversion.  See Note O – Legal Matters Involving The
      Company of the Notes to the Consolidated Financial Statements
      included in Part II, Item 8 Financial Statements and
      Supplementary Data of this Report Form
  10-K.
 
 ·
              During
      the year ended December 31, 2008, we recognized approximately $0.8 million
      in provision for doubtful accounts related to receivables from borrowers
      for reimbursement of property taxes, accrued interest and other related
      expenses in connection with our investment in real estate
      loans.
 
 ·
              Other
      expenses increased approximately $0.8 million for the year ended December
      31, 2008, as a result of expenses related to non-performing
      loans.
 
 Total Non-Operating Income
(Loss):  For the year ended December 31, 2008 total
non-operating loss was approximately $3.0 million compared to non-operating
income of approximately $1.8 million during the year ended December 31, 2007, a
decline of approximately $4.8 million or 261%.  This is decline is
primarily due to the following factors:
 
 ·
              During
      the year ended December 31, 2008, we recorded a loss on sale of real
      estate loan of approximately $2.8 million as a result of the sale a non
      performing loan, Silver Star Destinations, LLC, to an unrelated third
      party for approximately $9.9 million, of which our portion was
      approximately $9.5 million.  At the time of the sale, the loan
      was carried at approximately $12.3 million, which included an allowance
      for loan loss of approximately $13.4
million.
 
 ·
              We
      recognized an other-than-temporary impairment of our marketable securities
      – related party, totaling approximately $2.2 million, for the year ended
      December 31, 2008.  In addition, we experienced a decrease of
      approximately $1.2 million of interest income from banking institutions
      due to a decrease in cash balances referred to
  above.
 
 ·
              This
      decrease was partially off set by a gain of approximately $1.6 million,
      relating to the purchase of outstanding debt at a discount to the face
      amount of such debt.  No assurances can be given that any
      additional purchases of debt at a discount will occur in future
      periods.
 
 Total Loss from Real Estate Held for
Sale:  For the year ended December 31, 2008, total losses from
real estate held for sale were approximately $48.9 million compared to
approximately $2.0 million during the year ended December 31, 2007, an increase
of approximately $46.8 million or 2288% due in significant part to the following
factors:
  - 34
-
 Table of Contents
  
 ·
              We
      wrote down approximately $47.2 million on 12 properties held for sale
      during the year ended December 31, 2008.  These write downs
      resulted from declining real estate values which adversely impacted the
      value of the properties we acquired through foreclosure.  For
      additional information see 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 Report Form 10-K.  As of
      December 31, 2008, we had 11 properties held for sale totaling
      approximately $24.4 million compared to two properties held for sale as of
      December 31, 2007 totaling approximately $28.6
  million.
 
 ·
              We
      recorded a gain on sale of real estate held for sale related to seller
      financed loans of approximately $2.0 million during the year ended
      December 31, 2007, as a result of two seller financed loans being paid in
      full.  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 financed, 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.  We have no real estate held for sale – seller financed
      as of December 31, 2008 and no related income during the year ended
      December 31, 2008.
 
 Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to declare dividends, 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
declare dividends based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our dividends may at times be
more or less than our reported earnings as computed in accordance with
GAAP.  During the year ended December 31, 2008, we declared cash
dividends approximately $0.49 per common share.  For tax purposes,
approximately $0.03 per common share is classified as ordinary dividends and the
balance of approximately $0.46 per common share is classified as non-dividend
distributions.
 
 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.  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 dividends 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 dividends that
we must declare 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 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 carry back dividends made, for example, in 2008 to 2007, for the purposes of
zeroing out our 2007 REIT taxable income.  As a result, included in
the dividends of approximately $7.3 million declared during the year ended
December 31, 2008 is approximately $0.4 million that was used to reduce our 2007
REIT taxable income to zero.
  - 35
-
 Table of Contents
  
 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,
2008:
 
 For
      the
                      Year
      EndedDecember
      31, 2008Net
      loss, as reported
                    
                    $
                    (130,169,000
                    )Add
      (deduct):Provision
      for loan losses
                    
                    
                    83,712,000Write
      down on real estate held for sale
                    
                    
                    47,225,000Net
      tax loss on foreclosure of real estate loans
                    
                    
                    (18,896,000
                    )Book
      loss on sale of real estate held for sale
                    
                    
                    259,000Tax
      loss on sale of real estate held for sale
                    
                    
                    (756,000
                    )Book
      loss on sale of real estate loan
                    
                    
                    2,760,000Tax
      loss on sale of real estate loan
                    
                    
                    (16,190,000
                    )Recovery
      of allowance for doubtful notes receivable
                    
                    
                    (86,000
                    )Provision
      for doubtful accounts related to receivable
                    
                    
                    754,000Payment
      on accrued legal expenses
                    
                    
                    (1,049,000
                    )Non-dividend
      distribution from VRM I
                    
                    
                    (75,000
                    )Book
      tax difference of TRS II, Inc Income
                    
                    
                    500,000Taxable
      distribution VRM II received from TRS II, Inc.
                    
                    
                    551,000Tax
      loss on note receivable deemed worthless which was fully
      reserved
                    
                    
                    (505,000
                    )Impairment
      of marketable securities-related party
                    
                    
                    2,228,000Total
      taxable loss
                    
                    
                    (29,737,000
                    )Less
      : Taxable Income attributable to TRS II, Inc.
                    
                    
                    (551,000
                    )Estimated
      REIT taxable loss (prior to deductions for dividends paid)
                    
                    $
                    (30,288,000
                    )
 
 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 $48.9
      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.
 
 ·
              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:
  - 36
-
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 ·
              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 four cemeteries and eight mortuaries in
      Hawaii.
 
 ·
              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.
 
 ·
              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.
 
 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.
 
  - 37
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  Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to declare dividends, 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
declare dividends based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our dividends 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.  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 dividends 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 dividends that
we must declare 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 dividends 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 dividends 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
 
  - 38
-
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  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.
 
 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 four cemeteries and eight 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.
  - 39
-
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 ·
              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.
 
 ·
              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.
 
 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 Fund II and
us from the sale of shares or membership units.
 
 During
the year ended December 31, 2008, net cash flows provided by operating
activities approximated $7.8 million.  Operating cash flows were
adversely impacted by the payment of approximately $2.1 million in legal fees
relating to legal actions that have been filed against us in connection with the
REIT conversion and RightStar.  In addition, we incurred approximately
$47.2 million in write-downs on real estate held for sale and approximately
$83.7 million in provisions for loan losses, during the year ended December 31,
2008.  These write-downs and provisions represent the decreases in the
fair value of these properties, which will affect the amount of proceeds we will
receive from future sales of these assets.  Cash flows related to
investing activities consisted of cash provided by loan payoffs and sales of
real estate loans of approximately $103.1 million and cash used for new
investments and purchases of real estate loans totaling approximately $103.6
million.  Cash flows used for financing activities consisted of
dividends to stockholders, net of reinvestment, of approximately $8.6 million
and the purchase of debt totaling approximately $2.2
million.  Financing activities also consisted of cash flows used for
the purchase of our own stock totaling approximately $4.3
million.
  - 40
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 At
December 31, 2008, we had approximately $8.0 million in cash, $0.5 million in
marketable securities – related party and approximately $199.5 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales, sales of real estate held
for sale and/or borrowings.  We believe we have sufficient working
capital to meet our operating needs in the near term, provided that payment on
the junior subordinated notes discussed below is not accelerated.  In
the event that our current cash resources prove insufficient, we have no
facility in place to raise additional funds and we believe that, given current
market conditions, it might be very difficult for us to increase our capital
resources, either from lenders or equity investors.  In addition to
the foregoing assets, as of December 31, 2008, we had approximately $5.0 million
in restricted cash, which relates related to the First Supplemental Indenture,
where by Taberna is entitled to draw upon such letters of credit to pay
principal and interest on the junior subordinated notes if an Event of Default
has occurred.  The letters of credit may not be subordinated to any of
our Senior Debt.
 
 Since we
comply with the REIT requirements and distribute at least ninety percent (90%)
of our annual taxable income, 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.  We rely primarily upon repayment of
outstanding loans and proceeds from sales of real estate held for sale to
provide capital for investment in new loans.  The significant level of
defaults on outstanding loans has reduced 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 has diminished our capital resources
and impaired our ability to invest in new loans.  During June 2008,
our Board of Directors decided to suspend the payment of
dividends.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.  We
will continue to comply with the REIT requirements and will distribute at least
ninety percent (90%) of our annual taxable income.
 
 Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale totaling approximately $73.7 million and $24.4
million, respectively, as of December 31, 2008, compared to approximately $19.4
million and $28.6 million, respectively, as of December 31, 2007.  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 have increased in significant part as
a result of conditions in the real estate and credit markets.  We
believe that the continued weakness in real estate markets may result in
additional losses on our real estate held for sale.
 
 As of
March 4, 2009, one performing loan, totaling $12.6 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 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.  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 in many cases to pay
back our loans.  Thus, we have had to work with some of our borrowers
to either: modify, restructure and/or extend their loans in order to keep or
restore the loans to performing status.  Our manager will continue to
evaluate our loan portfolio in order to minimize risk associated with current
market conditions.
 
 We have
no current plans to sell any new shares except through our dividend reinvestment
program.  As of March 4, 2009, approximately 10% 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.
  - 41
-
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 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
original indenture governing the notes included a number of covenants including
the following financial covenants:  (i) we were required to maintain a
Tangible Net Worth of not less than $225 million, (ii) our trailing twelve
months EBITDA was required to be not 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
September 30, 2008, we were not in compliance with the tangible net worth
covenant included in the indenture.  On November 7, 2008, we entered
into an agreement with Taberna Capital Management, LLC (“Taberna”), in its
capacity as collateral manager for certain collateral debt obligation vehicles
that are the holders of the junior subordinated notes, providing for an
amendment of the tangible net worth covenant (the “First Supplemental
Indenture”).  As amended, the tangible net worth covenant will require
us to maintain Tangible Net Worth of not less than the lesser of $150 million or
2.5 times the then outstanding principal balance of junior subordinated notes
(which amount is currently approximately $56.4 million.)  Pursuant to
the Taberna Letter Agreement and First Supplemental Indenture agreement, the
EBITDA covenant in the indenture was also amended to provide that our EBITDA for
the four preceding quarters shall not be less than 1.5 times Interest Expense
for such period, provided that, for one quarter only, EBITDA shall not be less
than 1.2 times Interest Expense for the four quarters ending June 30,
2009.  The First Supplemental Indenture also requires us to post a
$3,750,000 letter of credit by November 12, 2008 and a $1,250,000 letter of
credit by April 12, 2009.  Taberna would be entitled to draw upon such
letters of credit to pay principal and interest due on the junior subordinated
notes if we are subject to an Event of Default under the
indenture.  For further information about the First Supplemental
Indenture, see Note I to our financial statements.
 
 On
December 31, 2008, we were not in compliance with the revised tangible net worth
covenant and the debt to tangible net worth covenant in the First Supplemental
Indenture.  On March 25, 2009, we entered into a letter agreement with
Taberna providing for a waiver of all financial covenants effective December 31,
2008 through June 30, 2009.  In addition, pursuant to the letter
agreement we will exchange $20 million of the junior subordinated notes for
certain replacement securities, which we expect to acquire for approximately $10
million of cash.  This will reduce our obligation on the junior
subordinated notes to approximately $36.3 million, which should facilitate
future compliance with financial covenants set forth in the First Supplemental
Indenture.  In addition, we are to pay additional interest equal to
$250,000 per year, payable quarterly on the same payment dates as the current
terms of the Junior Subordinated Notes.  We agreed to make a
nonrefundable payment of $200,000 to Taberna to cover its costs related to the
waiver and exchange arrangement.  This transaction would result in a
net gain of approximately $9 million including transaction costs.  The
replacement securities will be acquired with funds consisting of $5 million from
our operating funds and $5 million from the $5 million letter of
credit.  For additional information regarding the First Supplemental
Indenture see Note I – Junior
Subordinated Notes of the Notes to the Consolidated Financial Statements
included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 On March
25, 2009, we entered into an unsecured promissory note for $3 million payable on
or before May 8, 2009, with an exit fee of $0.6 million due on or before May 26,
2009.  We intend to use these funds to purchase a portion of the
junior subordinated notes referred to above.  Per the terms of the
loan, all subsequent proceeds from loan repayments and sales of property will be
used to pay down the note.  We are currently anticipating receipt of
proceeds from the sale of properties, which will meet our on-going
obligations.  No assurance can be made that these sales will be
completed.
 
  - 42
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 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
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, 2008, we had purchased 1,198,573
shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $5.7 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.
 
 We may
seek to expand our capital resources through borrowings from institutional
lenders or through securitization of our loan portfolio or similar
arrangements.  No assurance can be given that, if we should seek to
borrow additional funds or to securitize our assets we would be able to do so on
commercially attractive terms.  Our ability to expand our capital
resources in this manner is subject to many factors, some of which are beyond
our control, including the state of the economy, the state of the capital
markets and the perceived quality of our loan portfolio.
 
 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 6% to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 39 real estate loans, as of
December 31, 2008, with a balance of approximately $225.0 million as compared to
investments in 46 real estate loans as of December 31, 2007, with a balance of
approximately $291.1 million.
 
 As of
December 31, 2008, we had 20 loans considered non-performing (i.e., 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).  These loans are
currently carried on our books at a value of approximately $73.7 million, net of
allowance for loan losses of approximately $71.2 million, which does not include
the allowances of approximately $7.0 million relating to the decrease in the
property value for performing loans as of December 31, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and, based on current estimates, believes that the value of the underlying
collateral is sufficient to protect us from loss of
principal.  However, such estimates may change, or the value of the
underlying collateral may deteriorate, in which case further losses may be
incurred.  During January and February 2009, we foreclosed upon one
non-performing loan, Redwood Place, LLC, and sold two non-performing loans,
Preston Hollow Assisted Living, L.P. and Trinity Theo, LLC, to unrelated third
parties, no gain or loss was recognized on these sales.  As of March
4, 2009, we had 17 loans considered non-performing.
 
 During
March 2007, our manager extended the Mid-State Raceway loan from March 31, 2007
to March 31, 2008.  As of March 31, 2008, this loan had a balance of
approximately $19.8 million, of which our portion was approximately $17.0
million.  This loan was paid in full on April 10, 2008.
 
 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, 2008, we have
provided a specific reserve related to 17 non-performing loans and 7 performing
loans, based on updated appraisals and evaluation of the borrower obtained by
our manager.  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.
  - 43
-
 Table of Contents
  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 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 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, 2008, 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, 2008, we held 11 properties with a total carrying value of
approximately $24.4 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.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities, other than the
interest in VCT I as discussed in Note I – 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.
 
  - 44
-
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  CONTRACTUAL
OBLIGATIONS
 
 The
following summarizes our contractual obligations at December 31,
2008:
 
 Contractual
      Obligation
                      
                      Total
                      
                      
                      Less
      Than 1 Year
                      
                      
                      1-3
      Years
                      
                      
                      3-5
      Years
                      
                      
                      More
      Than
                        5
      YearsJunior
      subordinated notes payable (1)
                      
                      $
                      56,350,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      56,350,000Secured
      borrowings (2)
                      
                      
                      9,907,000
                      
                      
                      
                      9,907,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Notes
      payable (3)
                      
                      
                      24,000
                      
                      
                      
                      24,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Total
                      
                      $
                      66,281,000
                      
                      
                      $
                      9,931,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      56,350,000
 
 (1)
              See
      Note I – 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.
 
 (2)
              See
      Note J – Secured
      Borrowings 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.
 
 (3)
              See
      Note K – Notes
      Payable 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.
 
 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.  For further information regarding related
party transactions, refer to Note G – 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.
 
 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
non-performing.  A loan is considered non-performing 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, 2008, 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
                    
                    $
                    2,669,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
                    
                    $
                    13,344,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
                    
                    $
                    (2,669,000
                    )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
                    
                    $
                    (13,344,000
                    )
 
  - 45
-
 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, 2008, 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
                    
                    $
                    2,250,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
                    
                    $
                    11,252,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
                    
                    $
                    (2,250,000
                    )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
                    
                    $
                    (11,252,000
                    )
 
 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 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.
 
 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 are 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
  - 46
-
 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
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 sales 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 sales
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.
 
  - 47
-
 Table of Contents
  ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVEDISCLOSURES 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, 2008, our aggregate investment in real
estate loans was approximately $146.8 million, net of allowance of approximately
$78.2 million, with a weighted average effective interest rate of
12.14%.  The weighted average interest rate of 12.14% is based on the
contractual terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of December 31, 2008, was 10.4%.  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, 2008, was 20
months.  All but one of the outstanding real estate loans at December
31, 2008, was a fixed rate loan.  The variable interest rate loan was
considered non-performing as of December 31, 2008, see Note D – Investments in Real Estate
Loans in 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.  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.  As of December 31, 2008, none of our loans had a prepayment
penalty, although 25 of our loans, totaling approximately $129.0 million, had an
exit fee.  Out of the 25 loans with an exit fee, 12 loans, totaling
approximately $65.1 million, were considered non-performing as of December 31,
2008.
 
 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, 2008.  The presentation aggregates
the investment in real estate loans by their maturity dates for maturities
occurring in each of the years 2009 through 2013 and thereafter and separately
aggregates the information for all maturities arising after 2013.  The
carrying values of these assets approximate their fair value as of December 31,
2008.
 
 Interest
      Earning Assets
                      Aggregated
      by Maturity at December 31, 2008Interest
      Earning Assets
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    Thereafter
                    
                    
                    Total(a)Investments
      In Real Estate Loans
                    
                    $
                    205,186,000
                    
                    
                    $
                    19,856,000
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    225,042,000Weighted
      Average Interest Rates
                    
                    
                    12.20
                    %
                    
                    
                    11.54%
                    
                    
                    
                    --%
                    
                    
                    
                    --%
                    
                    
                    
                    --%
                    
                    
                    
                    --%
                    
                    
                    
                    12.14%
  (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to December 31,
2008.
 
 At
December 31, 2008, we also had approximately $8.5 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.
  - 48
-
 Table of Contents
  
 ITEM
      8.
              FINANCIALSTATEMENTS AND SUPPLEMENTARY
  DATA
 
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
 
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
              50CONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheets
              51Consolidated Statements of Operations
              52Consolidated Statements of Equity and Other Comprehensive
      Income
              53Consolidated Statements of Cash Flows
              55Notes to the Consolidated Financial
      Statements
              57SUPPLEMENTARY INFORMATION
              97Investments in Real Estate Loans:Real Estate Loan Roll Forward
              97Real Estate Loans by Type of
Property
              98Real Estate Loans by Lien Position
              98Real Estate Loans that Exceed Three Percent of the
      Portfolio
              99
 
  - 49
-
 Table of Contents
  
 
 REPORT
OF INDEPENDENT REGISTEREDPUBLIC 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, 2008 and 2007 and related
consolidated statements of operations, equity and other comprehensive income
(loss) and cash flows for the years ended December 31, 2008 and 2007 and for the
twelve months ended December 31, 2006.  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 Company
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, 2008 and 2007 and the results of its operations and its
cash flows for the years ended December 31, 2008 and 2007 and for the twelve
months ended December 31, 2006 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 have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, 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 26, 2009, expressed an
unqualified opinion thereon.
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 March 26,
2009
 
 
 
  - 50
-
 Table of Contents
  FINANCIAL
STATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSDecember
      31, 2008
                      
                      
                      December
      31, 2007AssetsCash
                      
                      $
                      8,026,000
                      
                      
                      $
                      20,241,000Cash
      - restricted
                      
                      
                      5,000,000
                      
                      
                      
                      --Certificates
      of deposit
                      
                      
                      --
                      
                      
                      
                      102,000Investment
      in marketable securities - related party
                      
                      
                      496,000
                      
                      
                      
                      2,460,000Interest
      and other receivables, net of allowance of $593,000 at December 31, 2008
      and $160,000 at December 31, 2007
                      
                      
                      1,345,000
                      
                      
                      
                      4,162,000Notes
      receivable, net of allowance of $2,340,000 at December 31, 2008 and
      $2,619,000 at December 31, 2007
                      
                      
                      --
                      
                      
                      
                      --Real
      estate held for sale
                      
                      
                      24,433,000
                      
                      
                      
                      28,563,000Investment
      in real estate loans, net of allowance for loan losses of $78,208,000 at
      December 31, 2008 and $12,873,000 at December 31, 2007
                      
                      
                      146,834,000
                      
                      
                      
                      278,190,000Investment
      in equity affiliate
                      
                      
                      100,000
                      
                      
                      
                      100,000Assets
      under secured borrowings
                      
                      
                      10,600,000
                      
                      
                      
                      --Deferred
      financing costs
                      
                      
                      2,504,000
                      
                      
                      
                      2,213,000Other
      assets
                      
                      
                      144,000
                      
                      
                      
                      137,000Total
      assets
                      
                      $
                      199,482,000
                      
                      
                      $
                      336,168,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
                      
                      $
                      2,154,000
                      
                      
                      $
                      2,641,000Due
      to related parties
                      
                      
                      522,000
                      
                      
                      
                      122,000Secured
      borrowings
                      
                      
                      9,907,000
                      
                      
                      
                      --Junior
      subordinated notes payable
                      
                      
                      56,350,000
                      
                      
                      
                      60,100,000Note
      payable
                      
                      
                      24,000
                      
                      
                      
                      --Dividend
      payable
                      
                      
                      --
                      
                      
                      
                      1,546,000Total
      liabilities
                      
                      
                      68,957,000
                      
                      
                      
                      64,409,000Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
                      
                      
                      --
                      
                      
                      
                      --Treasury
      stock, at cost 1,198,573 shares at December 31, 2008 and 109,634 at
      December 31, 2007
                      
                      
                      (5,692,000
                      )
                      
                      
                      (1,440,000
                      )Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 13,798,790 shares
      issued and outstanding at December 31, 2008 and 14,866,219 shares issued
      and outstanding at December 31, 2007
                      
                      
                      1,000
                      
                      
                      
                      1,000Additional
      paid in capital
                      
                      
                      278,550,000
                      
                      
                      
                      278,367,000Accumulated
      deficit
                      
                      
                      (141,627,000
                      )
                      
                      
                      (4,198,000
                      )Accumulated
      other comprehensive loss
                      
                      
                      (707,000
                      )
                      
                      
                      (971,000
                      )Total
      stockholders' equity
                      
                      
                      130,525,000
                      
                      
                      
                      271,759,000Total
      liabilities and stockholders' equity
                      
                      $
                      199,482,000
                      
                      
                      $
                      336,168,000
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 51
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONSFor
      the
                          Year
      Ended
                        
                        
                        For
      the
                          Year
      Ended
                        
                        
                        For
      the Twelve
                          Months
      Ended12/31/2008
                        
                        
                        12/31/2007
                        
                        
                        12/31/2006RevenuesInterest
      income from investment in real estate loans
                        
                        $
                        18,604,000
                        
                        
                        $
                        26,982,000
                        
                        
                        $
                        21,718,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
                        
                        
                        --
                        
                        
                        
                        1,044,000
                        
                        
                        
                        --Other
      income
                        
                        
                        703,000
                        
                        
                        
                        984,000
                        
                        
                        
                        335,000Total
      revenues
                        
                        
                        19,307,000
                        
                        
                        
                        29,010,000
                        
                        
                        
                        22,053,000Operating
      expensesManagement
      fees - related party
                        
                        
                        1,098,000
                        
                        
                        
                        1,097,000
                        
                        
                        
                        1,096,000Provision
      for loan loss
                        
                        
                        83,712,000
                        
                        
                        
                        3,116,000
                        
                        
                        
                        5,500,000Interest
      expense
                        
                        
                        6,421,000
                        
                        
                        
                        3,367,000
                        
                        
                        
                        1,446,000Professional
      fees
                        
                        
                        3,714,000
                        
                        
                        
                        3,004,000
                        
                        
                        
                        1,219,000Professional
      fees - related party
                        
                        
                        236,000
                        
                        
                        
                        138,000
                        
                        
                        
                        88,000Provision
      for doubtful accounts related to receivable
                        
                        
                        754,000
                        
                        
                        
                        235,000
                        
                        
                        
                        329,000Loan
      fees – related party
                        
                        
                        594,000
                        
                        
                        
                        --
                        
                        
                        
                        --Other
                        
                        
                        1,123,000
                        
                        
                        
                        922,000
                        
                        
                        
                        946,000Total
      operating expenses
                        
                        
                        97,652,000
                        
                        
                        
                        11,879,000
                        
                        
                        
                        10,624,000Income
      (loss) from operations
                        
                        
                        (78,345,000
                        )
                        
                        
                        17,131,000
                        
                        
                        
                        11,429,000Non-operating
      income (loss)Gain
      on sale of marketable securities
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        21,000Gain
      on purchase of debt
                        
                        
                        1,556,000
                        
                        
                        
                        --
                        
                        
                        
                        --Dividend
      income - related party
                        
                        
                        86,000
                        
                        
                        
                        308,000
                        
                        
                        
                        72,000Interest
      income from banking institutions
                        
                        
                        376,000
                        
                        
                        
                        1,535,000
                        
                        
                        
                        1,333,000Loss
      on sale of investment in real estate loan
                        
                        
                        (2,760,000
                        )
                        
                        
                        --
                        
                        
                        
                        --Impairment
      on marketable securities - related party
                        
                        
                        (2,228,000
                        )
                        
                        
                        --
                        
                        
                        
                        --Total
      other non-operating income (loss)
                        
                        
                        (2,970,000
                        )
                        
                        
                        1,843,000
                        
                        
                        
                        1,426,000Income
      (loss) from real estate held for saleRevenue
      related to real estate held for sale
                        
                        
                        --
                        
                        
                        
                        86,000
                        
                        
                        
                        4,101,000Net
      gain (loss) on sale of real estate held for sale
                        
                        
                        (259,000
                        )
                        
                        
                        --
                        
                        
                        
                        1,517,000Gain
      on sale of real estate held for sale - seller financed
                        
                        
                        --
                        
                        
                        
                        2,003,000
                        
                        
                        
                        2,293,000Expenses
      related to real estate held for sale
                        
                        
                        (1,370,000
                        )
                        
                        
                        (2,869,000
                        )
                        
                        
                        (4,915,000
                        )Write
      downs on real estate held for sale
                        
                        
                        (47,225,000
                        )
                        
                        
                        (1,266,000
                        )
                        
                        
                        --Total
      income (loss) from real estate held for sale
                        
                        
                        (48,854,000
                        )
                        
                        
                        (2,046,000
                        )
                        
                        
                        2,996,000Income
      (loss) before provision for income taxes
                        
                        
                        (130,169,000
                        )
                        
                        
                        16,928,000
                        
                        
                        
                        15,851,000Provision
      for income taxes
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --NET
      INCOME (LOSS)
                        
                        $
                        (130,169,000
                        )
                        
                        $
                        16,928,000
                        
                        
                        $
                        15,851,000Basic
      and diluted earnings (loss) per weighted average common share / membership
      unit
                        
                        $
                        (8.86
                        )
                        
                        $
                        1.14
                        
                        
                        $
                        1.06Dividends
      declared per common share / cash distribution to members per membership
      unit
                        
                        $
                        0.49
                        
                        
                        $
                        1.50
                        
                        
                        $
                        1.51Weighted
      average common shares / membership units
                        
                        
                        14,695,756
                        
                        
                        
                        14,909,651
                        
                        
                        
                        14,935,585
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 52
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
      THE YEAR ENDED DECEMBER 31, 2008Treasury
      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
                      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
                    )
                    
                    $
                    --
                    
                    
                    $
                    278,486,000Comprehensive
      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 MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSSFOR
      THE YEAR ENDED DECEMBER 31, 2008(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, 2007
                  
                  
                  --
                  
                  
                  
                  109,634
                  
                  
                  $
                  (1,440,000
                  )
                  
                  
                  14,866,219
                  
                  
                  $
                  1,000
                  
                  
                  $
                  278,367,000
                  
                  
                  $
                  (4,198,000
                  )
                  
                  $
                  (971,000
                  )
                  
                  $
                  --
                  
                  
                  $
                  271,759,000Comprehensive
      Loss:Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (130,169,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (130,169,000
                  )Recognition
      of Unrealized Loss on Marketable Securities – Related
Party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  971,000
                  
                  
                  
                  
                  
                  
                  
                  971,000Unrealized
      Loss on Marketable Securities - Related Party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (707,000
                  )
                  
                  
                  
                  
                  
                  
                  (707,000
                  )Comprehensive
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (129,905,000
                  )Purchase
      of Treasury Stock
                  
                  
                  
                  
                  
                  
                  1,088,939
                  
                  
                  
                  (4,252,000
                  )
                  
                  
                  (1,088,939
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,252,000
                  )Dividends
      Declared to Stockholder, $0.49 per common share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,260,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,260,000
                  )Reinvestment
      of Dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,510
                  
                  
                  
                  --
                  
                  
                  
                  183,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  183,000Stockholders'
      Equity at
                    December
      31, 2008
                  
                  
                  --
                  
                  
                  
                  1,198,573
                  
                  
                  $
                  (5,692,000
                  )
                  
                  
                  13,798,790
                  
                  
                  $
                  1,000
                  
                  
                  $
                  278,550,000
                  
                  
                  $
                  (141,627,000
                  )
                  
                  $
                  (707,000
                  )
                  
                  $
                  --
                  
                  
                  $
                  130,525,000
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 - 54
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the
                          Year
      Ended
                        
                        
                        For
      the
                          Year
      Ended
                        
                        
                        For
      the Twelve
                          Months
      Ended12/31/2008
                        
                        
                        12/31/2007
                        
                        
                        12/31/2006Cash
      flows from operating activities:Net
      income (loss)
                        
                        $
                        (130,169,000
                        )
                        
                        $
                        16,928,000
                        
                        
                        $
                        15,851,000Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for doubtful accounts related to receivable
                        
                        
                        754,000
                        
                        
                        
                        235,000
                        
                        
                        
                        329,000Loss
      on sale of investment in real estate loan
                        
                        
                        2,760,000
                        
                        
                        
                        --
                        
                        
                        
                        --Gain
      /loss on sale of marketable securities
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        (21,000
                        )Impairment
      of marketable securities - related party
                        
                        
                        2,228,000
                        
                        
                        
                        --
                        
                        
                        
                        --Write
      downs on real estate held for sale
                        
                        
                        47,225,000
                        
                        
                        
                        1,266,000
                        
                        
                        
                        --Gain
      on sale of real estate held for sale
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        (2,014,000
                        )Loss
      on sale of real estate held for sale
                        
                        
                        259,000
                        
                        
                        
                        --
                        
                        
                        
                        497,000Gain
      on sale of real estate held for sale - seller financed
                        
                        
                        --
                        
                        
                        
                        (2,003,000
                        )
                        
                        
                        (2,293,000
                        )Gain
      on purchase of debt
                        
                        
                        (1,556,000
                        )
                        
                        
                        --
                        
                        
                        
                        --Recovery
      of allowance for doubtful notes receivable included in other
      income
                        
                        
                        (87,000
                        )
                        
                        
                        (594,000
                        )
                        
                        
                        (487,000
                        )Provision
      for loan loss
                        
                        
                        83,712,000
                        
                        
                        
                        3,116,000
                        
                        
                        
                        5,500,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
                        
                        
                        --
                        
                        
                        
                        (1,044,000
                        )
                        
                        
                        --Amortized
      interest income
                        
                        
                        (155,000
                        )
                        
                        
                        (1,323,000
                        )
                        
                        
                        (1,328,000
                        )Amortized
      financing costs, included in interest expense
                        
                        
                        607,000
                        
                        
                        
                        88,000
                        
                        
                        
                        --Change
      in operating assets and liabilities:Interest
      and other receivables
                        
                        
                        2,063,000
                        
                        
                        
                        (1,330,000
                        )
                        
                        
                        273,000Due
      to/from related parties
                        
                        
                        400,000
                        
                        
                        
                        153,000
                        
                        
                        
                        294,000Other
      assets
                        
                        
                        160,000
                        
                        
                        
                        434,000
                        
                        
                        
                        343,000Accounts
      payable and accrued liabilities
                        
                        
                        (446,000
                        )
                        
                        
                        2,354,000
                        
                        
                        
                        381,000Net
      cash provided by operating activities
                        
                        
                        7,755,000
                        
                        
                        
                        18,280,000
                        
                        
                        
                        17,325,000Cash
      flows from investing activities:Investments
      in real estate loans
                        
                        $
                        (91,592,000
                        )
                        
                        $
                        (141,384,000
                        )
                        
                        $
                        (202,748,000
                        )Purchase
      of investments in real estate loans from:VRM
      I
                        
                        
                        (3,300,000
                        )
                        
                        
                        --
                        
                        
                        
                        (1,350,000
                        )Fund
      III
                        
                        
                        --
                        
                        
                        
                        (1,300,000
                        )
                        
                        
                        (4,900,000
                        )Other
      related parties
                        
                        
                        --
                        
                        
                        
                        (661,000
                        )
                        
                        
                        (2,556,000
                        )Third
      parties
                        
                        
                        (8,745,000
                        )
                        
                        
                        (14,246,000
                        )
                        
                        
                        (23,000,000
                        )Proceeds
      from loan payoffs
                        
                        
                        50,900,000
                        
                        
                        
                        90,712,000
                        
                        
                        
                        203,106,000Sale
      of investments in real estate loans to:VRM
      I
                        
                        
                        500,000
                        
                        
                        
                        4,434,000
                        
                        
                        
                        500,000Fund
      III
                        
                        
                        --
                        
                        
                        
                        1,153,000
                        
                        
                        
                        6,000,000Other
      related parties
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        2,000,000Third
      party
                        
                        
                        51,669,000
                        
                        
                        
                        3,319,000
                        
                        
                        
                        175,000Proceeds
      related to investment in real estate held for sale
                        
                        
                        635,000
                        
                        
                        
                        250,000
                        
                        
                        
                        35,553,000Proceeds
      from sale of real estate held for sale
                        
                        
                        925,000
                        
                        
                        
                        --
                        
                        
                        
                        --Principal
      payments on real estate held for sale-seller financed
                        
                        
                        --
                        
                        
                        
                        10,598,000
                        
                        
                        
                        8,113,000Legal
      expenses paid and applied against loan allowance
                        
                        
                        --
                        
                        
                        
                        (94,000
                        )
                        
                        
                        (906,000
                        )Proceeds
      from note receivable
                        
                        
                        87,000
                        
                        
                        
                        641,000
                        
                        
                        
                        686,000Purchase
      of marketable securities - related parties
                        
                        
                        --
                        
                        
                        
                        (731,000
                        )
                        
                        
                        (2,700,000
                        )Proceeds
      from sale of marketable securities
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        7,263,000Purchase
      of investments in certificates of deposit
                        
                        
                        (2,000
                        )
                        
                        
                        (1,027,000
                        )
                        
                        
                        (17,061,000
                        )Proceeds
      from investments in certificates of deposit
                        
                        
                        104,000
                        
                        
                        
                        1,175,000
                        
                        
                        
                        17,811,000Unearned
      revenue proceeds related to loan restructuring
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        608,000Deposit
      liability
                        
                        
                        --
                        
                        
                        
                        665,000
                        
                        
                        
                        6,942,000Cash
      - restricted
                        
                        
                        (5,000,000
                        )
                        
                        
                        --
                        
                        
                        
                        --Net
      cash provided (used) by investing activities
                        
                        $
                        (3,819,000
                        )
                        
                        $
                        (46,496,000
                        )
                        
                        $
                        33,536,000
 
  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
                        Year
      Ended
                      
                      
                      For
      the Twelve Months Ended12/31/2008
                      
                      
                      12/31/2007
                      
                      
                      12/31/2006Cash
      flows from financing activities:Principal
      payments on notes payable
                      
                      $
                      (184,000
                      )
                      
                      $
                      (256,000
                      )
                      
                      $
                      (25,857,000
                      )Proceeds
      from issuance of notes payable
                      
                      
                      --
                      
                      
                      
                      2,000
                      
                      
                      
                      --Proceeds
      from issuance of debt
                      
                      
                      --
                      
                      
                      
                      60,000,000
                      
                      
                      
                      --Cash
      used for purchase of debt
                      
                      
                      (2,194,000
                      )
                      
                      
                      --
                      
                      
                      
                      --Deferred
      financing costs
                      
                      
                      (898,000
                      )
                      
                      
                      (2,301,000
                      )
                      
                      
                      --Dividends
      paid to stockholders, net of reinvestments
                      
                      
                      (8,367,000
                      )
                      
                      
                      (23,776,000
                      )
                      
                      
                      (11,906,000
                      )Dividends
      paid to stockholders - related party
                      
                      
                      (256,000
                      )
                      
                      
                      (613,000
                      )
                      
                      
                      (100,000
                      )Purchase
      of treasury stock at cost
                      
                      
                      (4,252,000
                      )
                      
                      
                      (1,440,000
                      )
                      
                      
                      --Members'
      distributions, net of reinvestments
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (5,315,000
                      )Members'
      distributions - related party
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (16,000
                      )Members'
      redemptions
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (30,459,000
                      )Net
      cash provided (used) in financing activities
                      
                      
                      (16,151,000
                      )
                      
                      
                      31,616,000
                      
                      
                      
                      (73,653,000
                      )NET
      CHANGE IN CASH
                      
                      
                      (12,215,000
                      )
                      
                      
                      3,400,000
                      
                      
                      
                      (22,792,000
                      )Cash,
      beginning of period
                      
                      
                      20,241,000
                      
                      
                      
                      16,841,000
                      
                      
                      
                      39,633,000Cash,
      end of period
                      
                      $
                      8,026,000
                      
                      
                      $
                      20,241,000
                      
                      
                      $
                      16,841,000Supplemental
      disclosures of cash flows information:Interest
      paid
                      
                      $
                      6,421,000
                      
                      
                      $
                      3,367,000
                      
                      
                      $
                      1,446,000Non-cash
      investing and financing activities:Dividend
      payable
                      
                      $
                      --
                      
                      
                      $
                      1,546,000
                      
                      
                      $
                      4,078,000Reinvestment
      of dividends
                      
                      $
                      183,000
                      
                      
                      $
                      514,000
                      
                      
                      $
                      235,000Reinvestment
      of member distributions
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      742,000Adjustment
      to allowance for loan loss related to sale of investment in real estate
      loan
                      
                      $
                      13,430,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Payoff
      of loans funded through secured borrowings
                      
                      $
                      10,400,000
                      
                      
                      $
                      13,796,000
                      
                      
                      $
                      23,518,000Loans
      funded through secured borrowing
                      
                      $
                      19,982,000
                      
                      
                      $
                      --
                      
                      
                      $
                      17,560,000Interest
      reserves related to secured borrowings
                      
                      $
                      1,018,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Repurchase
      of interest reserves related to secured borrowings
                      
                      $
                      325,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Note
      payable relating to prepaid E & O insurance
                      
                      $
                      208,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Real
      estate held for sale acquired through foreclosure, net of prior
      allowance
                      
                      $
                      44,915,000
                      
                      
                      $
                      --
                      
                      
                      $
                      25,476,000Loan
      rewritten with same or similar collateral
                      
                      $
                      3,301,000
                      
                      
                      $
                      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
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      127,000Write
      off of interest receivable and related allowance
                      
                      $
                      321,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Unearned
      revenue from loans rewritten with same or similar property as
      collateral
                      
                      $
                      --
                      
                      
                      $
                      454,000
                      
                      
                      $
                      27,000Decrease
      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
                      
                      $
                      192,000
                      
                      
                      $
                      978,000
                      
                      
                      $
                      --Settlement
      for reimbursement of legal fees, including amount applied towards related
      loan loss
                      
                      $
                      --
                      
                      
                      $
                      523,000
                      
                      
                      $
                      --Prepaid
      amount applied to accounts payable
                      
                      $
                      41,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Recognition
      of unrealized loss on marketable securities – related
party
                      
                      $
                      971,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --Unrealized
      gain (loss) on marketable securities - related party
                      
                      $
                      (707,000
                      )
                      
                      $
                      (358,000
                      )
                      
                      $
                      (613,000
                      )
  The
accompanying notes are an integral part of these consolidated
statements.
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 VESTIN
REALTY MORTGAGEII, INC.
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
31, 2008
 
 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, 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, a
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. (“Vestin Originations”) that has continued the business of
brokerage, placement and servicing of real estate loans.  Vestin
Originations 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 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 have been formed to 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”).
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 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Management
Estimates
 
 The
preparation of consolidated financial statements in conformity with 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.
 
 Restricted
Cash
 
 On
November 7, 2008, we entered into an agreement with Taberna Capital Management,
LLC (“Taberna”), in its capacity as collateral manager for certain collateral
debt obligation vehicles that are the holders of the junior subordinated notes,
providing for an amendment of the tangible net worth covenant (the “First
Supplemental Indenture”).  We have restricted cash of $5.0 million
related to the First Supplemental Indenture, where by Taberna is entitled to
draw upon such letters of credit to pay principal and interest on the junior
subordinated notes if an Event of Default has occurred.  The letters
of credit may not be subordinated to any of our Senior
Debt.[conform]  On December 31, 2008, we were not in compliance with
the revised tangible net worth covenant and the debt to tangible net worth
covenant in the First Supplemental Indenture.  On March 25, 2009, we
entered into a letter agreement with Taberna providing for a waiver of all
financial covenants effective December 31, 2008 through June 30,
2009.  In addition, pursuant to the letter agreement we will exchange
$20 million of the junior subordinated notes for certain replacement securities,
which we expect to acquire for approximately $10 million of
cash.  This will reduce our obligation on the junior subordinated
notes to approximately $36.3 million, which should facilitate future compliance
with financial covenants set forth in the First Supplemental
Indenture.  This transaction would result in a net gain of
approximately $9 million including transaction costs.  In addition, we
are to pay additional interest equal to $250,000 per year, payable quarterly on
the same payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  The replacement securities will be acquired with funds
consisting of $5 million from our operating funds and $5 million from the $5
million letter of credit.  For additional information regarding the
First Supplemental Indenture see Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part II, Item 8
Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 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.
 
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  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 initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received or when management’s assessment of
the value has changed, to 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.
 
 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 may be 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;
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 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed 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.
 
 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 foreclose on non-performing 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 sales 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 sales
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.
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 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
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.
 
 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
closing market price as of December 31, 2008.  All securities are
classified as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”).
 
 We
evaluate our available-for-sale investment for other-than-temporary impairment
charges in accordance with Emerging Issues Task Force, or EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and it’s Application to Certain Investments.  FAS
115 and EITF 03-1 require us to determine when an investment is considered
impaired (i.e., decline in fair value below its amortized cost), and evaluate
whether the impairment is other than temporary (i.e., investment value will not
be recovered over its remaining life), and, if the impairment is other than
temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value.
 
 According
to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M -
Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, there
are numerous factors to be considered in such an evaluation and their relative
significance will vary from case to case.  The following are a few
examples of the factors that individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
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 ·
              The
      length of the time and the extent to which the market value has been less
      than cost;
 
 ·
              The
      financial condition and near-term prospects of the issuer, including any
      specific events which may influence the operations of the issuer such as
      changes in technology that may impair the earnings potential of the
      investment or the discontinuance of a segment of the business that may
      affect the future earnings potential;
or
 
 ·
              The
      intent and ability of the holder to retain its investment in the issuer
      for a period of time sufficient to allow for any anticipated recovery in
      market value.
 
 Fair Value
Disclosures
 
 On
January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115 (“FAS 159”).  FAS 159 permits companies to choose to
measure certain financial assets and liabilities at fair value (the “fair value
option”).  If the fair value option is elected, any upfront costs and
fees related to the item must be recognized in earnings and cannot be deferred,
e.g. debt issue costs.  The fair value election is irrevocable and may
generally be made on an instrument-by-instrument basis, even if a company has
similar instruments that it elects not to fair value.  At the adoption
date, unrealized gains and losses on existing items for which fair value has
been elected are reported as a cumulative adjustment to beginning retained
earnings.
 
 We chose
not to elect the fair value option for our financial assets and liabilities
existing on January 1, 2008, and did not elect the fair value option for
financial assets and liabilities transacted during the year ended December 31,
2008.  Therefore, the adoption of FAS 159 had no impact on our
consolidated financial statements.
 
 On
January 1, 2008, we also adopted FAS No. 157, Fair Value Measurement (“FAS
157”), as required for financial assets and liabilities, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements
for non-financial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis.  The adoption of FAS
157 for our financial assets and liabilities did not have a material impact on
our consolidated financial statements.  We do not expect the adoption
of FAS 157 as it pertains to non-financial assets and liabilities to have a
material impact on our consolidated financial statements.
 
 Under FAS
157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. “the exit price”) in an orderly
transaction between market participants at the measurement date.  In
determining fair value, the Company uses various valuation approaches, including
quoted market prices and discounted cash flows.  FAS 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources.  Unobservable inputs are inputs
that reflect a company’s judgment concerning the assumptions that market
participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.  The fair value
hierarchy is broken down into three levels based on the reliability of inputs as
follows:
 
 ·
              Level
      1 – Valuations based on quoted prices in active markets for identical
      instruments that the Company is able to access.  Since
      valuations are based on quoted prices that are readily and regularly
      available in an active market, valuation of these products does not entail
      a significant degree of judgment.
 
 ·
              Level
      2 – Valuations based on quoted prices in active markets for instruments
      that are similar, or quoted prices in markets that are not active for
      identical or similar instruments, and model-derived valuations in which
      all significant inputs and significant value drivers are observable in
      active markets.
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 ·
              Level
      3 – Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, which utilize the Company’s estimates
      and assumptions.
 
 Basic and Diluted Earnings
Per Common Share
 
 Basic
earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share, 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
years ended December 31, 2008 and 2007.  The following is a
computation of the EPS data for the years ended December 31, 2008 and
2007:
 
 For
      the Year
                      Ended
      December 31,2008
                    
                    
                    2007Net
      income (loss) to common stockholders
                    
                    $
                    (130,169,000
                    )
                    
                    $
                    16,928,000Weighted
      average number of common shares outstanding during the
    period
                    
                    
                    14,695,756
                    
                    
                    
                    14,909,651Basic
      and diluted earnings (loss) per weighted average common
    share
                    
                    $
                    (8.86
                    )
                    
                    $
                    1.14
 
 Net Income (Loss) 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 (loss) 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
      the Twelve Months Ended December 31, 2006Net
      income (loss) 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
 
 During
the year ended December 31, 2007, we declared cash dividends approximately $1.50
per common share, representing ordinary income.
 
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  During
the year ended December 31, 2008, we declared cash dividends approximately $0.49
per common share.  For tax purposes, approximately $0.03 per common
share is classified as ordinary dividends and the balance of approximately $0.46
per common share is classified as non-dividend distributions.
 
 During
June 2008, our Board of Directors decided to suspend the payment of
dividends.  We will continue to comply with the REIT requirements and
will distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 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,
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 of treasury stock through the repurchase program noted
above.  These shares are carried on our books at a cost totaling
approximately $1.4 million.  As of December 31, 2008, we had purchased
a total of 1,198,573 shares of treasury stock through the repurchase program
noted above.  These shares are carried on our books at a cost totaling
approximately $5.7 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 I – 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, 2008, and 2007, was approximately
zero.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ consolidated financial
statements to conform to the current period presentation.
 
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  NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash,
marketable securities related party 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 based on management review of these financial
institutions.  As of December 31, 2008 and December 31, 2007, we had
approximately $11.4 million and $19.7 million, respectively, in excess of the
federally insured limits.
 
 As of
December 31, 2008, 40%, 26%, 11% and 8% of our loans were in Nevada, Arizona,
California and Hawaii, respectively, compared to 45%, 15%, 7% and 6%, at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, the downturn in the local real estate
markets in these states has had a material adverse effect on us.
 
 At
December 31, 2008, the aggregate amount of loans to our three largest borrowers
represented approximately 15% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in Oregon and Hawaii, with first lien positions, interest rates between 12% and
14%, with an aggregate outstanding balance of approximately $33.3
million.  As of December 31, 2008, our three largest loans were
considered non-performing.  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.  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 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.  As
the economy weakens and credit has become more difficult to obtain, many of our
borrowers who develop and sell commercial real estate projects have been unable
to complete their projects, obtain takeout financing or have been otherwise
adversely impacted.  In addition, an increase in interest rates over
the loan rate applicable at origination of the loan may have an adverse effect
on our borrower’s ability to refinance.
 
 Common
Guarantors
 
 As of
December 31, 2008, three loans totaling approximately $23.0 million,
representing approximately 10.2% of our portfolio’s total value, had a common
guarantor.  All three loans were considered non-performing as of
December 31, 2008.  As of December 31, 2007, these three loans
represented approximately 7.9% of our portfolio’s total value.  All
three loans were considered performing as of December 31, 2007.
 
 As of
December 31, 2008, six loans totaling approximately $23.6 million, representing
approximately 10.5% of our portfolio’s total value, had a common guarantor, of
these six loans; three loans were related to our secured borrowings of
approximately $10.6 million, including approximately $0.7 million in interest
reserves.  One of the six loans, totaling approximately $7.2 million,
was considered non-performing as of December 31, 2008.  Subsequent to
December 31, 2008, these loans have been modified, whereby the interest rate was
reduced to 8% starting in January 2009.  Interest payments will be
payable monthly, ranging from 3.0% to 4.25%, beginning January 25, 2009, and
accrued at a range of 3.75% to 5.0% payable at the end of the loan for five of
the six loans.  The remaining loan’s interest payments will be payable
quarterly at 3.0% beginning March 25, 2009, and accrued at 5.0% payable at the
end of the loan.  All these loans required payments have been received
as of March 11, 2009, and are considered performing.  As of December
31, 2007, we had six loans totaling approximately $26.8 million with this
guarantor, representing approximately 9.2% of our portfolio’s total
value.  All six loans were considered performing as of December 31,
2007.
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 As of
December 31, 2008, five loans totaling approximately $23.7 million, representing
approximately 10.5% of our portfolio’s total value, had a common
guarantor.  All five loans were considered non-performing as of
December 31, 2008.  As of December 31, 2007, we had six loans totaling
approximately $54.8 million with this guarantor, representing approximately
18.8% of our portfolio’s total value, had a common guarantor.  All six
loans were considered performing as of December 31, 2007.
 
 For
additional information regarding the above non-performing loans see
“Non-Performing Loans” 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 Report Form 10-K.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
December 31, 2008, and 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, 2008, we had approximately $52.7 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 $60.0
million.  These loans had interest reserves of approximately $5.7
million, of which our portion was approximately $4.9 million.  As of
December 31, 2008, two of these loans, totaling approximately $18.8 million,
which had interest reserves, were considered non-performing.  These
loans’ interest reserves, totaling approximately $3.2 million, have been
suspended as of December 31, 2008 and we no longer draw monthly interest income
from them.  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.
 
 On
December 12, 2008, we, VRM I, and Fund III, sold the Silver Star Destinations,
LLC loan, which was considered non-performing, to an unrelated third party for
approximately $9.9 million, of which our portion was approximately $9.5
million.  At the time of the sale, the loan was carried at
approximately $12.3 million, which included an allowance for loan loss of
approximately $13.4 million.  The sale resulted in us recognizing a
net loss of approximately $2.8 million.
 
 As of
December 31, 2008, 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 6% to 15%.  Revenue by product will fluctuate based upon
relative balances during the period.
 
 Loan
Portfolio
 
 Investments
in real estate loans as of December 31, 2008, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average Interest Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and Development
                      
                      
                      1
                      
                      
                      $
                      13,000,000
                      
                      
                      
                      13.00%
                      
                      
                      
                      5.78%
                      
                      
                      
                      92.00%Commercial
                      
                      
                      20
                      
                      
                      
                      107,456,000
                      
                      
                      
                      12.64%
                      
                      
                      
                      47.75%
                      
                      
                      
                      81.09%Construction
                      
                      
                      7
                      
                      
                      
                      27,612,000
                      
                      
                      
                      10.55%
                      
                      
                      
                      12.27%
                      
                      
                      
                      103.26%Land
                      
                      
                      11
                      
                      
                      
                      76,974,000
                      
                      
                      
                      11.87%
                      
                      
                      
                      34.20%
                      
                      
                      
                      78.59%Total
                      
                      
                      39
                      
                      
                      $
                      225,042,000
                      
                      
                      
                      12.14%
                      
                      
                      
                      100.00%
                      
                      
                      
                      84.01%
 
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  Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average Interest Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and Development
                      
                      
                      4
                      
                      
                      $
                      18,338,000
                      
                      
                      
                      12.85%
                      
                      
                      
                      6.30%
                      
                      
                      
                      46.75%Commercial
                      
                      
                      19
                      
                      
                      
                      131,257,000
                      
                      
                      
                      12.12%
                      
                      
                      
                      45.10%
                      
                      
                      
                      74.57%Construction
                      
                      
                      9
                      
                      
                      
                      45,883,000
                      
                      
                      
                      11.04%
                      
                      
                      
                      15.76%
                      
                      
                      
                      73.84%Land
                      
                      
                      14
                      
                      
                      
                      95,585,000
                      
                      
                      
                      12.12%
                      
                      
                      
                      32.84%
                      
                      
                      
                      62.41%Total
                      
                      
                      46
                      
                      
                      $
                      291,063,000
                      
                      
                      
                      12.00%
                      
                      
                      
                      100.00%
                      
                      
                      
                      68.52%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
“Weighted Average Interest Rate” as shown above is based on the contractual
terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of December 31, 2008 and December 31, 2007, was 12.42% and 11.84%,
respectively.  Please see “Non-Performing Loans” and “Asset Quality
and Loan Reserves” below for further information regarding performing and
non-performing loans.
 
 Loan-to-value
ratios are generally based on the most recent appraisals and may not reflect
subsequent changes in value and include allowances for loan
losses.  Recognition of allowance for loan losses will result in a
maximum loan-to-value ratio of 100% per loan.
 
 The
following is a schedule of priority of real estate loans as of December 31, 2008
and December 31, 2007:
 
 Loan
      Type
                  
                  Number
      of Loans
                  
                  
                  December
      31, 2008 Balance*
                  
                  
                  Portfolio
                    Percentage
                  
                  
                  Number
      of Loans
                  
                  
                  December
      31, 2007 Balance*
                  
                  
                  Portfolio
                    PercentageFirst
      deeds of trust
                  
                  
                  31
                  
                  
                  $
                  188,219,000
                  
                  
                  
                  83.64%
                  
                  
                  
                  44
                  
                  
                  $
                  288,665,000
                  
                  
                  
                  99.18%Second
      deeds of trust
                  
                  
                  8
                  
                  
                  
                  36,823,000
                  
                  
                  
                  16.36%
                  
                  
                  
                  2
                  
                  
                  
                  2,398,000
                  
                  
                  
                  0.82%Total
                  
                  
                  39
                  
                  
                  $
                  225,042,000
                  
                  
                  
                  100.00%
                  
                  
                  
                  46
                  
                  
                  $
                  291,063,000
                  
                  
                  
                  100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of December 31, 2008:
 
 Non-performing
      and past due loans (a)
                    
                    $
                    162,768,000January
      2009 – March 2009
                    
                    
                    8,671,000April
      2009 - June 2009
                    
                    
                    12,600,000July
      2009 - September 2009
                    
                    
                    5,265,000October
      2009 - December 2009
                    
                    
                    15,882,000January
      2010 – March 2010
                    
                    
                    4,448,000Thereafter
                    
                    
                    15,408,000Total
                    
                    $
                    225,042,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to December 31,
2008.
 
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  The
following is a schedule by geographic location of investments in real estate
loans as of December 31, 2008 and December 31, 2007:
 
 December
      31, 2008 Balance *
                      
                      
                      Portfolio
      Percentage
                      
                      
                      December
      31, 2007 Balance *
                      
                      
                      Portfolio
      PercentageArizona
                      
                      $
                      59,628,000
                      
                      
                      
                      26.50%
                      
                      
                      $
                      43,865,000
                      
                      
                      
                      15.07%California
                      
                      
                      24,298,000
                      
                      
                      
                      10.80%
                      
                      
                      
                      19,673,000
                      
                      
                      
                      6.76%Hawaii
                      
                      
                      17,291,000
                      
                      
                      
                      7.68%
                      
                      
                      
                      17,291,000
                      
                      
                      
                      5.94%Nevada
                      
                      
                      89,917,000
                      
                      
                      
                      39.95%
                      
                      
                      
                      132,000,000
                      
                      
                      
                      45.35%New
      York
                      
                      
                      --
                      
                      
                      
                      --%
                      
                      
                      
                      16,981,000
                      
                      
                      
                      5.83%Oklahoma
                      
                      
                      2,155,000
                      
                      
                      
                      0.96%
                      
                      
                      
                      5,051,000
                      
                      
                      
                      1.74%Oregon
                      
                      
                      16,048,000
                      
                      
                      
                      7.13%
                      
                      
                      
                      46,620,000
                      
                      
                      
                      16.02%Texas
                      
                      
                      13,904,000
                      
                      
                      
                      6.18%
                      
                      
                      
                      7,924,000
                      
                      
                      
                      2.72%Washington
                      
                      
                      1,801,000
                      
                      
                      
                      0.80%
                      
                      
                      
                      1,658,000
                      
                      
                      
                      0.57%Total
                      
                      $
                      225,042,000
                      
                      
                      
                      100.00%
                      
                      
                      $
                      291,063,000
                      
                      
                      
                      100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 Balance Sheet
      Reconciliation
 
 The
following table reconciles the balance of the loan portfolio to the amount shown
on the accompanying Consolidated Balance Sheets.
 
 December
      31, 2008 Balance (a)
                      
                      
                      December
      31, 2007 BalanceBalance
      per loan portfolio
                      
                      $
                      225,042,000
                      
                      
                      $
                      291,063,000Less:Allowance
      for loan losses (b)
                      
                      
                      (78,208,000
                      )
                      
                      
                      (12,873,000
                      )Balance
      per consolidated balance sheet
                      
                      $
                      146,834,000
                      
                      
                      $
                      278,190,000
 
 (a)
              We
      recognized an impairment loss of approximately $0.6 million, which was
      applied to the 2503 Panorama, LLC loan balance, related to the
      restructuring of a loan, whereby the interest rate was reduced from 12% to
      6% starting in May 2008.  As of December 31, 2008, we, VRM I and
      Fund III recognized an allowance for loan loss of approximately $4.0
      million, of which our portion was approximately $3.1 million, related to
      this loan.  In addition, we recognized an impairment loss of
      approximately $0.5 million, which was applied to the VBP Partners, LLC
      loan balance, related to the modification of the loan, whereby the
      interest rate was reduced from 11.5% to 8% starting in October
      2008.  Interest payments will be payable semi-annually at 3%
      beginning March 25, 2009, and accrued at 5% payable at the end of the
      loan.  As of December 31, 2008, we and VRM I recognized an
      allowance for loan loss of approximately $3.7 million, of which our
      portion was approximately $3.4 million, related to this
    loan.
 
 (b)
              Please
      refer to Specific
      Reserve Allowance below.
 
 Non-Performing
Loans
 
 As of
December 31, 2008, we had 20 loans considered non-performing (i.e., 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).  These loans are
currently carried on our books at a value of approximately $73.7 million, net of
allowance for loan losses of approximately $71.2 million, which does not include
the allowances of approximately $7.0 million relating to the decrease in the
property value for performing loans as of December 31, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  At December 31, 2008, the following
loans were non-performing:
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 ·
              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.  As of December 31, 2008, based on
      our manager’s evaluation and an updated appraisal, our manager has
      provided a specific allowance of approximately $14.4 million, of which our
      portion is approximately $9.8 million.  See Note O – Legal Matters Involving The
      Company for further
information.
 
 ·
              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, 2008, this loan has been considered
      non-performing for the last twenty-eight 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 our
      foreclosure of a Deed of Trust and sale of other collateral located in
      Kansas City, Missouri securing the non-performing loan.  We
      filed a Petition to set aside the sale of the Missouri collateral, which
      the court dismissed.  We appealed the dismissal and are awaiting
      a decision.  We are vigorously contesting Monterrey’s position;
      however, we cannot determine at this time the outcome of these legal
      proceedings.  As of December 31, 2008, based on our manager’s
      evaluation, our manager has provided a specific allowance for the full
      amount of the loan totaling approximately $4.4 million, of which our
      portion is approximately $2.2
million.
 
 ·
              3900,
      LLC, is a second position loan that provided bridge financing for an
      approximate 7.66 acre neighborhood retail center, located in Tempe,
      Arizona.  The loan is secured by a second position lien, junior
      to a first position lien in the amount of $6.0 million.  In
      addition, the loan is guaranteed by principals of the
      borrower.  The outstanding balance of the loan is approximately
      $3.3 million.  On April 5, 2008, this loan was considered to be
      in default due to the default of the Redwood Place, LLC loan, as a result
      of cross-default provisions.  Our manager has commenced
      foreclosure, and is proceeding with legal action to enforce the personal
      guarantees.  On October 17, 2008, the borrower filed for
      bankruptcy protection.  A settlement agreement was negotiated
      with the borrower and guarantors; however, they are currently in default
      under the settlement agreement.  We intend to proceed against
      them; however, it cannot be determined at this time how much, if any, will
      be collected.  As of December 31, 2008, this loan has been
      considered non-performing for the last eight months, and based on our
      manager’s evaluation and an updated appraisal, our manager has provided a
      specific allowance for the full amount of the loan totaling approximately
      $3.3 million.
 
 ·
              World
      Capital La Piazza, LLC, is a loan to provide financing for the development
      of 8.44 net acres of land located in Henderson, NV.  The loan is
      secured by a first lien on the property, and is guaranteed by principals
      of the borrower.  The outstanding balance on the loan is
      approximately $13.0 million.  As of December 31, 2008, this loan
      has been considered non-performing for the last eight
      months.  The loan matured on June 29, 2008, and the borrower
      failed to either payoff the loan or extend the term.  On October
      29, 2008, the borrower filed for bankruptcy protection.  Our
      manager was successful in lifting the automatic stay from bankruptcy, and
      has commenced both foreclosure proceedings, and litigation to enforce the
      personal guarantees.  The foreclosure sale is scheduled for
      March 30, 2009.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance of approximately $6.8
million.
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 ·
              World
      Capital Durango Alpha is a loan to provide financing for the development
      of 9.27 acres of land located in Las Vegas, NV with an outstanding balance
      of approximately $7.1 million of which our portion is approximately $4.8
      million and is secured by a first lien on the property and guaranteed by
      the principals of the borrower.  As of December 31, 2008, this
      loan has been considered non-performing for the last eight
      months.  On October 29, 2008, the borrower filed for bankruptcy
      protection.  Our manager was successful in lifting the automatic
      stay from bankruptcy, and has commenced both foreclosure proceedings and
      litigation against the personal guarantors in order to enforce the
      personal guarantees.  The foreclosure sale is scheduled for
      March 30, 2009.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance totaling approximately $2.0 million, of which our portion is
      approximately $1.4 million.
 
 ·
              Peoria
      180, LLC is a loan, with a variable interest rate, to provide financing
      for the development of 171 acres located in Glendale, Arizona with an
      outstanding balance of $18.0 million of which our portion is approximately
      $14.8 million and is secured by a first lien on the property and
      guaranteed by the principals of the borrower.  As of December
      31, 2008, this loan has been considered non-performing for the last eight
      months.  Our manager has commenced foreclosure proceedings and
      has been awarded a default judgment against the guarantors for
      approximately $24.4 million, although it cannot be determined at this time
      how much, if any, can be recovered from the guarantors.  On
      September 26, 2008, the borrower filed for bankruptcy
      protection.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance of approximately $15.0 million, of which our portion is
      approximately $12.3 million.  On March 23, 2008, we, VRM I and
      Fund III, sold the Peoria 180, LLC loan to an unrelated third party for
      $3.0 million.  The sale resulted in no gain or
    loss.
 
 ·
              Redwood
      Place, LLC is a loan that provided for the acquisition and conversion to
      condominiums of a 186-unit apartment complex located in Phoenix,
      Arizona.  The loan is secured by a first lien on the property,
      and is guaranteed by principals of the borrower.  The
      outstanding balance on the loan is approximately $15.0 million, of which
      our portion is approximately $11.4 million.  The loan matured on
      April 5, 2008, and the borrower failed to either pay the loan or extend
      the term.  As of December 31, 2008, this loan has been
      considered non-performing for the last eight months.  Our
      manager has commenced both foreclosure proceedings and litigation against
      the personal guarantors in order to enforce the personal
      guarantees.  On August 27, 2008, the borrower filed for
      bankruptcy protection.  On September 30, 2008, we, VRM I, and
      Fund III reached a tentative settlement agreement with the borrower to
      foreclose upon the property.  The guarantors entered into a
      confession of judgment for an amount of $1.1 million and agreed to pay
      annual deficiency payments starting on September 30, 2009, monthly
      interest payments starting on November 1, 2008 and accrued property taxes
      due on or before November 28, 2008.  The guarantors are
      currently in default under the settlement agreement, and we intend to
      proceed against them, however it cannot be determined at this time how
      much, if any, will be collected.  As of December 31, 2008, based
      on our manager’s evaluation and pending sales agreement, our manager has
      provided a specific allowance of approximately $7.0 million, of which our
      portion is approximately $5.3 million.  On January 16, 2009, we,
      VRM I, and Fund III foreclosed upon Redwood Place, LLC and classified the
      property as real estate held for sale.  During February 2009,
      our manager received a sales agreement to purchase the property for
      approximately $8.7 million, of which our portion would be approximately
      $6.7 million.  There can be no assurance that the sale will be
      completed.
 
 ·
              WCP
      Warm Springs Holdings 1, LLC is a loan to provide financing for 10 acres
      of vacant land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $8.5 million,
      of which our portion is approximately $5.1 million.  As of
      December 31, 2008, this loan has been considered non-performing for the
      last seven months.  On October 29, 2008, the borrower filed for
      bankruptcy protection.  Our manager was successful in lifting
      the automatic stay, and has commenced both foreclosure proceedings and
      litigation to enforce the personal guarantees.  As of December
      31, 2008, based on our manager’s evaluation and an updated appraisal, our
      manager has provided a specific allowance of approximately $4.1 million,
      of which our portion is approximately $2.5
  million.
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 ·
              Babuski,
      LLC is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $7.7 million.  The borrowers defaulted and the loan became
      non-performing.  On October 16, 2008, we, VRM I and Fund III
      entered into a forbearance agreement to postpone the foreclosure date on
      the property.  The guarantor paid $250,000 for cost and interest
      due related to the loan.  As of December 31, 2008, this loan has
      been considered non-performing for the last seven months.  Our
      manager has commenced foreclosure proceedings, and is proceeding with
      legal action to enforce the personal guarantees.  As of December
      31, 2008, based on our manager’s evaluation and an updated appraisal, our
      manager has concluded that the current value of the underlying collateral
      should be sufficient to protect us from loss of principal.  No
      specific allowance was deemed necessary as of December 31,
      2008
 
 ·
              Bright
      Haven Builders, LLC is a construction loan to provide financing for 10
      single family residential lots (lots 74 and 169-177) located within Cherry
      Meadows Subdivision located in Yelm, WA.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is approximately
      $2.2 million, of which our portion is approximately $1.8
      million.  As of December 31, 2008, this loan has been considered
      non-performing for the last seven months.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  As of December 31, 2008, based
      on our manager’s evaluation and an updated appraisal, our manager has
      provided a specific allowance of approximately $0.8 million, of which our
      portion is approximately $0.6 million.  On March 6, 2009, we
      and, VRM I foreclosed upon Bright Haven Builders, LLC and classified the
      property as real estate held for
sale.
 
 ·
              South
      Bay Villas, LLC is a construction loan to provide financing for a 48 unit
      condominium building which is part of the Desert Sands Condominiums Phase
      2 located in Laughlin, NV.  The loan is secured by a first lien
      on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $6.0 million,
      of which our portion is approximately $5.8 million.  As of
      December 31, 2008, this loan has been considered non-performing for the
      last seven months.  A settlement agreement has been negotiated
      with the borrower, wherein they will be responsible for the completion of
      the property at the borrower’s expense, with the lenders to receive 100%
      of the net sales proceeds from the sale of condominiums units until the
      loan has been repaid in full.  As of December 31, 2008, based on
      our manager’s evaluation of completion costs for the project and an
      updated appraisal, our manager has provided a specific allowance of
      approximately $1.2 million, of which our portion is approximately $1.2
      million.
 
 ·
              Preston
      Hollow Assisted Living, L.P. is a commercial loan to provide financing for
      the Preston Hollow Assisted Living Facility located in Dallas,
      TX.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $3.6 million.  As of December 31, 2008,
      this loan has been considered non-performing for the last seven
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance of approximately $2.5 million.  On January 7, 2009,
      this loan was sold to an unaffiliated third party for approximately $1.1
      million, which approximated our book value of the loan, net of
      allowances.
  - 71
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 ·
              Barger
      Road Cottages, LLC is a commercial loan to provide financing for the
      Alpine Meadow Retirement Community, consisting of 23 cottage units with
      garages, community building and surplus land, located in Eugene,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $6.0 million, of which our portion is
      $46,000.  As of December 31, 2008, this loan has been considered
      non-performing for the last seven months.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  On January 7, 2009, the main
      principal of the borrower filed for bankruptcy protection and has filed a
      motion to enjoin us from proceeding to foreclose.  Our legal
      counsel is opposing the motion and is confident that we will prevail in
      our position.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has concluded that the
      current value of the underlying collateral should be sufficient to protect
      us from loss of principal.  No specific allowance was deemed
      necessary as of December 31, 2008.
 
 ·
              Lohrey
      Investments, LLC is a commercial loan to provide financing for income
      producing property located in Gilroy, CA.  The loan is secured
      by a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $16.0 million,
      of which our portion is $11.6 million.  As of December 31, 2008,
      this loan has been considered non-performing for the last six
      months.  Our manager has commenced foreclosure proceedings, and
      has been awarded a default judgment against the guarantors for
      approximately $21.3 million, although it cannot be determined at this time
      how much, if any, can be recovered from the guarantors.  During
      October 2008, the tenant, who is a related party to the borrower, filed
      for bankruptcy protection and then on January 6, 2009 the borrower filed
      for bankruptcy protection.  On February 11, 2009, the guarantors
      filed for bankruptcy protection.  The property is not currently
      generating any income.  As of December 31, 2008, based on our
      manager’s evaluation and an updated appraisal, our manager has provided a
      specific allowance of approximately $7.2 million, of which our portion is
      approximately $5.2 million.
 
 ·
              Cascadia
      Canyon, LLC is a commercial loan to provide financing for 12.39 acres of
      land plus the SUMCO North Campus, SUMCO South Campus located in Salem,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $19.5 million, of which our portion
      is approximately $16.0 million.  As of December 31, 2008, this
      loan has been considered non-performing for the last five
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  As of December 31, 2008, based on our manager’s
      evaluation, an updated appraisal and current sales price, our manager has
      provided a specific allowance totaling approximately $10.3 million, of
      which our portion is approximately $8.4
million.
 
 ·
              Trinity
      Theo, LLC is a land loan to provide bridge financing for a 1.86 acre
      single family development custom home lot located in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $1.5 million.  As of
      December 31, 2008, this loan has been considered non-performing for the
      last four months.  Our manager has commenced foreclosure
      proceedings, and is proceeding with legal action to enforce the personal
      guarantees.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has concluded that the
      current value of the underlying collateral should be sufficient to protect
      us from loss of principal.  No specific allowance was deemed
      necessary as of December 31, 2008.  On February 11, 2009, this
      loan was sold to an unaffiliated third party for approximately $1.6
      million, which included accrued interest of approximately $0.1 million, no
      gain or loss was recognized on this
transaction.
  - 72
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 ·
              VBP
      Partners, LLC is a land loan to provide financing for approximately 4.14
      acres of land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property and is guaranteed by the principals of the
      borrower.  The outstanding balance on the loan is approximately
      $7.9 million, of which our portion is $7.2 million.  As of
      December 31, 2008, this loan has been considered non-performing for the
      last three months.  As of December 31, 2008, based on our
      manager’s evaluation and an updated appraisal, our manager has provided a
      specific allowance of approximately $3.7 million, of which our portion is
      approximately $3.4 million.  In addition, we recognized an
      impairment loss of approximately $0.5 million, which was applied to the
      loan balance, related to the modification of the loan, whereby the
      interest rate was reduced from 11.5% to 8% starting in October
      2008.  Interest payments will be payable semi-annually at 3%
      beginning March 25, 2009, and accrued at 5% payable at the end of the
      loan.  As of March 25, 2009, this loan was considered
      performing.  Our manager will continue to evaluate our position
      in the loan.
 
 ·
              WHM
      Copper Mountain Investments, LLC is a land loan to provide financing for
      various parcels of land within Copper Mountain Ranch Master Planned
      Community totaling approximately 2,330 acres lying within sections 15, 16,
      21, 28 & 33 of the Copper Mountain Ranch Master Planned Community
      located in Casa Grande, AZ.  The loan is secured by a first lien
      on the property and is guaranteed by the principals of the
      borrower.  The outstanding balance on the loan is $22.3 million,
      of which our portion is approximately $15.6 million.  As of
      December 31, 2008, this loan has been considered non-performing for the
      last three months.  On October 31, 2008, the borrower filed for
      bankruptcy protection.  Our manager has commenced legal action
      to enforce the personal guarantees.  As of December 31, 2008,
      based on our manager’s evaluation and an updated appraisal, our manager
      has provided a specific allowance of approximately $4.9 million, of which
      our portion is approximately $4.1
million.
 
 ·
              Meadowlark
      Assisted Living Community, LLC is a commercial loan to provide financing
      for a 74 bed Assisted Living/Memory Care residential facility, located on
      approximately 4.35 acres of land, located in the Yreka, CA.  The
      loan is secured by a second lien on the property, with a preexisting first
      lien of approximately $3.5 million, and is guaranteed by the principals of
      the borrower.  The outstanding balance on the second lien loan
      is approximately $3.8 million, of which our portion is approximately $2.2
      million.  As of December 31, 2008, this loan has been considered
      non-performing for the last three months.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  As of December 31, 2008, based
      on our manager’s evaluation and foreclosure of the first lien position,
      our manager has provided a specific allowance for the full amount of the
      loan totaling approximately $3.8 million, of which our portion is
      approximately $2.2 million.
 
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  The
following schedule summarizes the non-performing loans as of December 31,
2008:
 
 Loan
      Name
                      
                      Balance
      at
                        December
      31, 2008
                      
                      Allowance
      for Loan Loss *
                      
                      Net
      Balance at
                        December
      31, 2008
                      
                      Maturity
      Date
                      
                      Number
      of Months Non-Performing
                      
                      Percentage
      of Total Loan BalanceRightStar,
      Inc. (Part I & Part II)
                      $
                      17,291,000
                      $
                      (9,757,000)
                      $
                      7,534,000
                      
                      3/31/2004
                      
                      57
                      
                      45%
      of Part I
                        65%
      of Part IIMonterrey
      Associates, L.P.
                      
                      2,155,000
                      
                      (2,155,000)
                      
                      --
                      
                      9/1/2006
                      
                      28
                      
                      49%3900
      LLC
                      
                      3,276,000
                      
                      (3,276,000)
                      
                      --
                      
                      6/10/2008
                      
                      8
                      
                      100%World
      Capital La Piazza, LLC
                      
                      13,000,000
                      
                      (6,836,000)
                      
                      6,164,000
                      
                      6/29/2008
                      
                      8
                      
                      100%World
      Capital Durango Alpha (2)
                      
                      4,846,000
                      
                      (1,364,000)
                      
                      3,482,000
                      
                      5/16/2008
                      
                      8
                      
                      68%Peoria
      180, LLC
                      
                      14,806,000
                      
                      (12,337,000)
                      
                      2,469,000
                      
                      6/30/2008
                      
                      8
                      
                      82%Redwood
      Place, LLC
                      
                      11,350,000
                      
                      (5,284,000)
                      
                      6,066,000
                      
                      4/5/2008
                      
                      8
                      
                      76%WCP
      Warm Springs Holdings 1, LLC
                      
                      5,114,000
                      
                      (2,457,000)
                      
                      2,657,000
                      
                      5/10/2008
                      
                      7
                      
                      60%Babuski,
      LLC
                      
                      7,707,000
                      
                      --
                      
                      7,707,000
                      
                      6/17/2008
                      
                      7
                      
                      81%Bright
      Haven Builders, LLC
                      
                      1,801,000
                      
                      (628,000)
                      
                      1,173,000
                      
                      3/28/2008
                      
                      7
                      
                      82%South
      Bay Villas, LLC
                      
                      5,800,000
                      
                      (1,188,000)
                      
                      4,612,000
                      
                      5/6/2008
                      
                      7
                      
                      97%Preston
      Hollow Assisted Living, L.P.
                      
                      3,600,000
                      
                      (2,501,000)
                      
                      1,099,000
                      
                      12/31/2008
                      
                      7
                      
                      100%Barger
      Road Cottages, LLC
                      
                      46,000
                      
                      --
                      
                      46,000
                      
                      12/5/2008
                      
                      7
                      
                      1%Lohrey
      Investments, LLC
                      
                      11,600,000
                      
                      (5,223,000)
                      
                      6,377,000
                      
                      10/29/2008
                      
                      6
                      
                      73%Cascadia
      Canyon, LLC
                      
                      16,002,000
                      
                      (8,434,000)
                      
                      7,568,000
                      
                      2/12/2009
                      
                      5
                      
                      82%Trinity
      Theo, LLC
                      
                      1,477,000
                      
                      --
                      
                      1,477,000
                      
                      1/28/2009
                      
                      4
                      
                      100%VBP
      Partners, LLC
                      
                      7,218,000
                      
                      (3,430,000)
                      
                      3,788,000
                      
                      9/26/2008
                      
                      3
                      
                      92%WHM
      Copper Mountain Investments, LLC
                      
                      15,555,000
                      
                      (4,093,000)
                      
                      11,462,000
                      
                      12/11/2009
                      
                      3
                      
                      83%Meadowlark
      Assisted Living Community, LL
                      
                      2,217,000
                      
                      (2,217,000)
                      
                      --
                      
                      8/7/2009
                      
                      3
                      
                      59%$
                      144,861,000
                      $
                      (71,180,000)
                      $
                      73,681,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Management’s evaluation may include, but is not limited to,
appraisals, real estate broker comps, the borrower’s current financial standing
and other market conditions.  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, 2008, we have provided specific
reserves, related to 17 non-performing loans and 7 performing loans, of
approximately $78.2 million.  Our manager evaluated the loans and,
based on current estimates regarding the value of the remaining underlying
collateral or the borrowers’ ability to pay, believes that such collateral is
sufficient to protect us against further losses of
principal.  However, such estimates could change or the value of
underlying real estate could decline.  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 dividends payable to our stockholders.
 
  - 74
-
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  Specific Reserve
      Allowances
 
 The
following table is a roll-forward of the allowance for loan losses for the year
ended December 31, 2008.  Following the table is a discussion of the
status of each identified loan and the reasons for the recording of additional
reserves during the year ended December 31, 2008.
 
 Description
                      
                      Balance
      at
                        December
      31, 2007
                      
                      
                      Specific
      Reserve Allocation
                      
                      
                      Sales
      &
                        Transfers
      to REO
                      
                      
                      Balance
      at
                        December
      31, 2008RightStar,
      Inc. (Part I & Part II)
                      
                      $
                      9,757,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      9,757,000Monterrey
      Associates, L.P.
                      
                      
                      1,174,000
                      
                      
                      
                      981,000
                      
                      
                      
                      --
                      
                      
                      
                      2,155,000Brawley
      CA 122, LLC
                      
                      
                      256,000
                      
                      
                      
                      --
                      
                      
                      
                      (256,000
                      )
                      
                      
                      --Peoria
      180, LLC
                      
                      
                      1,309,000
                      
                      
                      
                      11,028,000
                      
                      
                      
                      --
                      
                      
                      
                      12,337,000Terravita,
      LLC (a)
                      
                      
                      377,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      377,000V
      & M Homes at the Palms, Inc.
                      
                      
                      --
                      
                      
                      
                      913,000
                      
                      
                      
                      (913,000
                      )
                      
                      
                      --Redwood
      Place, LLC
                      
                      
                      --
                      
                      
                      
                      5,284,000
                      
                      
                      
                      --
                      
                      
                      
                      5,284,000The
      Laurels at Mesquite Estates, LLC
                      
                      
                      --
                      
                      
                      
                      358,000
                      
                      
                      
                      (358,000
                      )
                      
                      
                      --2503
      Panorama, LLC (a)
                      
                      
                      --
                      
                      
                      
                      3,051,000
                      
                      
                      
                      --
                      
                      
                      
                      3,051,0003900,
      LLC
                      
                      
                      --
                      
                      
                      
                      3,276,000
                      
                      
                      
                      --
                      
                      
                      
                      3,276,000MRPE,
      LLC
                      
                      
                      --
                      
                      
                      
                      2,086,000
                      
                      
                      
                      (2,086,000
                      )
                      
                      
                      --VBP,
      LLC
                      
                      
                      --
                      
                      
                      
                      3,430,000
                      
                      
                      
                      --
                      
                      
                      
                      3,430,000The
      Orleans at Mesquite Estates, LLC
                      
                      
                      --
                      
                      
                      
                      380,000
                      
                      
                      
                      (380,000
                      )
                      
                      
                      --Silver
      Star Destinations, LLC
                      
                      
                      --
                      
                      
                      
                      13,430,000
                      
                      
                      
                      (13,430,000
                      )
                      
                      
                      --WCP
      Warm Springs Holdings 1, LLC
                      
                      
                      --
                      
                      
                      
                      2,457,000
                      
                      
                      
                      --
                      
                      
                      
                      2,457,000Bright
      Haven Builders, LLC
                      
                      
                      --
                      
                      
                      
                      628,000
                      
                      
                      
                      --
                      
                      
                      
                      628,000Lohrey
      Investments, LLC
                      
                      
                      --
                      
                      
                      
                      5,223,000
                      
                      
                      
                      --
                      
                      
                      
                      5,223,000South
      Bay Villas, LLC
                      
                      
                      --
                      
                      
                      
                      1,188,000
                      
                      
                      
                      --
                      
                      
                      
                      1,188,000World
      Capital La Piazza, LLC
                      
                      
                      --
                      
                      
                      
                      6,836,000
                      
                      
                      
                      --
                      
                      
                      
                      6,836,000Meadowlark
      Assisted Living Community, LLC
                      
                      
                      --
                      
                      
                      
                      2,217,000
                      
                      
                      
                      --
                      
                      
                      
                      2,217,000WHM
      Copper Mountain Investments, LLC
                      
                      
                      --
                      
                      
                      
                      4,093,000
                      
                      
                      
                      --
                      
                      
                      
                      4,093,000Preston
      Hollow Assisted Living, L.P.
                      
                      
                      --
                      
                      
                      
                      2,501,000
                      
                      
                      
                      --
                      
                      
                      
                      2,501,000World
      Capital Durango Alpha (2)
                      
                      
                      --
                      
                      
                      
                      1,364,000
                      
                      
                      
                      --
                      
                      
                      
                      1,364,000Wolfpack
      Properties, LLC (a)
                      
                      
                      --
                      
                      
                      
                      1,082,000
                      
                      
                      
                      --
                      
                      
                      
                      1,082,000ExecuSuite
      Properties, LLC (a)
                      
                      
                      --
                      
                      
                      
                      528,000
                      
                      
                      
                      --
                      
                      
                      
                      528,000SE
      Property Investments, LLC (a)
                      
                      
                      --
                      
                      
                      
                      407,000
                      
                      
                      
                      --
                      
                      
                      
                      407,000Devonshire,
      LLC (a)
                      
                      
                      --
                      
                      
                      
                      1,493,000
                      
                      
                      
                      --
                      
                      
                      
                      1,493,000Building
      A, LLC & Building C, LLC
                      
                      
                      --
                      
                      
                      
                      90,000
                      
                      
                      
                      --
                      
                      
                      
                      90,000Cascadia
      Canyon, LLC
                      
                      
                      --
                      
                      
                      
                      8,434,000
                      
                      
                      
                      --
                      
                      
                      
                      8,434,000Total
                      
                      $
                      12,873,000
                      
                      
                      $
                      82,758,000
                      
                      
                      $
                      (17,423,000
                      )
                      
                      $
                      78,208,000
 
 (a)
              As
      of December 31, 2008, these loans were considered
    performing.
 
 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:
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 Table of Contents
  
 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);
 
 ·
              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.
 
 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 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
trust’s 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.
  - 76
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 Table of Contents
  
 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.
 
 In June
2008, the State of Hawaii allowed us and the other lenders to put in place a new
management team that replaced the previous receiver.
 
 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 were 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, 2008, our specific reserve allowance
on the RightStar loans totaled approximately $9.8 million.
 
 Monterrey Associates, L.P. –
As of December 31, 2008, our manager has provided a specific reserve allowance
for the outstanding balance of the loan, related to a non-performing commercial
loan on a 248-unit apartment complex in Oklahoma City, OK, of approximately $4.4
million, of which our portion was approximately $2.2 million.  This
specific reserve allowance was based on our manager’s evaluation and an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2008, and our manager’s evaluation.  Our manager will
continue to evaluate our position in the loan.
 
 Peoria 180, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a land loan on property located in Glendale, AZ, of approximately
$15.0 million, of which our portion was approximately $12.3
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan obtained by our manager
during February 2009.  As of December 31, 2008, the loan was
considered non-performing.  On March 23, 2008, we, VRM I and Fund III,
sold the Peoria 180, LLC loan to an unrelated third party for $3.0
million.  The sale resulted in no gain or loss.
 
 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, NV, totaling approximately $0.7 million, of which our portion
was approximately $0.4 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 January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which included a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $1.7
million.  The terms of the rewritten loan remain the same as those of
the original loans and the loan was performing as required as of December 31,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Redwood Place, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan for the acquisition and conversion to
condominiums of a 186-unit apartment complex located in Phoenix, Arizona, of
approximately $7.0 million, of which our portion was approximately $5.3
million.  This specific reserve allowance was based on our manager’s
evaluation and pending sales agreement, obtained by our manager during February
2009.  On January 16, 2009, we, VRM I, and Fund III foreclosed upon
Redwood Place, LLC and classified the property as real estate held for
sale.  During February 2009, our manager received a sales agreement to
purchase the property for approximately $8.7 million, of which our portion would
be approximately $6.7 million.  There can be no assurance that the
sale will be completed.
 
  - 77
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 Table of Contents
  2503 Panorama, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan for a 5,700 square foot penthouse located on the
25th floor of Panorama Towers I in Las Vegas, NV, of approximately $4.0 million,
of which our portion is approximately $3.1 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during February 2009.  In
addition, we recognized an impairment loss of approximately $0.6 million, which
was applied to the loan balance, related to the restructuring of the loan,
whereby the interest rate was reduced from 12% to 6% starting in May
2008.  Our manager will continue to evaluate our position in the
loan.
 
 3900, LLC – As of December
31, 2008, our manager has provided a specific reserve allowance for the
outstanding balance of the loan, related to a non-performing loan on 7.66 acre
neighborhood retail center, located in Tempe, AZ, of approximately $3.3
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.
 
 VBP Partners, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan for the development of 4.14 acres of land
located in Las Vegas, NV, of approximately $3.7 million, of which our portion is
approximately $3.4 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during January 2009.  Our manager will continue to
evaluate our position in the loan.  In addition, we recognized an
impairment loss of approximately $0.5 million, which was applied to the loan
balance, related to the modification of the loan, whereby the interest rate was
reduced from 11.5% to 8% starting in October 2008.  Interest payments
will be payable semi-annually at 3% beginning Mach 25, 2009, and accrued at 5%
payable at the end of the loan.  As of March 25, 2009, this loan was
considered performing.  Our manager will continue to evaluate our
position in the loan.
 
 WCP Warm Springs Holdings 1,
LLC – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a non-performing loan on 10 acres of vacant land
located in Las Vegas, NV, of approximately $4.1 million, of which our portion is
approximately $2.5 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Bright Haven Builders, LLC –
As of December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on 10 single family residential lots (lots 74
and 169-177) located within Cherry Meadows Subdivision located in Yelm, WA, of
approximately $0.8 million, of which our portion is approximately $0.6
million.  This specific reserve allowance was based on our manager’s
evaluation of the underlying collateral for this loan during January
2009.  On March 6, 2009, we and, VRM I foreclosed upon Bright Haven
Builders, LLC and classified the property as real estate held for
sale.
 
 Lohrey Investments, LLC – As
of December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on income producing property located in Gilroy,
CA, of approximately $7.2 million, of which our portion is approximately $5.2
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during October 2008.  Our manager will continue to evaluate our
position in the loan.
 
 South Bay Villas, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on a 48 unit condominium building part of the
Desert Sands Condominiums Phase 2 located in Laughlin, NV, of approximately $1.2
million, of which our portion is approximately $1.2 million.  This
specific reserve allowance was based on completion costs of the property
evaluated by our manager during October 2008 and updated
appraisal.  Our manager will continue to evaluate our position in the
loan.
 
  - 78
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  World Capital La Piazza, LLC
– As of December 31, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on approximately 8.44 net acres of
land located in Henderson, NV, of approximately $6.8 million.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during December
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Meadowlark Assisted Living
Community, LLC – As of December 31, 2008, our manager has provided a
specific reserve allowance for the outstanding balance of the loan, which is a
second lien position on a 74 bed Assisted Living/Memory Care residential
facility, located on approximately 4.35 acres of land in the Yreka, CA, of
approximately $3.8 million, of which our portion is approximately $2.2
million.  This specific reserve allowance was based on our manager’s
evaluation, which included the foreclosure of the property by the first lien
holder.  Our manager will continue to evaluate our position in the
loan.
 
 WHM Copper Mountain Investments,
LLC – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a non-performing loan on approximately 2,330 acres
lying within sections 15, 16, 21, 28 & 33 of the Copper Mountain Ranch
Master Planned Community located in Casa Grande, AZ, of approximately $4.9
million, of which our portion is approximately $4.1 million.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 Preston Hollow Assisted Living,
L.P. – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a non-performing loan on the Preston Hollow
Assisted Living Facility located in Dallas, TX, of approximately $2.5
million.  This specific reserve allowance was based on our manager’s
evaluation and current purchase agreement.  On January 7, 2009, this
loan was sold to an unaffiliated third party for approximately $1.1 million,
which approximated our book value of the loan, net of allowances.
 
 World Capital Durango Alpha,
– As of December 31, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on 9.27 acres of land located in Las
Vegas, NV, of approximately $2.0 million, of which our portion is approximately
$1.4 million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 Casciadia Canyon, LLC, – As
of December 31, 2008, our manager has provided a specific reserve allowance,
related to an non-performing loan on 12.39 acres of land plus the SUMCO North
Campus, SUMCO South Campus located in Salem, OR, of approximately $10.3 million,
of which our portion is approximately $8.4 million.  This specific
reserve allowance was based on the current sales price of the underlying
collateral for this loan.  Our manager will continue to evaluate our
position in the loan.
 
 Wolfpack Properties, LLC, –
As of December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on a 22,000 SqFt Class A Office Building "B" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.2 million, of which our portion is approximately $1.1
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 ExecuSuite Properties, LLC, –
As of December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "D" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $0.6 million, of which our portion is approximately $0.5
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
  - 79
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 Table of Contents
  SE Property Investments, LLC,
– As of December 31, 2008, our manager has provided a specific reserve
allowance, related to a performing loan on 22,000 SqFt Class A Office Building
"E" of Village Business Park located on 1.48 acres of land located in Las Vegas,
NV, of approximately $0.4 million, of which our portion is approximately $0.4
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 Devonshire, LLC, – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "F" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.6 million, of which our portion is approximately $1.5
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 Building A, LLC & Building C,
LLC, – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a second lien position performing loan on 3.18
acres of land lying within the Village Business Park and a 45,622 SqFt Office
Building "C" of Village Business Park located on 1.48 acres of land located in
Las Vegas, NV, of $106,000, of which our portion is $90,000.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 As of
December 31, 2008, our manager had granted extensions on 18 loans, totaling
approximately $157.1 million, of which our portion was approximately $114.0
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 generally 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.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  Subsequent to their extension, 9 of the 18 loans have
become non-performing.  The loans, which became non-performing after
their extension, had a total principal amount at December 31, 2008, of
approximately $104.0 million, of which our portion is approximately $79.4
million.  Subsequent to December 31, 2008, we modified six loans with
a common guarantor, one of which was non-performing.  As part of the
modifications, these loans were extended.  For further information
regarding these loans, see Common Guarantors in Note C – Financial Instruments and
Concentrations of Credit Risk.
 
 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;
  - 80
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 ·
              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.  The following is a breakdown of allowance for loan losses
related to performing and non-performing loans as of December 31, 2008 and
December 31, 2007:
 
 As
      of December 31, 2008Balance
                    
                    
                    Allowance
      for loan losses *
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    9,230,000
                    
                    
                    $
                    --
                    
                    
                    $
                    9,230,000Non-performing
      loans – related allowance
                    
                    
                    135,631,000
                    
                    
                    
                    (71,180,000
                    )
                    
                    
                    64,451,000Subtotal
      nonperforming loans
                    
                    
                    144,861,000
                    
                    
                    
                    (71,180,000
                    )
                    
                    
                    73,681,000Performing
      loans – no related allowance
                    
                    
                    57,666,000
                    
                    
                    
                    --
                    
                    
                    
                    57,666,000Performing
      loans – related allowance
                    
                    
                    22,515,000
                    
                    
                    
                    (7,028,000
                    )
                    
                    
                    15,487,000Subtotal
      performing loans
                    
                    
                    80,181,000
                    
                    
                    
                    (7,028,000
                    )
                    
                    
                    73,153,000Total
                    
                    $
                    225,042,000
                    
                    
                    $
                    (78,208,000
                    )
                    
                    $
                    146,834,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesabove.
 
 As
      of December 31, 2007Balance
                    
                    
                    Allowance
      for loan losses
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    10,364,000
                    
                    
                    $
                    --
                    
                    
                    $
                    10,364,000Non-performing
      loans – related allowance
                    
                    
                    20,201,000
                    
                    
                    
                    (11,187,000
                    )
                    
                    
                    9,014,000Subtotal
      nonperforming loans
                    
                    
                    30,565,000
                    
                    
                    
                    (11,187,000
                    )
                    
                    
                    19,378,000Performing
      loans – no related allowance
                    
                    
                    240,603,000
                    
                    
                    
                    --
                    
                    
                    
                    240,603,000Performing
      loans – related allowance
                    
                    
                    19,895,000
                    
                    
                    
                    (1,686,000
                    )
                    
                    
                    18,209,000Subtotal
      performing loans
                    
                    
                    260,498,000
                    
                    
                    
                    (1,686,000
                    )
                    
                    
                    258,812,000Total
                    
                    $
                    291,063,000
                    
                    
                    $
                    (12,873,000
                    )
                    
                    $
                    278,190,000
 
 Our
manager evaluated our loans and, based on current estimates with respect to the
value of the underlying collateral, believes that such collateral is sufficient
to protect us against further losses of principal or
interest.  However, such estimates could change or the value of the
underlying real estate could decline.  Our manager will continue to
evaluate our 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, 2008, we owned 533,675 shares of VRM I’s common stock, representing
approximately 8.05% of their total outstanding common stock.
 
  - 81
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 Table of Contents
  During
the year ended December 31, 2008, in accordance with FAS 115 and FSP FAS 115-1
and FAS 124-1, we evaluated our investment in VRM I’s common stock and
determined there was an other-than-temporary impairment as of September 30,
2008.  Based on this evaluation we have reversed our unrealized other
comprehensive losses and realized losses on our investment to its fair value, as
of September 30, 2008, to $2.25 per share totaling approximately $1.2 million
dollars and recognizing an impairment of approximately $2.2
million.
 
 As of
December 31, 2008, our manager evaluated the near-term prospects of VRM I in
relation to the severity and duration of the unrealized loss since September 30,
2008.  Based on that evaluation and our ability and intent to hold
this investment for a reasonable period of time sufficient for a forecasted
recovery of fair value, we do not consider our investment in VRM I to be
other-than-temporarily impaired at December 31, 2008.  We will
continue to evaluate our investment in marketable securities on a quarterly
basis.  There were no other-than-temporary impairments made during the
year ended December 31, 2007.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At
December 31, 2008, we held 11 properties with a total carrying value of
approximately $24.4 million, which were acquired through foreclosure and
recorded as investments in real estate held for sale.  None of these
properties generated income from rentals or other sources during the year ended
December 31, 2008.  Expenses incurred during the year ended December
31, 2008, related to our real estate held for sale totaled approximately $48.9
million.  These expenses included approximately $47.2 million in write
downs on real estate held for sale.  The summary below includes our
percentage of ownership in each of the properties.  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.  Set forth
below is a roll-forward of investments in real estate held for sale during the
year ended December 31, 2008, followed by a discussion of the basis for
recording additional write-downs during the year ended December 31,
2008:
 
 Description
                        Date
      Acquired
                        
                        Percentage
      of Ownership
                        
                        
                        Balance
      at December 31, 2007
                        
                        
                        Acquisitions
                        
                        
                        Write
      Downs
                        
                        
                        Cash
      Reductions
                        
                        
                        Net
      Cash Proceeds on Sales
                        
                        
                        Gain
      (Loss) on Sale of Real Estate
                        
                        
                        Balance
      at December 31, 2008Marshall's
      Vista, LTD (1)
                        8/3/2004
                        
                        
                        100%
                        
                        
                        $
                        4,438,000
                        
                        
                        $
                        --
                        
                        
                        $
                        (1,128,000
                        )
                        
                        $
                        (550,000
                        )
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        2,760,000Rio
      Vista Nevada, LLC(2)
                        12/21/2006
                        
                        
                        86%
                        
                        
                        
                        24,125,000
                        
                        
                        
                        --
                        
                        
                        
                        (22,180,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        1,945,000Pirates
      Lake, LTD (3)
                        2/5/2008
                        
                        
                        48%
                        
                        
                        
                        --
                        
                        
                        
                        4,100,000
                        
                        
                        
                        (3,127,000
                        )
                        
                        
                        (86,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        887,000Forest
      Development, LLC (4)
                        3/7/2008
                        
                        
                        64%
                        
                        
                        
                        --
                        
                        
                        
                        1,681,000
                        
                        
                        
                        (497,000
                        )
                        
                        
                        --
                        
                        
                        
                        (925,000
                        )
                        
                        
                        (259,000
                        )
                        
                        
                        --Brawley
      CA 122, LLC(5)
                        5/1/2008
                        
                        
                        33%
                        
                        
                        
                        --
                        
                        
                        
                        499,000
                        
                        
                        
                        (191,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        308,000V
      & M Homes at the Palms, Inc. (6)
                        7/15/2008
                        
                        
                        39%
                        
                        
                        
                        --
                        
                        
                        
                        597,000
                        
                        
                        
                        (142,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        455,000The
      Orleans at Mesquite Estates, LLC (7)
                        8/8/2008
                        
                        
                        100%
                        
                        
                        
                        --
                        
                        
                        
                        1,946,000
                        
                        
                        
                        (1,118,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        828,000MRPE,
      LLC (8)
                        8/11/2008
                        
                        
                        72%
                        
                        
                        
                        --
                        
                        
                        
                        10,100,000
                        
                        
                        
                        (5,483,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        4,617,000The
      Laurels at Mesquite Estates, LLC(9)
                        8/11/2008
                        
                        
                        100%
                        
                        
                        
                        --
                        
                        
                        
                        2,432,000
                        
                        
                        
                        (1,512,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        920,000Jeffrey's
      Court, LLC(10)
                        9/3/2008
                        
                        
                        61%
                        
                        
                        
                        --
                        
                        
                        
                        3,073,000
                        
                        
                        
                        (844,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        2,229,000Cliff
      Shadows Properties, LLC(11)
                        9/8/2008
                        
                        
                        95%
                        
                        
                        
                        --
                        
                        
                        
                        16,118,000
                        
                        
                        
                        (8,014,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        8,104,000The
      Sycamore Glenn at Mesquite Estates, LLC(12)
                        9/8/2008
                        
                        
                        100%
                        
                        
                        
                        --
                        
                        
                        
                        4,369,000
                        
                        
                        
                        (2,989,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        1,380,000Total
                        
                        
                        
                        
                        
                        
                        $
                        28,563,000
                        
                        
                        $
                        44,915,000
                        
                        
                        $
                        (47,225,000
                        )
                        
                        $
                        (636,000
                        )
                        
                        $
                        (925,000
                        )
                        
                        $
                        (259,000
                        )
                        
                        $
                        24,433,000
 
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 (1)
              Marshall's Vista, LTD –
      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
      sales contract required that the buyer complete the purchase on or before
      June 29, 2007; however, the buyer chose to extend the closing date
      multiple times by paying a non-refundable extension fee that was applied
      to the property value recorded 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 had elected to extend the
      closing date to December 2008, by paying a non-refundable extension fee of
      $50,000 every 30 days until closing.  As of December 31, 2008,
      we had received a total of $800,000 in extension fees.  In
      January 2009, the potential buyer informed us that they were not in a
      position to close and that they could no longer continue to make extension
      payments.  Subsequently, the sale has cancelled.  Our
      manager has evaluated the carrying value of the property and based on the
      current sales price, the property was written down approximately $1.1
      million.  The property is currently listed for sale at
      approximately $3.0 million, which approximates the total book value, plus
      selling costs, for this property.
 
 (2)
              Rio Vista Nevada, LLC –
      During December 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, 2008, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s evaluation and an updated
      appraisal obtained during February 2009, the property was written down
      approximately $25.9 million, of which our portion was approximately $22.2
      million, during the year ended December 31,
  2008.
 
 (3)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings approximately 46.75 acres of land in Galveston,
      TX.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in October 2008 and
      the current sales price, the property was written down approximately $6.5
      million, of which our portion was approximately $3.1
      million.  During June 2008, we received a deposit refund
      totaling $86,000.  The property is currently listed for sale at
      $1.8 million, which approximates the total book value, plus selling costs,
      for this property held by us, VRM I and Fund
  III.
 
 (4)
              Forest Development, LLC
      – During March 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings two 4,000 square foot single family residences, together with
      the four remaining lots in a subdivision, located on Mt. Charleston,
      NV.  Our manager has evaluated the carrying value of the
      property and based on that evaluation the property was written down
      approximately $0.8 million, of which our portion was approximately $0.5
      million.  During September 2008, we, VRM I and Fund III sold
      this property for approximately $1.4 million, of which our portion was
      approximately $0.9 million.  The sale resulted in a net loss of
      approximately $0.4 million, of which our portion was approximately $0.3
      million.
 
 (5)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings a 25 acre proposed 122 single-family subdivision to be known
      as River Drive Subdivision in Brawley, CA.  Our manager has
      evaluated the carrying value of the property and based on an updated
      appraisal obtained in December 2008, the property was written down
      approximately $0.6 million, of which our portion was approximately $0.2
      million, during the year ended December 31, 2008.  The property
      is currently listed for sale.
 
 (6)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings an 80 acre parcel of land in Florence,
      AZ.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in February 2009, the
      property was written down approximately $0.4 million, of which our portion
      was approximately $0.1 million, during the year ended December 31,
      2008.  The property is currently listed for
  sale.
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 (7)
              The Orleans at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 21.7 gross acres of Mesquite Estates Planned Unit Development
      with 65 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate,
      updated appraisal obtained in January 2009, and current sales price, the
      property was written down approximately $1.1 million, during the year
      ended December 31, 2008.  The property is currently listed for
      sale at approximately $0.9 million, which approximates the total book
      value, plus selling costs, for this
property.
 
 (8)
              MRPE, LLC – During
      August 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings 132.03 acres of land within the Wolf Creek Estates Master
      Planned Community, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its analysis,
      updated appraisal obtained in January 2009, and current sales price, the
      property was written down approximately $7.6 million, of which our portion
      was approximately $5.5 million, during the year ended December 31,
      2008.  The property is currently listed for sale at
      approximately $7.0 million, which approximates the total book value, plus
      selling costs, for this property held by us, VRM I and Fund
      III.
 
 (9)
              The Laurels at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 26.5 gross acres of Mesquite Estates Planned Unit Development
      with 60 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate,
      updated appraisal obtained in August 2008, and current sales price, the
      property was written down approximately $1.5 million, during the year
      ended December 31, 2008.  The property is currently listed for
      sale at approximately $1.0 million, which approximates the total book
      value, plus selling costs, for this
property.
 
 (10)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings 4.92 acres of land to be developed into 119
      condominium units in Las Vegas, NV.  Our manager has evaluated
      the carrying value of the property and based on its analysis, updated
      appraisal obtained in January 2009, and current sales price, the property
      was written down approximately $1.4 million, of which our portion is
      approximately $0.8 million, during the year ended December 31,
      2008.  The property is currently listed for
  sale.
 
 (11)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and Fund III acquired
      through foreclosure proceedings a 106 Unit Townhouse Project known as
      Cliff Shadows Townhomes located in Las Vegas, NV.  Our manager
      has evaluated the carrying value of the property and based on an updated
      appraisal obtained in September 2008 and the current purchase agreement,
      the property was written down approximately $8.4 million, of which our
      portion was approximately $8.0 million, during the year ended December 31,
      2008.  During January 2009, our manager received a sales
      agreement to purchase the property for approximately $9.6 million, of
      which our portion would be approximately $9.1 million.  On March
      6, 2009, we, VRM I, and Fund III completed the sale of 98 units, with the
      remaining units pending final
escrow.
 
 (12)
              The Sycamore Glenn at Mesquite
      Estates, LLC – During September 2008, we acquired through
      foreclosure proceedings 32.3 gross acres of Mesquite Estates Planned Unit
      Development with 180 "paper" lots, located in Mesquite, NV.  Our
      manager has evaluated the carrying value of the property and based on its
      estimate, the property was written down approximately $3.0 million, during
      the year ended December 31, 2008.  The property is currently
      listed for sale at approximately $1.5 million, which approximates the
      total book value, plus selling costs, for this
  property.
 
 NOTE
G — 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, such acquisitions and sales are made without any mark up
or mark down.  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.
 
  - 84
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  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 years ended December 31, 2008, 2007 and the
twelve months ended December 31, 2006, were $1.1 million, $1.1 million and $1.1
million, respectively.  We paid our manager approximately $0.6 million
for unpaid fees owed to our manager from our borrowers.  These unpaid
fees became due and payable on demand from us.
 
 As of
December 31, 2008, our manager owned 92,699 of our common shares.  For
the years ended December 31, 2008, 2007 and the nine months ended December 31,
2006, we declared $45,000, $139,000, and $92,000, respectively, 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.
 
 During
September 2008, we, VRM I and Fund III sold the Forest Development, LLC property
to an unrelated third party.  As part of the sale, we, VRM I and Fund
III paid our manager a commission of $46,000, shared pro-rata between us, VRM I
and Fund III.
 
 As of
December 31, 2008, we owed our manager $623,000.  As of December 31,
2007, we had receivables from our manager of $1,000.
 
 Transactions with Other
Related Parties
 
 As of
December 31, 2008, we owned 533,675 common shares of VRM I, representing
approximately 8.05% of their total outstanding common stock.  For the
years ended December 31, 2008, 2007 and the twelve months ended December 31,
2006, we recognized $86,000, $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.
 
 As of
December 31, 2008, VRM I owned 225,134 of our common shares, representing
approximately 1.63% of our total outstanding common stock.  For the
years ended December 31, 2008, 2007 and the twelve months ended December 31,
2006, we declared $110,000, $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, 2008, we sold approximately $0.5 million in real
estate loans to VRM I and purchased $1.8 million in real estate loans from VRM
I.  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, 2008, we had receivables from VRM I of $92,000.  As of
December 31, 2007, we owed VRM I $123,000.
 
 As of
December 31, 2008, Fund III owned 114,117 of our common shares, representing
approximately 0.83% of our total outstanding common stock.  For the
years ended December 31, 2008, 2007 and the twelve months ended December 31,
2006, we declared $56,000, $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.  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.
 
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  As of
December 31, 2008, we had receivables from Fund III of $9,000.  As of
December 31, 2007, and 2006, we did not have a balance due to or due from Fund
III.
 
 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 year ended
December 31, 2008 and 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 years ended
December 31, 2008 and 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 years ended
December 31, 2008 and 2007.
 
 During
the years ended December 31, 2008, 2007 and the twelve months ended December 31,
2006, we incurred $236,000, $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.
 
 On March
23, 2009, our board of directors authorized us to enter into a consulting
agreement with the previous COO of the Manager to assist us in the repurchase of
the Junior Subordinated Notes.  The consulting fee paid will
be up to three and half percent of the discounted amount of the
repurchase
 
 NOTE
H — 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, 2008, we have received $104,000
in principal payments.  Payments will be recognized as income when
received.  The balance of $336,000 was fully reserved as of December
31, 2008.
 
 During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
approximately $5.5 million of which our share of the proceeds were approximately
$3.8 million, which resulted in a loss of approximately $0.8
million.  In addition, during June 2005, we and VRM I entered into a
settlement agreement with the guarantors of the loan in the amount of $2.0
million in exchange for a release of their personal guarantees, of which our
share was approximately $1.4 million.  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 $1.1 million from July 2005 through July
2008, at which time the entire balance is due.  As of December 31,
2008, we have received $616,000 in principal payments.  Payments will
be recognized as income when received.  The balance of $745,000 was
fully reserved as of December 31, 2008.
 
 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 approximately
$6.0 million.  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.  As of December 31, 2007,
we received $234,000 in principal payments and the balance of $184,000 was fully
reserved.  Due to the uncertainty of collectability, the balance for
the entire remaining balance of the promissory note was fully
reserved.
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  On August
7, 2007, we and VRM I filed a complaint against the guarantor in the U.S.
District Court for 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 were granted a default
judgment for all the amounts due.  However, due to the current
financial position of the guarantor, our Manager has determined that we would
not be able to recover any amounts due from the guarantor.  As of
March 31, 2008, the note was fully written off.
 
 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 June
2007, we and VRM I entered into a settlement agreement, which reduced the note
to $175,000, of which our portion is $115,000.  On July 16, 2007, we
and VRM I received a payment totaling $50,000, of which our portion was
$33,000.  On July 1, 2008, we and VRM I received a $113,000 payment,
of which our portion was $74,000.  The payment represented full
settlement of the note and the remaining balance of $8,000 was written
off.
 
 During
2006, we and VRM I entered into a settlement agreement in the amount of $1.5
million with the guarantors of a loan collateralized by a 126 unit (207 bed)
assisted living facility in Phoenix, AZ, which 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.  As of December 31, 2008, we had received $2,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of approximately $1.3 million was fully
reserved as of December 31, 2008.
 
 NOTE
I — 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 years ended December 31, 2008 and 2007,
interest expense on the junior subordinated notes totaled approximately $5.0
million and $2.7 million, respectively.  As of December 31, 2008, the
balance outstanding was approximately $56.4 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.
 
 On
November 7, 2008, we entered into an agreement with Taberna Capital Management,
LLC (“Taberna”), in its capacity as collateral manager for certain collateral
debt obligation vehicles that are the holders of the junior subordinated notes,
providing for an amendment of the tangible net worth covenant (the “First
Supplemental Indenture”).  On December 31, 2008, we were not in
compliance with the revised tangible net worth covenant and the debt to tangible
net worth covenant in the First Supplemental Indenture.
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 The First
Supplemental Indenture provides as follows (defined terms refer to the
definitions in the indenture):
 
 ·
              The
      tangible net worth covenant was changed from not less than $225 million to
      not less than the lesser of $150 million or 2.5 times the then outstanding
      principal balance of the junior subordinated
  notes.
 
 ·
              The
      EBITDA covenant was changed from 2.5 times Interest Expense to 1.5 times
      Interest Expense, provided that, for one quarter only, the requirement
      will be 1.2 times Interest Expense for the four quarter period ending June
      30, 2009.
 
 ·
              The
      restriction on the Company redeeming notes at par prior to July 30, 2012
      were removed and no pre-payment penalty will be applied to such
      redemptions.
 
 ·
              We
      were required to post a $3,750,000 letter of credit by November 12, 2008
      and a $1,250,000 letter of credit by April 12, 2009.  Taberna is
      entitled to draw upon such letters of credit to pay principal and interest
      on the junior subordinated notes if an Event of Default has
      occurred.  The letters of credit may not be subordinated to any
      of our Senior Debt.  During November 2008, we posted the entire
      $5,000,000 letter of credit.
 
 ·
              The
      notice and cure provisions in the indenture were changed from 30 days to
      15 days.
 
 ·
              Taberna
      was granted expanded rights to examine our books and
    records.
 
 ·
              We
      agreed to reimburse Taberna’s fees related to the First Supplemental
      Indenture in an amount not to exceed
$50,000.
 
 On
December 31, 2008, we were not in compliance with the revised tangible net worth
covenant and the debt to tangible net worth covenant in the First Supplemental
Indenture.  On March 25, 2009, we entered into a letter agreement with
Taberna providing for a waiver of all financial covenants effective December 31,
2008 through June 30, 2009.  In addition, pursuant to the letter
agreement we will exchange $20 million of the junior subordinated notes for
certain replacement securities, which we expect to acquire for approximately $10
million of cash.  This will reduce our obligation on the junior
subordinated notes to approximately $36.3 million, which should facilitate
future compliance with financial covenants set forth in the First Supplemental
Indenture.  This transaction would result in a net gain of
approximately $9 million including transaction cost.  The replacement
securities will be acquired with funds consisting of $5 million from our
operating funds and $5 million from the $5 million letter of credit referred to
above.  The funds shall be deposited on or before April 2,
2009.  In addition, we are to pay additional interest equal to
$250,000 per year, payable quarterly on the same payment dates as the current
terms of the Junior Subordinated Notes.  We agreed to make a
nonrefundable payment of $200,000 to Taberna to cover its costs related to the
waiver and exchange arrangement.
 
 During
May 2008, we acquired debt securities resulting in a gain on extinguishment of
debt totaling approximately $1.6 million.
 
 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 in 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”).
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  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
borrowings arrangements.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part IV, Item 15 of
this Report Form 10-K).  The participation interest is at 11% on the
outstanding balance.  We incurred approximately $0.9 million in
finance costs related to the secured borrowings, these costs are being amortized
to interest expense over the term of the agreements.  As of December
31, 2008, we had $10.6 million in funds, including approximately $0.7 million in
interest reserves, used under Inter-creditor Agreements as compared to none as
of December 31, 2007.  During the year ended December 31, 2008, we
paid down approximately $10.4 million of the $21.0 million in funds used under
Inter-creditor Agreements.
 
 NOTE
K — NOTE PAYABLE
 
 In May
2008, we financed a 12-month insurance policy for Directors and Officers
liability, with an annual interest rate of 4.9%.  The agreement
required a down payment of $38,000 and nine monthly payments of $23,000
beginning on May 27, 2008.  As of December 31, 2008, the outstanding
balance of the note was $24,000.
 
 On March
25, 2009, we entered into a promissory note for $3 million payable on or before
May 8, 2009, with an exit fee of $0.6 million due on or before May 26,
2009.  We intend to use these funds to purchase a portion of the
junior subordinated notes.
 
 NOTE
L — FAIR VALUE
 
 As of
December 31, 2008, financial assets and liabilities utilizing Level 1 inputs
included investment in marketable securities - related party.  We had
no assets or liabilities utilizing Level 2 inputs and assets and liabilities
utilizing Level 3 inputs included investments in real estate loans, secured
borrowings and junior subordinated notes payable.
 
 To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment.  Accordingly, our degree of judgment exercised in
determining fair value is greatest for instruments categorized in Level
3.  In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy.  In such cases, FAS
157 requires that an asset or liability be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair
value.
 
 Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure.  Therefore, even when market assumptions are
not readily available, our own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement
date.  We use prices and inputs that are current as of the measurement
date, including during periods of market dislocation, such as the recent
illiquidity in the auction rate securities market.  In periods of
market dislocation, the observability of prices and inputs may be reduced for
many instruments.  This condition may cause our financial instruments
to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
 
 FAS 157
requires that the valuation techniques used by us be consistent with at least
one of the three possible approaches: the market approach, income approach
and/or cost approach.  Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active
securities exchanges.
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  Our Level
2 inputs are primarily based on the market approach of quoted prices in active
markets or current transactions in inactive markets for the same or similar
collateral that do not require significant adjustment based on unobservable
inputs.  Our Level 3 inputs are primarily based on the income and cost
approaches, specifically, discounted cash flow analyses, which utilize
significant inputs based on our estimates and assumptions.
 
 The
following table presents the valuation of our financial assets and liabilities
as of December 31, 2008 measured at fair value on a recurring basis by the input
levels prescribed by FAS 157:
 
 Quoted
      Prices in Active Markets For Identical Assets (Level 1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservable Inputs (Level 3)
                    
                    
                    Balance
      at
                      12/312008AssetsInvestment
      in marketable securities - related party
                    
                    $
                    496,000
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    496,000Investment
      in real estate loans
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    145,959,000
                    
                    
                    $
                    145,959,000Assets
      under secured borrowings
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    10,600,000
                    
                    
                    $
                    10,600,000LiabilitiesSecured
      borrowings
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    9,907,000
                    
                    
                    $
                    9,907,000Junior
      subordinated notes payable
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    28,600,000
                    
                    
                    $
                    28,600,000
 
 The
following table presents the changes in our financial assets and liabilities
that are measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from January 1, 2008 to December 31,
2008:
 
 AssetsInvestment
      in
                      real
      estate loans
                    
                    
                    Assets
      under secured borrowingsBalance
      on January 1, 2008
                    
                    $
                    278,005,000
                    
                    
                    $
                    --Change
      in temporary valuation adjustment included in net lossIncrease
      in allowance for loan losses
                    
                    
                    (82,758,000
                    )
                    
                    
                    --Change
      in impairment on restructured loans
                    
                    
                    (954,000
                    )
                    
                    
                    --Loss
      on sale of investment in real estate loan
                    
                    
                    (2,760,000
                    )
                    
                    
                    --Purchase
      and additions of assetsTransfer
      of real estate loans to real estate held for sale
                    
                    
                    (48,907,000
                    )
                    
                    
                    --Transfer
      of allowance on real estate loans to real estate held for
    sale
                    
                    
                    3,992,000
                    
                    
                    
                    --New
      mortgage loans and mortgage loans bought
                    
                    
                    93,854,000
                    
                    
                    
                    --Payment
      on assets under secured borrowings
                    
                    
                    10,400,000
                    
                    
                    
                    (10,400,000
                    )Sales,
      pay downs and reduction of assetsCollections
      of principal and sales of investment in real estate loans
                    
                    
                    (96,653,000
                    )
                    
                    
                    --Reduction
      of allowance for loan loss related to sale of investment in real estate
      loan
                    
                    
                    13,430,000
                    
                    
                    
                    --Payment
      on assets under secured borrowings
                    
                    
                    (21,000,000
                    )
                    
                    
                    21,000,000Temporary
      change in estimated fair value based on future cash flows
                    
                    
                    (690,000
                    )
                    
                    
                    --Transfer
      to Level 1
                    
                    
                    --
                    
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --
                    
                    
                    
                    --Balance
      on December 31, 2008, net of temporary valuation
adjustment
                    
                    $
                    145,959,000
                    
                    
                    $
                    10,600,000
 
  - 90
-
 Table of Contents
  
 LiabilitiesSecured
      borrowings
                    
                    
                    Junior
      subordinated notes payableBalance
      on January 1, 2008
                    
                    $
                    --
                    
                    
                    $
                    60,100,000Purchase
      of liabilitiesSecured
      borrowings
                    
                    
                    21,000,000
                    
                    
                    
                    --Reduction
      of interest reserves related to secured borrowings
                    
                    
                    (693,000
                    )
                    
                    
                    --Repurchase
      junior subordinated notes payable on open market
                    
                    
                    --
                    
                    
                    
                    (2,194,000
                    )Gain
      on repurchase of junior subordinated notes payable
                    
                    
                    --
                    
                    
                    
                    (1,556,000
                    )Payment
      of liabilitiesPayments
      on secured borrowings
                    
                    
                    (10,400,000
                    )
                    
                    
                    --Temporary
      change in estimated fair value
                    
                    
                    --
                    
                    
                    
                    (27,750,000
                    )Transfer
      to Level 1
                    
                    
                    --
                    
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --
                    
                    
                    
                    --Balance
      on December 31, 2008, net of temporary valuation
adjustment
                    
                    $
                    9,907,000
                    
                    
                    $
                    28,600,000
 
 NOTE
M — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
January 2009, the FASB issued FASB Staff Position (“FSP”) EITF 99-20-1 – Amendments to the Impairment
Guidance of EITF Issue No. 99-20.  This FSP affects all
entities with certain beneficial interests in securitized financial assets
within the scope of EITF Issue No. 99-20.  In determining
other-than-temporary-impairment, Issue 99-20 requires reliance on market
participant assumptions about future cash flows.  While FAS 115 –
Accounting for Certain
Investments in Debt and Equity Securities” (“FAS 115”) uses these same
assumptions, it permits the use of reasonable management judgment on the
probability that the holder will be unable to collect all amounts
due.  This FSP brings the impairment model on beneficial interest held
by a transferor in securitized financial assets, to be similar to the impairment
model of FAS 115.  The FSP is effective for interim and annual
reporting periods ending after December 15, 2008.  The adoption of
this standard did not have a material impact on our financial position or
results of operations.
 
 In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8 –
Disclosures about Transfers of
Financial Assets and Interests in Variable Interest Entities (“FSP 140-4
and 46(R)-8”).  This FSP requires additional disclosures by public
entities with continuing involvement in transfers of financial assets to special
purpose entities and with variable interests in VIEs, including sponsors that
have a variable interest in a VIE.  Additionally, this FSP requires
certain disclosures to be provided by a public entity that is (1) a sponsor of a
qualifying special-purpose entity (“SPE”) that holds a variable interest in the
qualifying SPE but was not the transferor (non-transferor) of financial assets
to the qualifying SPE, and (2) a servicer of a qualifying SPE that holds a
significant variable interest in the qualifying SPE but was not the transferor
(non-transferor) of financial assets to the qualifying SPE.  This FSP
is effective for the first reporting period (interim or annual) that ends after
December 15, 2008.  The adoption of this standard did not have a
material impact on our financial position or results of operations.
 
 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.
 
  - 91
-
 Table of Contents
  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.
 
 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
United States Court of Appeals for the Ninth Circuit, 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.
 
 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.  In
December 2008, this lawsuit was settled.  The settlement has no effect
on us.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class 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 court certified a class of all former Fund I unit holders
who voted against the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The trial is currently scheduled to begin on June 19,
2009.  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.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by approximately 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
rescission .  The trial is currently scheduled to begin on April 19,
2010.  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
 
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-
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  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 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
trust’s 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.
 
 We and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class 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 court certified a class of all former Fund II unit holders
who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc.,
and a subclass of all class members who were over the age of 60 and Nevada
residents at the time of the merger.  The trial is currently scheduled
to begin on June 19, 2009.  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 sets of plaintiffs representing approximately 138
individuals (“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
rescission .  The trial is currently scheduled to begin on April 19,
2010.  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
Shustek have entered into confidential settlement agreements with individual
plaintiffs who collectively held approximately 10% of the total shares at issue
in the action.  In addition, four individual plaintiffs have
voluntarily withdrawn their claims against us, Vestin Mortgage, Inc. and Michael
Shustek with prejudice.
 
 In
addition to the matters described above, we are involved in a number of other
legal proceedings concerning matters arising in the ordinary course 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
 
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-
 Table of Contents
  To
maintain our status as a REIT, we are required to declare dividends, 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 dividends 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.
 
 Our Board
of Directors decided to suspend the payment of dividends during June
2008.  We will continue to comply with the REIT requirements and will
distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 NOTE
Q — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following schedule is a selected quarterly financial data for the year ended
December 31, 2008 and December 31, 2007:
 
 For
      the Year Ended December 31, 20081st
      Quarter
                  
                  
                  2nd
      Quarter
                  
                  
                  3rd
      Quarter
                  
                  
                  4th
      Quarter
                  
                  
                  YearTotal
      revenues
                  
                  $
                  7,156,000
                  
                  
                  $
                  5,916,000
                  
                  
                  $
                  3,687,000
                  
                  
                  $
                  2,548,000
                  
                  
                  $
                  19,307,000Total
      operating expenses
                  
                  
                  2,103,000
                  
                  
                  
                  24,867,000
                  
                  
                  
                  23,924,000
                  
                  
                  
                  46,758,000
                  
                  
                  
                  97,652,000Total
      non-operating income (loss)
                  
                  
                  185,000
                  
                  
                  
                  1,639,000
                  
                  
                  
                  (2,102,000
                  )
                  
                  
                  (2,692,000
                  )
                  
                  
                  (2,970,000
                  )Total
      income (loss) from real estate held for sale
                  
                  
                  (1,965,000
                  )
                  
                  
                  (11,291,000
                  )
                  
                  
                  (17,807,000
                  )
                  
                  
                  (17,791,000
                  )
                  
                  
                  (48,854,000
                  )Income
      (loss) before provision for income taxes
                  
                  
                  3,273,000
                  
                  
                  
                  (28,603,000
                  )
                  
                  
                  (40,146,000
                  )
                  
                  
                  (64,693,000
                  )
                  
                  
                  (130,169,000
                  )Provision
      for income taxes
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --NET
      INCOME (LOSS)
                  
                  $
                  3,273,000
                  
                  
                  $
                  (28,603,000
                  )
                  
                  $
                  (40,146,000
                  )
                  
                  $
                  (64,693,000
                  )
                  
                  $
                  (130,169,000
                  )Basic
      and diluted earnings per weighted average common share
                  
                  $
                  0.22
                  
                  
                  $
                  (1.92
                  )
                  
                  $
                  (2.72
                  )
                  
                  $
                  (4.54
                  )
                  
                  $
                  (8.86
                  )Dividends
      declared per common share
                  
                  $
                  0.32
                  
                  
                  $
                  0.17
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  0.49Weighted
      average common shares
                  
                  
                  14,872,330
                  
                  
                  
                  14,881,563
                  
                  
                  
                  14,772,583
                  
                  
                  
                  14,250,794
                  
                  
                  
                  14,695,756Weighted
      average term of outstanding loans, including extensions
                  
                  19
      months
                  
                  
                  17
      months
                  
                  
                  20
      months
                  
                  
                  20
      months
                  
                  
                  20
      months
 
  - 94
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 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
 
 NOTE
R — SUBSEQUENT EVENTS
 
 On
January 7, 2009, we sold the Preston Hollow Assisted Living, L.P. loan to an
unaffiliated third party for approximately $1.1 million, which approximated our
book value of the loan, net of allowances.  No gain or loss was
recognized.
 
 On
January 16, 2009, we, VRM I, and Fund III foreclosed upon Redwood Place, LLC and
classified the property as real estate held for sale.  During February
2009, our manager received a sales agreement to purchase the property for
approximately $8.7 million, of which our portion would be approximately $6.7
million.
 
 On
January 26, 2009, we and VRM I, settled with a plaintiff, involved in the breach
of contract class action filed in San Diego, whereby we and VRM I, repurchased
the plaintiff’s stock and classified it as treasury stock.
 
 During
January and February 2009, we, Vestin Mortgage, Inc. and Michael Shustek have
entered into confidential settlement agreements with individual plaintiffs who
collectively held approximately 10% of the total shares at issue in the
action.  In addition, four individual plaintiffs have voluntarily
withdrawn their claims against us, Vestin Mortgage, Inc. and Michael Shustek
with prejudice.
 
 On
February 11, 2009, we sold the Trinity Theo, LLC loan to an unaffiliated third
party for approximately $1.6 million, no gain or loss was
recognized.
 
 As of
March 4, 2009, one performing loan, totaling $12.6 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 On March
6, 2009, we and, VRM I foreclosed upon Bright Haven Builders, LLC and classified
the property as real estate held for sale.
  - 95
-
 Table of Contents
  
 During
January 2009, our manager received a sales agreement to purchase the Cliff
Shadows Properties, LLC property for approximately $9.6 million, of which our
portion would be approximately $9.1 million.  On March 6, 2009, we,
VRM I, and Fund III completed the sale of 98 units, with the remaining units
pending final escrow.
 
 On March
23, 2008, we, VRM I and Fund III, sold the Peoria 180, LLC loan to an unrelated
third party for $3.0 million.  The sale resulted in no gain or
loss.
 
 On
December 31, 2008, we were not in compliance with the revised tangible net worth
covenant and the debt to tangible net worth covenant in the First Supplemental
Indenture.  On March 25, 2009, we entered into a letter agreement with
Taberna providing for a waiver of all financial covenants effective December 31,
2008 through June 30, 2009.  In addition, pursuant to the letter
agreement we will exchange $20 million of the junior subordinated notes for
certain replacement securities, which we expect to acquire for approximately $10
million of cash.  This will reduce our obligation on the junior
subordinated notes to approximately $36.3 million, which should facilitate
future compliance with financial covenants set forth in the First Supplemental
Indenture.  This transaction would result in a net gain of
approximately $9 million including transaction cost.  The replacement
securities will be acquired with funds consisting of $5 million from our
operating funds and $5 million from the $5 million letter of credit referred to
in Note I Junior Subordinated
Notes.  The funds shall be deposited on or before April 2,
2009.  In addition, we are to pay additional interest equal to
$250,000 per year, payable quarterly on the same payment dates as the current
terms of the Junior Subordinated Notes.  We agreed to make a
nonrefundable payment of $200,000 to Taberna to cover its costs related to the
waiver and exchange arrangement.
 
 On March
25, 2009, we entered into an unsecured promissory note for $3 million payable on
or before May 8, 2009, with an exit fee of $0.6 million due on or before May 26,
2009.  We intend to use these funds to purchase a portion of the
junior subordinated notes referred to above.  Per the terms of the
loan, all subsequent proceeds from loan repayments and sales of property will be
used to pay down the note.  We are currently anticipating receipt of
proceeds from the sale of properties, which will meet our on-going
obligations.  No assurance can be made that these sales will be
completed.
 
 On March
23, 2009, our board of directors authorized us to enter into a consulting
agreement with the previous COO of the Manager to assist us in the repurchase of
the Junior Subordinated Notes.  The consulting fees paid will be
up to three and half percent of the discounted amount of the
repurchase
 
  - 96
-
 Table of Contents
  
 SUPPLEMENTARY
INFORMATION
 
 ScheduleIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATE *REAL
      ESTATE LOAN ROLL FORWARDBalance,
      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
                    
                    $
                    291,063,000Additions
      during the periodNew
      real estate loans and additions
                    
                    
                    90,794,000Real
      estate loans bought
                    
                    
                    12,506,000Deductions
      during the periodCollections
      of principal and reductions
                    
                    
                    50,900,000Foreclosed
      loans (Real estate held for sale)
                    
                    
                    48,907,000Real
      estate loans sold
                    
                    
                    69,514,000Net
      Change in 2008
                    
                    
                    (66,021,000
                    )Balance,
      December 31, 2008
                    
                    $
                    225,042,000
 
 *  Includes
loans related to real estate held for sale – seller financed.
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 Table of Contents
  
 ScheduleIIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATE *REAL
      ESTATE LOANS BY TYPE OF PROPERTYAs
      of December 31, 2008:Type
      of Property
                            
                            Interest
      Rate
                            
                            
                            Face
      Amount of Loan
                            
                            
                            Carrying
      Amount of Loan
                            
                            
                            Maturity
      Date
                            
                            
                            Amount
      Subject to DelinquencyAcquisition
      and Development
                            
                            
                            13%
                            
                            
                            $
                            13,000,000
                            
                            
                            $
                            13,000,000
                            
                            
                            
                            06/08
                            
                            
                            $
                            13,000,000Commercial
                            
                            
                            6%-15%
                            
                            
                            $
                            164,567,000
                            
                            
                            $
                            107,456,000
                            
                            
                            04/04-04/10
                            
                            
                            $
                            67,538,000Construction
                            
                            
                            9.53%-12.5%
                            
                            
                            $
                            44,105,000
                            
                            
                            $
                            27,612,000
                            
                            
                            03/08-12/10
                            
                            
                            $
                            7,601,000Land
                            
                            
                            11%-13%
                            
                            
                            $
                            96,255,000
                            
                            
                            $
                            76,974,000
                            
                            
                            05/08-12/09
                            
                            
                            $
                            56,722,000Total
                            
                            
                            
                            
                            
                            
                            317,927,000
                            
                            
                            
                            225,042,000
                            
                            
                            
                            
                            
                            
                            
                            144,861,000As
      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
                            
                            
                            $
                            4,100,000Total
                            
                            
                            
                            
                            
                            $
                            433,051,000
                            
                            
                            $
                            291,063,000
                            
                            
                            
                            
                            
                            
                            $
                            30,565,000
 
 
 ScheduleIIIVESTIN
      REALTY MORTGAGE II, INC.REAL
      ESTATE LOANS ON REAL ESTATE *REAL
      ESTATE LOANS BY LIEN POSITIONAs
      of December 31, 2008:Lien
      Position
                        
                        Face
      Amount of Loan
                        
                        
                        Interest
      Rate
                        
                        
                        Carrying
      Amount of Loan
                        
                        Maturity
      Date
                        
                        Amount
      Subject to Delinquency1st
                        
                        $
                        260,503,000
                        
                        
                        
                        6%-15%
                        
                        
                        $
                        188,219,000
                        
                        03/04-12/10
                        
                        $
                        139,368,0002nd
                        
                        $
                        57,423,000
                        
                        
                        
                        10.5%-15%
                        
                        
                        $
                        36,823,000
                        
                        06/08-04/10
                        
                        $
                        5,493,000Total
                        
                        $
                        317,926,000
                        
                        
                        
                        
                        
                        
                        $
                        225,042,000
                        
                        
                        
                        $
                        144,861,000As
      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
                        
                        $
                        --Total
                        
                        $
                        433,051,000
                        
                        
                        
                        
                        
                        
                        $
                        291,063,000
                        
                        
                        
                        $
                        30,565,000
 
 *  Includes
loans related to real estate held for sale – seller financed.
 
  - 98
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 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, 2008: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
                      
                      
                      $
                      13,000,000Commercial
                      
                      
                      12.00%
                      
                      02/12/09
                      Fixed
      Interest only, Balloon Payment $16,002,000
                      1st
                      
                      $
                      19,453,000
                      
                      
                      $
                      16,002,000
                      
                      
                      $
                      16,002,000Commercial
                      
                      
                      10.00%
                      
                      10/29/08
                      Fixed
      Interest only, Balloon Payment $11,600,000
                      1st
                      
                      $
                      16,000,000
                      
                      
                      $
                      11,600,000
                      
                      
                      $
                      11,600,000Commercial
                      
                      
                      15.00%
                      
                      04/30/10
                      Fixed
      Interest only, Balloon Payment 10,163,000
                      2nd
                      
                      $
                      23,610,000
                      
                      
                      $
                      10,163,000
                      
                      
                      $
                      --Commercial
                      
                      
                      11.50%
                      
                      04/05/08
                      Fixed
      Interest only, Balloon Payment $11,350,000
                      1st
                      
                      $
                      14,977,000
                      
                      
                      $
                      11,350,000
                      
                      
                      $
                      11,350,000Commercial
                      
                      
                      14.00%
                      
                      03/31/04
                      Fixed
      Interest only, Balloon Payment $17,291,000
                      1st
                      
                      $
                      26,598,000
                      
                      
                      $
                      17,291,000
                      
                      
                      $
                      17,291,000Commercial
                      
                      
                      15.00%
                      
                      04/30/09
                      Fixed
      Interest only, Balloon Payment $12,600,000
                      2nd
                      
                      $
                      14,000,000
                      
                      
                      $
                      12,600,000
                      
                      
                      $
                      --Land
                      
                      
                      12.00%
                      
                      06/17/08
                      Fixed
      Interest only, Balloon Payment $7,707,000
                      1st
                      
                      $
                      9,500,000
                      
                      
                      $
                      7,707,000
                      
                      
                      $
                      7,707,000Land
                      
                      
                      11.00%
                      
                      06/30/08
                      Variable
      Interest only, Balloon Payment $14,806,000
                      1st
                      
                      $
                      18,000,000
                      
                      
                      $
                      14,806,000
                      
                      
                      $
                      14,806,000Land
                      
                      
                      11.00%
                      
                      03/14/09
                      Fixed
      Interest only, Balloon Payment $6,981,000
                      1st
                      
                      $
                      7,000,000
                      
                      
                      $
                      6,981,000
                      
                      
                      $
                      --Land
                      
                      
                      11.50%
                      
                      09/26/08
                      Fixed
      Interest only, Balloon Payment $7,725,000
                      1st
                      
                      $
                      8,425,000
                      
                      
                      $
                      7,218,000
                      
                      
                      $
                      7,218,000Land
                      
                      
                      11.50%
                      
                      12/11/09
                      Fixed
      Interest only, Balloon Payment $15,555,000
                      1st
                      
                      $
                      22,300,000
                      
                      
                      $
                      15,555,000
                      
                      
                      $
                      15,555,000Total
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      192,863,000
                      
                      
                      
                      144,273,000
                      
                      
                      
                      114,529,000
 
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 As
      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
                      
                      
                      $
                      --Total
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      246,438,000
                      
                      
                      $
                      173,958,000
                      
                      
                      $
                      17,290,644
 
 *  Includes
loans related to real estate held for sale – seller financed.
 
 ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
 
 None.
 
 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, 2008, 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, 2008, 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.
  - 100
-
 Table of Contents
  
 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.
 
 The
certifications of the our CEO and CFO required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this
report.
 
 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, 2008.  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, 2008, the Company’s
internal control over financial reporting is effective based on those
criteria.
 
 Our
internal control over financial reporting as of December 31, 2008 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.
 
 Changes in Internal Control
Over Financial Reporting
 
 As
required by Rule 13a-15(d) under the Exchange Act, our management, including our
CEO and our CFO, has evaluated our internal control over financial reporting to
determine whether any changes occurred during the fourth fiscal quarter of 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  Based on that
evaluation, there has been no such change during the fourth fiscal quarter of
2008.
 
  - 101
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 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, 2008, 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 the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting 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, 2008 based on the COSO
criteria.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Vestin
Realty Mortgage II, Inc., as of December 31, 2008 and 2007 and the related
consolidated statements of operations, equity and other comprehensive income
(loss) and cash flows for the years ended December 31, 2008, 2007 and for the
twelve months ended December 31, 2006 and our report dated March 26, 2009
expressed an unqualified opinion on those consolidated financial
statements.
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 March 26,
2009
 
  - 102
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 Table of Contents
  ITEM
      9A(T).
                CONTROLS
      AND PROCEDURES
  Not
applicable.
 
 ITEM
      9B.
              OTHER
      INFORMATION
 
 None.
 
 PARTIII
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVEOFFICERS AND 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, 2008 and positions
of the individuals who serve as our directors and executive officers as of
December 31, 2008:
 
 Name
                Age
                TitleMichael
      V. Shustek
                50
                President,
      Chief Executive Officer and DirectorRocio
      Revollo
                47
                Chief
      Financial OfficerJohn
      E. Dawson
                51
                DirectorRobert
      J. Aalberts(1)(2)(3)
                57
                DirectorFredrick
      J. Zaffarese Leavitt(1)(2)(3)
                38
                DirectorRoland
      M. Sansone(1)(2)(3)
                53
                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, 2009 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
                50
                President,
      Chief Executive Officer and ChairmanRocio
      Revollo
                47
                Chief
      Financial OfficerMichael
      J. Whiteaker
                59
                Vice
      President of Regulatory Affairs of Vestin GroupDaniel
      B. Stubbs
                47
                Senior
      Vice President of Vestin GroupEdwin
      H. Bentzen IV
                32
                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
 
  - 103
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 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.
 
 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.
 
 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.
 
 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.
 
  - 104
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  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 member of our boar of directors since January 2006 and was a director for
VRM I from January 2006 until he resigned in January 2008.  In March
2009, Mr. Aalberts was appointed to replace Mr. Micone, who resigned from VRM
I’s Board.  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 member of our boar of directors since January
2006 and was a director for VRM I from January 2006 until he resigned in 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 member of our boar of directors since January 2006 and was a director for
VRM I from January 2006 until he resigned in 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 member of our boar of directors since March 2007 and was a director for
VRM I from March 2007 until he resigned in 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.
 
 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;
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 ·
              The
      class II directors are Messrs, Dawson and Sansone, and their terms will
      expire at the 2011 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, 2008, the Board held seven meetings, the Audit
Committee held five meeting and the Nominating Committee held one
meeting.  Four out of five directors, as of December 31, 2008,
attended 100% of the aggregate of all Board and applicable standing committee
meetings.  The remaining director, Roland M. Sanson, attended 100% of
the Audit Committee and Nominating Committees meetings and three of the seven
Board meeting.  Directors are encouraged to attend annual meetings of
our stockholders.  At the last annual meeting of stockholders, all of
the five 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 2009 in connection with the audit of our 2008
financial statements, and held a total of four meetings in fiscal 2008.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 non-audit services to be performed by our independent
      auditors;
 
 ·
              Reviewing
      the design, implementation, adequacy and effectiveness of our internal
      controls and our critical accounting
policies;
 
 ·
              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.
 
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  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
2008, the Nominating Committee, consisting of Mr. Sansone (chair), Mr. Zaffarese
Leavitt and Mr. Aalberts, held no meetings.  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.
 
 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.
 
  - 107
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  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, 2008, 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 2008.
 
 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
      OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
 
 Shown
below is certain information as of January 31, 2009, with respect to beneficial
ownership, as that term is defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), of shares of common stock by the
only persons or entities known to us to be a beneficial owner of more than 5% of
the outstanding shares of common stock.  Unless otherwise noted, the
percentage ownership is calculated based on 13,785,040 shares of our common
stock as of January 31, 2009.
 
 Name
      and Address of
                Beneficial
      Owner
              
              Amount
      and Nature of
                Beneficial
      Ownership
              
              Percent
      of ClassMichael
      V. Shustek
                6149
      South Rainbow Boulevard
                Las
      Vegas, NV 89118
              
              Sole
      voting and investment power of 1,155,042 shares and shared voting and
      investment power of 225,134 shares
              
              10.01%
 
 
 The
following table sets forth the total number and percentage of our common stock
beneficially owned as of January 31, 2009, 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 13,785,040
shares of our total outstanding common stock as of January 31,
2009.
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 Common
      Shares Beneficially OwnedBeneficial
      Owner
                    Address
                    
                    Number
                    
                    
                    PercentMichael
      V. Shustek(1)
                    6149
      S. Rainbow Blvd.
                      Las
      Vegas, NV  89118
                    
                    
                    1,380,176
                    
                    
                    
                    10.01%Rocio
      Revollo (3)
                    6149
      S. Rainbow Blvd.
                      Las
      Vegas, NV  89118
                    
                    
                    384
                    
                    
                    
                    **John
      Dawson (2) (3)
                    3052
      Sabine Hill Ave.
                      Henderson,
      NV  89052
                    
                    
                    5,894
                    
                    
                    
                    **Robert
      J. Aalberts (2) (3)
                    2901
      El Camino Ave.
                      Las
      Vegas, NV  89102
                    
                    
                    189
                    
                    
                    
                    **Frederick
      J. Zaffarese Leavitt
                    P.O.
      Box 91683
                      Henderson,
      NV  89009
                    
                    
                    --
                    
                    
                    
                    --Roland
      M. Sansone
                    2310
      E. Sunset Rd #8015
                      Las
      Vegas, NV  89119
                    
                    
                    --
                    
                    
                    
                    --All
      directors and executive officers as a group (7 persons)
                    
                    
                    
                    1,386,643
                    
                    
                    
                    10.06%
 
 **  Less
than one percent of our total outstanding common stock.
 
 (1)
              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 is the beneficial owner of
      1,380,176 shares of Common Stock of the Issuer.  Mr. Shustek,
      directly owns 948,226 shares of the Issuer’s common stock and indirectly
      owns and has economic benefit of 92,699 shares of the Issuer’s common
      stock through his ownership of Vestin Mortgage.  In addition,
      through his management powers with respect to VRM I, Mr. Shustek has
      shared voting and dispositive power over 225,134 shares, owned by VRM I
      and sole voting and dispositive power with respect to 114,117 shares owned
      by Fund III.  Mr. Shustek owns an approximate 4.3% interest in
      VRM I and is an executive officer and director of VRM I.  Mr.
      Shustek’s pecuniary interest in the Issuer’s shares owned by VRM I is
      9,768 shares.  Mr. Shustek owns an approximate 11.1% interest in
      Fund III and is the Chairman, President and Chief Executive Officer of
      Vestin Mortgage, Inc., the manager of Fund III.  Mr. Shustek’s
      pecuniary interest in the Issuer’s shares owned by Fund III is 12,716
      shares.
                
                Mr.
      Shustek has sole voting and dispositive power with respect to shares owned
      directly by himself and, with respect to shares owned by Vestin Mortgage
      and Fund III.  He has shared voting and dispositive power with
      respect to shares owned by VRM I.  Voting and dispositive power
      with respect to shares owned by VRM I is shared with the members of VRM
      I’s Board of Directors.
                  
                  In
      May 2008, Mr. Shustek amended the 10b5-1 trading plan (the “Plan”),
      announced on April 30, 2007, pursuant to Rule 10b5-1 promulgated under the
      Securities Exchange Act of 1934.  Pursuant to the First Amended
      and Restated Plan, Mr. Shustek may spend up to an additional $2.6 million
      to acquire shares of the Company’s common stock at prevailing market
      prices over the course of the next 13 months.  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 First Amended and Restated Plan become effective on
      July 2, 2008 and expires on June 24, 2009.  As of January 31,
      2009, Mr. Shustek had purchased 455,855 shares under this plan for a total
      of approximately $1.7
million.
  (2)
              Includes
      5,416 shares held by the 12557 Limited Partnership, which Mr. Dawson is
      the controlling general partner.
 
 (3)
              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.
 
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  ITEM
      13.
              CERTAIN
      RELATIONSHIPSAND 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 G – 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 years ended December 31, 2008 and 2007, Moore Stephens Wurth Frazer and
Torbet, LLP (“Moore Stephens”) provided various audit, audit related and
non-audit services to us as follows:
 
 December
      31, 2008
                    
                    
                    December
      31, 2007Audit
      Fees
                    
                    $
                    296,000
                    
                    
                    $
                    335,000Audit
      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.
 
 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.
 
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 Table of Contents
  (a)
3.  Exhibits
 
 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
      (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 Indenture4.5
      (8)
              
              Letter
      Agreement dated November 7, 2008 pertaining to Junior Subordinated
      Indenture4.6
              
              First Supplemental Indenture dated of February 3,
      2009 pertaining to Junior Subordinated Indenture4.7
              
              Letter Agreement dated March 25, 2009 pertaining to
      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 Agreement10.11
      (7)
              
              Intercreditor
      Agreement, dated June 16, 2008, by and between Vestin Originations, Inc.,
      Vestin Mortgage, Inc., Vestin Realty Mortgage II, Inc., and Owens Mortgage
      Investment Fund21.1
      (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)(4)
              
              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)(6)
              
              Incorporated
      herein by reference to the Annual Report on Form 10-K filed on March 14,
      2008 (File No. 000-51892)(7)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed on August
      11, 2008 (File No. 000-51892)(8)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed on November
      10, 2008 (File No. 000-51892)
 
 
 
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 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
      26, 2009
 
 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
      26, 2009Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer and Director
              
              March
      26, 2009Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              March
      26, 2009John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              March
      26, 2009Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              March
      26, 2009Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              March
      26, 2009Roland
      M. Sansone
 
 
 
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