UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (MARK
ONE)
 
 [X]  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
quarterly period ended September 30,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 Transition
Period From _______ To ________
 
 COMMISSION
FILE NUMBER 333-105017
 
 VESTIN
      FUND III, LLC(Exact
      name of registrant as specified in its
charter)
 
 
 NEVADA
              
              87-0693972(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: 702.227.0965
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes  [X]    No   [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 Exchange Act).
 
 Yes  [   ]    No   [X]
 
 As of
November 14, 2008, 2,248,825 units of interest in the Company were
outstanding.
 
  Table of Contents
  TABLE
OF CONTENTS
 
 PagePart I
              FINANCIAL INFORMATIONItem 1.
              Financial StatementsBalance Sheets as of September 30, 2008 (unaudited) and
      December 31, 2007
              1Statements of Operations (unaudited) for the Three and Nine
      Months Ended September 30, 2008 and 2007
              2Statements of Members’ Equity and Other Comprehensive Loss
      (unaudited) for the Nine Months Ended September 30,
    2008
              3Statements of Cash Flows (unaudited) for the Nine Months
      Ended September 30, 2008 and 2007
              4Notes to Financial Statements
(unaudited)
              6Report of Independent Registered Public Accounting
      Firm
              28Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              29Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              40Item 4.
              Controls and Procedures
              41Item 4T
              Controls and Procedures
              42Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              42Item 1A.
              Risk Factors
              42Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              50Item 3.
              Defaults Upon Senior Securities
              51Item 4.
              Submission of Matters to a Vote of Security
      Holders
              51Item 5.
              Other Information
              51Item 6.
              Exhibits
              52SIGNATURES
              53Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
      STATEMENTS
 
 VESTIN
      FUNDIII, LLCBALANCE
      SHEETSASSETSSeptember
      30, 2008
              
              
              December
      31, 2007(Unaudited)AssetsCash
      and cash equivalents
              
              $
              1,256,000
              
              
              $
              2,720,000Cash
      - restricted
              
              
              985,000
              
              
              
              985,000Marketable
      securities - related party
              
              
              444,000
              
              
              
              1,113,000Interest
      and other receivables
              
              
              41,000
              
              
              
              198,000Real
      estate held for sale
              
              
              3,567,000
              
              
              
              546,000Investment
      in real estate loans, net of allowance for loan loss of $2,928,000 at
      September 30, 2008 and $1,026,000 at December 31, 2007
              
              
              10,802,000
              
              
              
              20,825,000Other
      assets
              
              
              --
              
              
              
              3,000Total
      assets
              
              $
              17,095,000
              
              
              $
              26,390,000LIABILITIES
      AND MEMBERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              113,000
              
              
              $
              125,000Due
      to related parties
              
              
              13,000
              
              
              
              1,000Deferred
      income
              
              
              985,000
              
              
              
              985,000Total
      liabilities
              
              
              1,111,000
              
              
              
              1,111,000Commitments
      and contingenciesMembers'
      equityMembers'
      units - authorized 10,000,000 units, 2,248,825 issued and outstanding at
      September 30, 2008 and 2,525,561 units issued and outstanding at December
      31, 2007
              
              
              15,984,000
              
              
              
              25,818,000Accumulated
      other comprehensive loss
              
              
              --
              
              
              
              (539,000
              )Total
      members' equity
              
              
              15,984,000
              
              
              
              25,279,000Total
      liabilities and members' equity
              
              $
              17,095,000
              
              
              $
              26,390,000
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these statements.
 - 1
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF OPERATIONS(UNAUDITED)For
      The Three Months Ended
              
              
              For
      The Nine Months Ended9/30/2008
              
              
              9/30/2007
              
              
              9/30/2008
              
              
              9/30/2007RevenuesInterest
      income from investment in real estate loans
              
              $
              151,000
              
              
              $
              498,000
              
              
              $
              836,000
              
              
              $
              1,952,000Other
              
              
              --
              
              
              
              10,000
              
              
              
              20,000
              
              
              
              14,000Total
      revenues
              
              
              151,000
              
              
              
              508,000
              
              
              
              856,000
              
              
              
              1,966,000Operating
      expensesManagement
      fees - related party
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              7,000Interest
      expense
              
              
              --
              
              
              
              1,000
              
              
              
              --
              
              
              
              119,000Provision
      for loan loss
              
              
              944,000
              
              
              
              35,000
              
              
              
              3,283,000
              
              
              
              35,000Professional
      fees
              
              
              60,000
              
              
              
              57,000
              
              
              
              195,000
              
              
              
              149,000Professional
      fees - related party
              
              
              2,000
              
              
              
              3,000
              
              
              
              6,000
              
              
              
              8,000Other
              
              
              34,000
              
              
              
              14,000
              
              
              
              64,000
              
              
              
              36,000Total
      operating expenses
              
              
              1,040,000
              
              
              
              110,000
              
              
              
              3,548,000
              
              
              
              354,000Income
      (loss) from operations
              
              
              (889,000
              )
              
              
              398,000
              
              
              
              (2,692,000
              )
              
              
              1,612,000Non-operating
      income (loss)Interest
      income from banking institutions
              
              
              13,000
              
              
              
              38,000
              
              
              
              54,000
              
              
              
              78,000Dividend
      income - related party
              
              
              --
              
              
              
              46,000
              
              
              
              56,000
              
              
              
              93,000Impairment
      of marketable securities - related party
              
              
              (1,208,000
              )
              
              
              --
              
              
              
              (1,208,000
              )
              
              
              --Total
      non-operating income (loss)
              
              
              (1,195,000
              )
              
              
              84,000
              
              
              
              (1,098,000
              )
              
              
              171,000Loss
      from real estate held for saleNet
      loss on sale of real estate held for sale
              
              
              (38,000
              )
              
              
              --
              
              
              
              (38,000
              )
              
              
              --Write
      down of real estate held for sale
              
              
              (1,263,000
              )
              
              
              (2,000
              )
              
              
              (2,454,000
              )
              
              
              (25,000
              )Expenses
      related to real estate held for sale
              
              
              (51,000
              )
              
              
              (20,000
              )
              
              
              (91,000
              )
              
              
              (62,000
              )Total
      loss from real estate held for sale
              
              
              (1,352,000
              )
              
              
              (22,000
              )
              
              
              (2,583,000
              )
              
              
              (87,000
              )NET
      INCOME (LOSS)
              
              $
              (3,436,000
              )
              
              $
              460,000
              
              
              $
              (6,373,000
              )
              
              $
              1,696,000Net
      income (loss) allocated to members
              
              $
              (3,436,000
              )
              
              $
              460,000
              
              
              $
              (6,373,000
              )
              
              $
              1,696,000Net
      income (loss) allocated to members per weighted average membership
      unit
              
              $
              (1.51
              )
              
              $
              0.18
              
              
              $
              (2.70
              )
              
              $
              0.65Weighted
      average membership units
              
              
              2,271,557
              
              
              
              2,525,561
              
              
              
              2,357,451
              
              
              
              2,597,429
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these statements.
 - 2
-
 Table of Contents
  
 
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE LOSSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008(UNAUDITED)Units
              
              
              AmountMembers'
      equity at December 31, 2007
              
              
              2,525,561
              
              
              $
              25,279,000Comprehensive
      loss:Net
      loss
              
              
              
              
              
              
              (6,373,000
              )Recognition
      of unrealized loss on marketable securities – related
party
              
              
              
              
              
              
              539,000Total
      comprehensive loss
              
              
              
              
              
              
              (5,834,000
              )Distributions
              
              
              
              
              
              
              (689,000
              )Members'
      redemptions
              
              
              (276,736
              )
              
              
              (2,772,000
              )Members'
      equity at September 30, 2008 (unaudited)
              
              
              2,248,825
              
              
              $
              15,984,000
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these statements.
 - 3
-
 Table of Contents
  VESTIN
      FUNDIII, LLCSTATEMENTS
      OF CASH FLOWS(UNAUDITED)For
      The Nine Months Ended09/30/08
                
                
                09/30/07Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (6,373,000
                )
                
                $
                1,696,000Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for loan loss
                
                
                3,283,000
                
                
                
                35,000Write
      downs on real estate held for sale
                
                
                2,454,000
                
                
                
                25,000Loss
      on real estate held for sale
                
                
                38,000
                
                
                
                --Impairment
      of marketable securities - related party
                
                
                1,208,000
                
                
                
                --Amortized
      interest income
                
                
                (10,000
                )
                
                
                --Change
      in operating assets and liabilities:Interest
      receivable
                
                
                157,000
                
                
                
                56,000Accounts
      payable and accrued liabilities
                
                
                (12,000
                )
                
                
                84,000Due
      to related parties
                
                
                12,000
                
                
                
                11,000Other
      assets
                
                
                3,000
                
                
                
                6,000Net
      cash provided by operating activities
                
                
                760,000
                
                
                
                1,913,000Cash
      flows from investing activities:Investments
      in real estate loans
                
                
                (696,000
                )
                
                
                (1,590,000
                )Proceeds
      from loan payoff
                
                
                1,730,000
                
                
                
                5,524,000Sale
      of investments in real estate loans to:VRM
      II
                
                
                --
                
                
                
                1,300,000Third
      parties
                
                
                --
                
                
                
                1,400,000Purchase
      of marketable securities - related party
                
                
                --
                
                
                
                (807,000
                )Proceeds
      related to investment in real estate held for sale
                
                
                29,000
                
                
                
                --Proceeds
      from sale of real estate held for sale
                
                
                174,000
                
                
                
                --Net
      cash provided by investing activities
                
                
                1,237,000
                
                
                
                5,827,000Cash
      flows from financing activities:Members'
      redemptions
                
                
                (2,772,000
                )
                
                
                (3,029,000
                )Members'
      distributions, net of reinvestments
                
                
                (627,000
                )
                
                
                (1,283,000
                )Members'
      distributions - related party
                
                
                (62,000
                )
                
                
                (120,000
                )Net
      cash used in financing activities
                
                
                (3,461,000
                )
                
                
                (4,432,000
                )NET
      CHANGE IN CASH
                
                
                (1,464,000
                )
                
                
                3,308,000Cash,
      beginning of period
                
                
                2,720,000
                
                
                
                821,000Cash,
      end of period
                
                $
                1,256,000
                
                
                $
                4,129,000
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these statements.
 - 4
-
 Table of Contents
  
 VESTIN
      FUND III, LLCSTATEMENTS
      OF CASH FLOWS (CONTINUED)(UNAUDITED)For
      The Nine Months Ended09/30/08
              
              
              09/30/07Supplemental
      disclosures of cash flows information:Interest
      paid during the period
              
              $
              --
              
              
              $
              119,000Non-cash
      investing and financing activities:Loan
      rewritten with same or similar collateral
              
              $
              468,000
              
              
              $
              3,219,000Payoff
      of loans funded through secured borrowings
              
              $
              --
              
              
              $
              4,430,000Real
      estate held for sale acquired through foreclosure
              
              $
              5,716,000
              
              
              $
              --Recognition
      of unrealized loss on marketable securities – related
party
              
              $
              539,000
              
              
              $
              --Unrealized
      loss on marketable securities - related party
              
              $
              --
              
              
              $
              (176,000
              )
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these statements.
 - 5
-
 Table of Contents
  VESTIN
FUNDIII, LLC
 
 NOTES
TO FINANCIAL STATEMENTS
 
 SEPTEMBER
30, 2008
 
 (UNAUDITED)
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund III, LLC was organized in April 2003 as a Nevada limited liability company
for the purpose of investing in commercial real estate loans (hereafter referred
to as “real estate loans”) and income-producing real property.  On
March 5, 2007, a majority of our members approved the Third Amended and Restated
Operating Agreement, which limits the Company’s investment objectives to
investments in real estate loans.  Prior to adopting this amendment,
we also invested in revenue-generating commercial real estate.  We
sold our real estate investment in November 2006.  In this report, we
refer to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”,
“us”, or “our”.
 
 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 Operating
Agreement as “Mortgage Assets”).  We commenced operations in February
2004.  Under our Operating Agreement, we would continue our operations
until December 2023 unless dissolved prior thereto or extended by vote of the
members under the provisions of our Operating Agreement.  However, our
manager is considering a proposal to the members to wind up our operations in
view of our limited operating assets.
 
 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 company investing in real estate loans we are
subject to the North American Securities Administration Association Mortgage
Program Guidelines (the “NASAA Guidelines”) promulgated by the state securities
administrators.  Prior to March 5, 2007, we also invested in real
estate and were subject to the North American Securities Administration
Association Real Estate Guidelines.
 
 On
November 7, 2003, our Registration Statement as filed with the United States
Securities and Exchange Commission (“SEC”) became effective for the initial
public offering of up to 10,000,000 units at $10 per unit
(“unit”).  On November 7, 2005, we discontinued the offering of our
units; however, members continued to purchase additional units through our
Distribution Reinvestment Plan whereby the members’ distributions were used to
purchase additional units at the current value.  As of September 30,
2008, we had sold approximately 3,113,166 units, which includes 247,245 units
purchased through our Distribution Reinvestment Plan.  On April 2,
2007, our manager decided to terminate our Distribution Reinvestment Plan
effective May 7, 2007, pursuant to Section 8.5 of our Operating
Agreement.  A letter was sent on April 2, 2007 to our members
notifying them of the Distribution Reinvestment Plan’s termination.
 
 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, 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 Operating Agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us.  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.
  See
review report of Independent Registered Public Accounting Firm.
 - 6
-
 Table of Contents
  Consequently,
our operating results are dependent upon our manager’s ability and performance
in managing our operations and servicing our assets.  The Operating
Agreement also provides that the members have certain rights, including the
right to terminate our manager subject to a majority vote of the
members.
 
 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 Realty Mortgage
II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund
II) and inVestin Nevada, Inc., (“inVestin”) a company wholly owned by our
manager’s CEO.  These entities also invest in real estate
loans.
 
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
financial statements of the Company have been prepared in accordance with the
accounting principles generally accepted in the United States of America
(“GAAP”).  Management has included all normal recurring adjustments
considered necessary to give a fair presentation of operating results for the
periods presented.  Interim results are not necessarily indicative of
results for a full year.  The information included in this Form 10-Q
should be read in conjunction with information included in the 2007 annual
report filed on Form 10-K and our quarterly reports filed on Form 10-Q for the
periods ended March 31, 2008 and June 30, 2008.
 
 Management
Estimates
 
 The
preparation of 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 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
 
 We have
restricted cash, which relates to a cash deposit held as collateral by a banking
institution for an irrevocable stand by letter of credit to support rent
payments on the property we sold during November 2006.  The
requirement for the deposit expires at the end of the lease on August 31,
2014.
 
 Revenue
Recognition
 
 Interest
is recognized as revenue when earned according to the terms of the loans, using
the effective interest method.  We do not accrue interest income on
loans once they are determined to be impaired.  A loan is impaired
when based on current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due.  Cash
receipts will be allocated to interest income, except when such payments are
specifically designated by the terms of the loan as principal reduction or when
management does not believe our investment in the loan is fully
recoverable.
 
 Investments in Real Estate
Loans
 
 We may
from time to time acquire or sell investments in real estate loans from or to
our manager or other related parties pursuant to the terms of our Operating
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.
  See
review report of Independent Registered Public Accounting Firm.
 - 7
-
 Table of Contents
  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, 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;
 
 ·
              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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 8
-
 Table of Contents
  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.
 
 Classification of Operating
Results from Real Estate Held for Sale
 
 FAS 144 –
Accounting for the Impairment
or Disposal of Long-Lived Assets ("FAS 144'') generally requires
operating results from long lived assets held for sale to be classified as
discontinued operations as a separately stated component of net
income.  Our operations related to real estate held for sale are
separately identified in the accompanying 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
VRM II (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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
 Table of Contents
  Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowing arrangements.
 
 Investment in Marketable
Securities – Related Party
 
 Investment
in marketable securities – related party consists of stock in VRM
II.  The securities are stated at fair value as determined by the
market price as of September 30, 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 which, individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
 
 ·
              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"), but we did not make any fair value elections with
respect to any of our eligible assets or liabilities as permitted under the
provisions of FAS 159 as of September 30, 2008.  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 nine months ended
September 30, 2008.  Therefore, the adoption of FAS 159 had no impact
on our consolidated financial statements.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
 Table of Contents
  On
January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements, as
required for financial assets and liabilities (“FAS 157”), 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.
 
 ·
              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.
 
 Net Income Allocated to
Members Per Weighted Average Membership Unit
 
 Net
income allocated to members per weighted average membership unit is computed by
dividing net income calculated in accordance with GAAP by the weighted average
number of membership units outstanding for the period.
 
 Segments
 
 We
operate as one business segment.
 
 Income
Taxes
 
 Income
tax effects resulting from our operations pass through to our members
individually and, accordingly, no provision for income taxes is included in the
financial statements.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ consolidated financial
statements to conform to the current period presentation.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
 Table of Contents
  NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash and loans
secured by deeds of trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits based on management review of these financial
institutions.  As of September 30, 2008 and December 31, 2007, we had
approximately $2.0 million and $3.6 million, respectively, in excess of the
federally insured limits.
 
 As of
September 30, 2008, 40%, 21%, 19% and 10% of our loans were in Nevada, Oregon,
Arizona and California, respectively, compared to 46%, 15%, 18% and 10% 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
September 30, 2008 and December 31, 2007, the loan to our largest borrower
represented 11% and 7%, respectively, of our total investment in real estate
loans.  This commercial property real estate loan is located in
Oregon, with a first lien position and an outstanding balance of approximately
$1.5 million.  As of September 30, 2008, this loan was considered
non-performing, see Note D – Investments in Real Estate
Loans, for further discussion.  We have a significant
concentration of credit risk with our largest borrowers.  Any
additional defaults could have a material adverse effect on us.
 
 As of
September 30, 2008, three loans totaling approximately $2.9 million,
representing approximately 21% of our portfolio’s total value, had a common
guarantor; all three loans were considered non-performing as of September 30,
2008.  In addition, five loans totaling approximately $1.9 million,
representing approximately 14% of our portfolio’s total value, had a common
guarantor; all five loans were performing as required as of September 30,
2008.
 
 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.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
September 30, 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 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 September 30, 2008, we had approximately $2.3 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 $37.3
million.  These loans had interest reserves of approximately $2.3
million, of which our portion was approximately $0.1 million.  At
December 31, 2007, we had approximately $6.2 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 $78.6 million.  These
loans had interest reserves of approximately $3.7 million, of which our portion
was approximately $0.3 million.
 
 As of
September 30, 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 6.0% to 15.0%.  Revenue by product will fluctuate based
upon relative balances during the period.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
 Table of Contents
  Loan
Portfolio
 
 Investments
in real estate loans as of September 30, 2008, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              --
              
              
              $
              --
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%Commercial
              
              
              11
              
              
              
              7,976,000
              
              
              
              11.32%
              
              
              
              58.09%
              
              
              
              76.29%Construction
              
              
              4
              
              
              
              1,622,000
              
              
              
              10.50%
              
              
              
              11.81%
              
              
              
              92.66%Land
              
              
              5
              
              
              
              4,132,000
              
              
              
              12.20%
              
              
              
              30.10%
              
              
              
              86.49%20
              
              
              $
              13,730,000
              
              
              
              11.49%
              
              
              
              100.00%
              
              
              
              81.88%
 
 Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              3
              
              
              $
              3,138,000
              
              
              
              12.77%
              
              
              
              14.36%
              
              
              
              62.80%Commercial
              
              
              10
              
              
              
              9,108,000
              
              
              
              11.17%
              
              
              
              41.68%
              
              
              
              81.84%Construction
              
              
              6
              
              
              
              2,501,000
              
              
              
              11.17%
              
              
              
              11.45%
              
              
              
              73.31%Land
              
              
              7
              
              
              
              7,104,000
              
              
              
              12.67%
              
              
              
              32.51%
              
              
              
              65.54%26
              
              
              $
              21,851,000
              
              
              
              11.89%
              
              
              
              100.00%
              
              
              
              72.70%
 
 *
              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 September 30, 2008 and December 31, 2007, was 11.81% and 11.61%,
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 September 30,
2008 and December 31, 2007:
 
 Loan
      Type
              
              Number
      of Loans
              
              
              September
      30, 2008 Balance *
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2007
                Balance
      *
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              17
              
              
              $
              12,862,000
              
              
              
              93.68%
              
              
              
              25
              
              
              $
              21,551,000
              
              
              
              98.63%Second
      deeds of trust
              
              
              3
              
              
              
              868,000
              
              
              
              6.32%
              
              
              
              1
              
              
              
              300,000
              
              
              
              1.37%20
              
              
              $
              13,730,000
              
              
              
              100.00%
              
              
              
              26
              
              
              $
              21,851,000
              
              
              
              100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
 Table of Contents
  
 The
following is a schedule of contractual maturities of investments in real estate
loans as of September 30, 2008:
 
 Non-performing
      and past due loans (a)
              
              $
              10,516,000October
      2008 - December 2008
              
              
              1,879,000January
      2009 – March 2009
              
              
              467,000April
      2009 - June 2009
              
              
              200,000July
      2009 - September 2009
              
              
              5,000October
      2009 - December 2009
              
              
              --Thereafter
              
              
              663,000Total
              
              $
              13,730,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to September 30,
2008.
 
 The
following is a schedule by geographic location of investments in real estate
loans as of September 30, 2008 and December 31, 2007:
 
 September
      30, 2008 Balance *
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2007 Balance *
              
              
              Portfolio
      PercentageArizona
              
              $
              2,676,000
              
              
              
              19.49%
              
              
              $
              3,864,000
              
              
              
              17.68%California
              
              
              1,400,000
              
              
              
              10.20%
              
              
              
              2,150,000
              
              
              
              9.84%Nevada
              
              
              5,507,000
              
              
              
              40.11%
              
              
              
              10,140,000
              
              
              
              46.40%Oklahoma
              
              
              1,000,000
              
              
              
              7.28%
              
              
              
              1,000,000
              
              
              
              4.58%Oregon
              
              
              2,947,000
              
              
              
              21.46%
              
              
              
              3,297,000
              
              
              
              15.09%Texas
              
              
              200,000
              
              
              
              1.46%
              
              
              
              1,400,000
              
              
              
              6.41%Total
              
              $
              13,730,000
              
              
              
              100.00%
              
              
              $
              21,851,000
              
              
              
              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 Balance Sheets.
 
 September
      30, 2008 Balance (a)
              
              
              December
      31, 2007 BalanceBalance
      per loan portfolio
              
              $
              13,730,000
              
              
              $
              21,851,000Less:Allowance
      for loan losses (b)
              
              
              (2,928,000
              )
              
              
              (1,026,000
              )Balance
      per balance sheet
              
              $
              10,802,000
              
              
              $
              20,825,000
 
 (a)
              We
      recognized an impairment cost of $47,000, which was applied to the loan
      balance, related to the restructuring of a loan, whereby the interest rate
      was reduced from 12% to 6% starting in May 2008.  In addition,
      we recognized an allowance for loan loss of approximately $2.2 million, of
      which our portion was $180,000, related to this
  loan.
 
 (b)
              Please
      refer to Specific
      Reserve Allowance below.
 
 Non-Performing
Loans
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  As of
September 30, 2008, we had 10 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 $7.9 million, net of
allowance for loan losses of approximately $2.6 million, which does not include
the allowances of approximately $0.3 million relating to the decrease in the
property value for a performing loan as of September 30, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  At September 30, 2008, the following
loans were non-performing:
 
 ·
              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 $1.0
      million.  As of September 30, 2008, this loan has been
      considered non-performing for the last twenty-five months.  Our
      manager brought foreclosure and other legal proceedings to protect our
      interest in the collateral.  The borrowers have alleged that our
      lien on the Oklahoma City apartment complex was extinguished as a result
      of legal actions commenced on our behalf with respect to other collateral
      securing the non-performing loan.  We are vigorously contesting
      their position; however, we cannot determine at this time the outcome of
      these legal proceedings.  As of September 30, 2008, based on our
      manager’s evaluation and updated appraisals, our manager has provided a
      specific allowance of approximately $2.8 million, of which our portion is
      approximately $0.6 million.
 
 ·
              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 $1.0 million and is
      secured by a first lien on the property and guaranteed by the principals
      of the borrower.  As of September 30, 2008, this loan has been
      considered non-performing for the last five months.  Our manager
      has commenced both foreclosure proceedings and litigation against the
      personal guarantors in order to enforce the personal
      guarantees.  On October 29, 2008, the borrower filed for
      bankruptcy protection.  As of September 30, 2008, based on our
      manager’s evaluation and updated appraisals, our manager has concluded
      that the value of the underlying collateral is sufficient to protect us
      from loss of principal.  No specific allowance was deemed
      necessary as of September 30, 2008.
 
 ·
              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
      $1.2 million and is secured by a first lien on the property and guaranteed
      by the principals of the borrower.  As of September 30, 2008,
      this loan has been considered non-performing for the last five
      months.  Our manager has commenced both foreclosure proceedings
      and litigation against the personal guarantors in order to enforce the
      personal guarantees.  On September 26, 2008, the borrower filed
      for bankruptcy protection.  As of September 30, 2008, based on
      our manager’s evaluation and updated appraisals, our manager has provided
      a specific allowance of approximately $9.9 million, of which our portion
      is approximately $0.7 million.
 
 ·
              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 $1.3 million.  The loan matured on
      April 5, 2008, and the borrower failed to either pay the loan or extend
      the term.  As of September 30, 2008, this loan has been
      considered non-performing for the last five 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
      VRM II 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.  Foreclosure on the property
      is scheduled for February 2009.  As of September 30, 2008, based
      on our manager’s evaluation and updated appraisals, our manager has
      provided a specific allowance of approximately $4.7 million, of which our
      portion is approximately $0.4
million.
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  
 ·
              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 $1.4 million.  As of
      September 30, 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.  On October 29, 2008, the borrower filed for
      bankruptcy protection.  As of September 30, 2008, based on our
      manager’s evaluation and updated appraisals, our manager has provided a
      specific allowance of approximately $1.0 million, of which our portion is
      approximately $0.2 million.
 
 ·
              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 $0.3
      million.  As of September 30, 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.  On October 16, 2008, we,
      VRM I and VRM II entered into a forbearance agreement to postpone the
      foreclosure date on the property.  On November 5, 2008, the
      guarantor paid $250,000 for cost and interest due related to the
      loan.  Based on our manager’s evaluation and updated appraisals,
      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
      September 30, 2008.
 
 ·
              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 $1.5
      million.  As of September 30, 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.  Based on our manager’s
      evaluation and updated appraisals, 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 September 30, 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 $1.4 million.  As of September 30, 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.  During October 2008, the tenant, which is a related
      party to the borrower, filed for bankruptcy protection.  As of
      September 30, 2008, based on our manager’s evaluation and updated
      appraisals, our manager has provided a specific allowance of approximately
      $7.2 million, of which our portion is approximately $0.6
      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 $1.2 million.  As of September 30, 2008, this
      loan has been considered non-performing for the last two
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  Based on our manager’s evaluation and updated
      appraisals, 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
      September 30, 2008.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 Table of Contents
  
 ·
              Silver
      Star Destinations, LLC, is a commercial loan to provide financing for
      three commercial retail properties, Sunriver Mall, Marcello Building and
      Chrome Pony comprising approximately 17.53 gross acres located in
      Sunriver, OR and commonly referred to as the Sunriver Mall.  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 $26.7 million, of which our portion is $0.3 million.  The
      loan matured on September 28, 2008, and the borrower failed to either pay
      the loan or extend the term.  As of September 30, 2008, this
      loan has been considered non-performing for the last month.  Our
      manager has commenced both foreclosure proceedings and litigation against
      the personal guarantors in order to enforce the personal
      guarantees.  As of September 30, 2008, based on our manager’s
      evaluation, updated appraisals and a letter of intent to purchase the note
      and deed of trust dated October 22, 2008, our manager has provided a
      specific allowance of approximately $13.9 million, of which our portion is
      approximately $0.1 million.  The purchase agreement of $13.0
      million, which our portion would be approximately $0.1 million, is
      scheduled to close on or before December 19, 2008; however, there can be
      no assurance that the sale will be
completed.
 
 The
following schedule summarizes the non-performing loans as of September 30,
2008:
 
 Loan
      Name
              
              Balance
      at
                September
      30, 2008
              
              
              Allowance
      for Loan Loss **
              
              
              Net
      Balance at September 30, 2008
              
              Maturity
      Date
              
              Number
      of Months Non-Performing
              
              
              Percentage
      of Total Loan BalanceMonterrey
      Associates, L.P.
              
              $
              1,000,000
              
              
              $
              (636,000
              )
              
              $
              364,000
              
              9/1/2006
              
              
              25
              
              
              
              23%World
      Capital Durango Alpha (2)
              
              
              1,000,000
              
              
              
              --
              
              
              
              1,000,000
              
              5/16/2008
              
              
              5
              
              
              
              14%Peoria
      180, LLC
              
              
              1,182,000
              
              
              
              (654,000
              )
              
              
              528,000
              
              6/30/2008
              
              
              5
              
              
              
              7%Redwood
      Place, LLC
              
              
              1,295,000
              
              
              
              (408,000
              )
              
              
              887,000
              
              4/5/2008
              
              
              5
              
              
              
              9%WCP
      Warm Springs Holdings 1, LLC
              
              
              1,400,000
              
              
              
              (158,000
              )
              
              
              1,242,000
              
              5/10/2008
              
              
              4
              
              
              
              16%Babuski,
      LLC
              
              
              293,000
              
              
              
              --
              
              
              
              293,000
              
              6/17/2008
              
              
              4
              
              
              
              3%Barger
      Road Cottages, LLC
              
              
              1,520,000
              
              
              
              --
              
              
              
              1,520,000
              
              12/5/2008
              
              
              4
              
              
              
              25%Lohrey
      Investments, LLC
              
              
              1,400,000
              
              
              
              (630,000
              )
              
              
              770,000
              
              10/29/2008
              
              
              3
              
              
              
              9%Cascadia
      Canyon, LLC
              
              
              1,150,000
              
              
              
              --
              
              
              
              1,150,000
              
              2/12/2009
              
              
              2
              
              
              
              6%Silver
      Star Destinations, LLC
              
              
              276,000
              
              
              
              (144,000
              )
              
              
              132,000
              
              9/28/2008
              
              
              1
              
              
              
              1%$
              10,516,000
              
              
              $
              (2,630,000
              )
              
              $
              7,886,000
 
 *
              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.  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 September 30, 2008, we have
provided specific reserves, related to six non-performing loans and two
performing loans, of approximately $2.9 million.  Our manager
evaluated the loans and, based on current estimates regarding the value of the
remaining underlying collateral, 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 distributions payable to our stockholders.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  Specific Reserve
      Allowances
 
 The
following table is a roll-forward of the allowance for loan losses for the nine
months ended September 30, 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 nine months ended September 30,
2008.
 
 Description
              
              Balance
      at
                December
      31, 2007
              
              
              Specific
      Reserve Allocation
              
              
              Transferred
      to REO
              
              
              Balance
      at
                September
      30, 2008Monterrey
      Associates, L.P.
              
              $
              545,000
              
              
              $
              91,000
              
              
              $
              --
              
              
              $
              636,000Brawley
      CA 122, LLC
              
              
              255,000
              
              
              
              --
              
              
              
              (255,000
              )
              
              
              --Peoria
      180, LLC
              
              
              108,000
              
              
              
              546,000
              
              
              
              --
              
              
              
              654,000Terravita,
      LLC (a)
              
              
              118,000
              
              
              
              --
              
              
              
              --
              
              
              
              118,000V
      & M Homes at the Palms, Inc.
              
              
              --
              
              
              
              839,000
              
              
              
              (839,000
              )
              
              
              --Redwood
      Place, LLC
              
              
              --
              
              
              
              408,000
              
              
              
              --
              
              
              
              408,0002503
      Panorama, LLC(a)
              
              
              --
              
              
              
              180,000
              
              
              
              --
              
              
              
              180,000MRPE,
      LLC
              
              
              --
              
              
              
              240,000
              
              
              
              (240,000
              )
              
              
              --Silver
      Star Destinations, LLC
              
              
              --
              
              
              
              144,000
              
              
              
              --
              
              
              
              144,000WCP
      Warm Springs Holdings 1, LLC
              
              
              --
              
              
              
              158,000
              
              
              
              --
              
              
              
              158,000Lohrey
      Investments, LLC
              
              
              --
              
              
              
              630,000
              
              
              
              --
              
              
              
              630,000Total
              
              $
              1,026,000
              
              
              $
              3,236,000
              
              
              $
              (1,334,000
              )
              
              $
              2,928,000
 
 (a)
              As
      of September 30, 2008, these loans were considered
    performing.
 
 Monterrey Associates, L.P. –
As of September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing commercial loan on a 248-unit apartment complex in
Oklahoma City, OK, of approximately $2.8 million, of which our portion was
approximately $0.6 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
September 30, 2008, our manager has provided a specific reserve allowance,
related to a land loan on property located in Glendale, AZ, of approximately
$9.9 million, of which our portion was approximately $0.7
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.  As of September 30, 2008, the loan was
considered non-performing.  Our manager will continue to evaluate our
position in the loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100 unit condominium/apartment project in
North Las Vegas, NV, totaling approximately $0.7 million, of which our portion
was approximately $0.1 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 $0.5
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 September 30,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Redwood Place, LLC – As of
September 30, 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 $4.7 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, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  
 2503 Panorama, LLC – As of
September 30, 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 $2.2 million,
of which our portion is approximately $0.2 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.  In addition,
we recognized an impairment cost of $47,000, 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.
 
 Silver Star Destinations, LLC
– As of September 30, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on three commercial retail
properties, Sunriver Mall, Marcello Building and Chrome Pony comprising
approximately 17.53 gross acres located in Sunriver, OR, of approximately $13.9
million, of which our portion is approximately $0.1 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 and a
letter of intent to purchase the note and deed of trust dated October 22,
2008.  The purchase agreement of $13.0 million, of which our portion
would be approximately $0.1 million, is scheduled to close on or before December
19, 2008; however, there can be no assurance that the sale will be
completed.  Our manager will continue to evaluate our position in the
loan.
 
 WCP Warm Springs Holdings 1,
LLC – As of September 30, 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 $1.0 million, of which our portion is
approximately $0.2 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.
 
 Lohrey Investments, LLC – As
of September 30, 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 $0.6
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.
 
 As of
September 30, 2008, our manager had granted extensions on 16 loans, totaling
approximately $165.8 million of which our portion was approximately $11.3
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.  Subsequent to their extension, 9 of the 16 loans have become
non-performing.  The loans, which became non-performing after their
extension, had a total principal amount at September 30, 2008 of approximately
$124.8 million, of which our portion is approximately $9.0 million.
 
 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;
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the loan
      amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  The following is a breakdown of allowance for loan losses
related to performing and non-performing loans as of September 30, 2008 and
December 31, 2007:
 
 As
      of September 30, 2008Balance
              
              
              Allowance
      for loan losses *
              
              
              Balance,
      net of allowanceNon-performing
      loans – no related allowance
              
              $
              3,963,000
              
              
              $
              --
              
              
              $
              3,963,000Non-performing
      loans – related allowance
              
              
              6,553,000
              
              
              
              (2,630,000
              )
              
              
              3,923,000Subtotal
      nonperforming loans
              
              
              10,516,000
              
              
              
              (2,630,000
              )
              
              
              7,886,000Performing
      loans – no related allowance
              
              
              2,284,000
              
              
              
              --
              
              
              
              2,284,000Performing
      loans – related allowance
              
              
              930,000
              
              
              
              (298,000
              )
              
              
              632,000Subtotal
      performing loans
              
              
              3,214,000
              
              
              
              (298,000
              )
              
              
              2,916,000Total
              
              $
              13,730,000
              
              
              $
              (2,928,000
              )
              
              $
              10,802,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesabove.
 
 As
      of December 31, 2007Balance
              
              
              Allowance
      for loan losses
              
              
              Balance,
      net of allowanceNon-performing
      loans – no related allowance
              
              $
              4,088,000
              
              
              $
              --
              
              
              $
              4,088,000Non-performing
      loans – related allowance
              
              
              1,750,000
              
              
              
              (800,000
              )
              
              
              950,000Subtotal
      nonperforming loans
              
              
              5,838,000
              
              
              
              (800,000
              )
              
              
              5,038,000Performing
      loans – no related allowance
              
              
              13,231,000
              
              
              
              --
              
              
              
              13,231,000Performing
      loans – related allowance
              
              
              2,782,000
              
              
              
              (226,000
              )
              
              
              2,556,000Subtotal
      performing loans
              
              
              16,013,000
              
              
              
              (226,000
              )
              
              
              15,787,000Total
              
              $
              21,851,000
              
              
              $
              (1,026,000
              )
              
              $
              20,825,000
 
 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
September 30, 2008, we owned 114,117 shares of VRM II’s common stock,
representing approximately 0.78% of their total outstanding common
stock.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  In
accordance with FAS 115 and EITF 03-1, we have evaluated our investment in VRM
II’s common stock and determined there is 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 $3.89 per share totaling
approximately $0.4 million dollars and recognizing an impairment of
approximately $1.2 million.  We will continue to evaluate our
investment in marketable securities on a quarterly basis.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At
September 30, 2008, we held seven properties with a total carrying value of
approximately $3.6 million, which were acquired through foreclosure and recorded
as investments in 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 nine months ended September 30, 2008, followed
by a discussion of the basis for recording additional write-downs during the
nine months ended September 30, 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 September 30, 2008Rio
      Vista Nevada, LLC (1)
              
              12/21/2006
              
              2%
              $
              546,000
              $
              --
              $
              (223,000)
              $
              --
              $
              --
              $
              --
              $
              323,000Pirates
      Lake, LTD(2)
              
              2/5/2008
              
              16%
              
              --
              
              1,400,000
              
              (1,068,000)
              
              (29,000)
              
              --
              
              --
              
              303,000Forest
      Development, LLC (3)
              
              3/7/2008
              
              12%
              
              --
              
              301,000
              
              (89,000)
              
              --
              
              (174,000)
              
              (38,000)
              
              --Brawley
      CA 122, LLC(4)
              
              5/1/2008
              
              33%
              
              --
              
              495,000
              
              (189,000)
              
              --
              
              --
              
              --
              
              306,000V
      & M Homes at the Palms, Inc. (5)
              
              7/15/2008
              
              36%
              
              --
              
              549,000
              
              --
              
              --
              
              --
              
              --
              
              549,000MRPE,
      LLC (6)
              
              8/11/2008
              
              8%
              
              --
              
              1,160,000
              
              (535,000)
              
              --
              
              --
              
              --
              
              625,000Jeffrey's
      Court, LLC(7)
              
              9/3/2008
              
              20%
              
              --
              
              1,000,000
              
              --
              
              --
              
              --
              
              --
              
              1,000,000Cliff
      Shadows Properties, LLC(8)
              
              9/8/2008
              
              4.8%
              
              --
              
              811,000
              
              (350,000)
              
              --
              
              --
              
              --
              
              461,000$
              546,000
              $
              5,716,000
              $
              (2,454,000)
              $
              (29,000)
              $
              (174,000)
              $
              (38,000)
              $
              3,567,000
 
 (1)
              Rio Vista Nevada, LLC –
      During December 2006, we, VRM I and VRM II acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the year ended December 31, 2007, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s evaluation and an updated
      appraisal obtained during July 2008, the property was written down
      approximately $11.5 million, of which our portion was approximately $0.2
      million.
 
 (2)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and VRM II 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 $1.1
      million.  During June 2008, we received a deposit refund
      totaling $29,000.  The property is currently listed for sale at
      $2.0 million, which approximates the total book value, plus selling costs,
      for this property held by us, VRM I and VRM
II.
 
 (3)
              Forest Development, LLC
      – During March 2008, we, VRM I and VRM II 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 $0.8million, of which our portion was approximately $0.1
      million.  During September 2008, we, VRM I and VRM II sold this
      property for approximately $1.4 million, of which our portion was
      approximately $0.2 million.  The sale resulted in a net loss of
      approximately $0.4 million, of which our portion was
    $38,000.
  See
review report of Independent Registered Public Accounting Firm.
 - 21
-
 Table of Contents
  
 (4)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and VRM II 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 May 2008, the property was written down
      approximately $0.6 million, of which our portion was approximately $0.2
      million.
 
 (5)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and VRM II 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 its estimate, no write down was deemed necessary as
      of September 30, 2008.
 
 (6)
              MRPE, LLC – During
      August 2008, we, VRM I, and VRM II 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 estimate and
      current sales price, the property was written down approximately $6.5
      million, of which our portion was approximately $0.5
      million.  The property is currently listed for sale at
      approximately $8.3 million, which approximates the total book value, plus
      selling costs, for this property held by us, VRM I, and VRM
      II.
 
 (7)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and VRM II 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 estimate, no write down was deemed
      necessary as of September 30, 2008.  On October 30, 2008, our
      manager received a sales agreement to purchase the property for
      approximately $6.3 million, of which our portion would be approximately
      $1.2 million.  The sale is scheduled to close on December 8,
      2008, where the buyer is to pay approximately $4.0 million down along with
      a one year note for the remaining $2.3 million.  There can be no
      assurance that the sale will be
completed.
 
 (8)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and VRM II 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 their
      evaluation, the property was written down approximately $7.3 million, of
      which our portion was approximately $0.5
  million.
 
 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
Operating 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.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us a management (acquisition and advisory)
fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
income.  For the three and nine months ended September 30, 2007, we
recorded fees to our manager of $0 and $7,000, respectively.  No
management fees were recorded during the three and nine months ended September
30, 2008.
 
 We paid
pro rata distributions owed to our manager totaling $1,000 and $15,000, during
the three and nine months ended September 30, 2008, respectively, based upon
54,863 units owned by our manager.  We paid pro rata distributions
owed to our manager totaling $11,000 and $35,000, during the three and nine
months ended September 30, 2007, respectively, based upon 54,863 units owned by
our manager.
 
 As of
September 30, 2008, we did not have a balance due to or due from our
manager.  As of December 31, 2007, we owed our manager
$1,000.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 22
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 Table of Contents
  Transactions with Other
Related Parties
 
 During
the nine months ended September 30, 2007, we sold $1.3 million in real estate
loans to VRM II.  There was no gain or loss associated with this
transaction.  There were no similar transactions during the nine
months ended September 30, 2008.
 
 As of
September 30, 2008, we owned 114,117 common shares of VRM II, representing
approximately 0.78% of their total outstanding common stock.  For the
three and nine months ended September 30, 2008, we recorded $0 and $56,000,
respectively, in dividend income based on the number of shares we held on the
dividend record dates.  For the three and nine months ended
September30, 2007, we recorded $46,000 and $93,000, respectively, in dividend
income based on the number of shares we held on the dividend record
dates.
 
 As of
September 30, 2008, we owed VRM II $11,000.  We had no intercompany
balance with VRM II as of December 31, 2007.
 
 We paid
pro rata distributions owed to inVestin totaling $1,000 and $10,000, during the
three and nine months ended September 30, 2008, respectively, based upon 34,856
of our units owned by inVestin.  We paid pro rata distributions owed
to inVestin totaling $7,000 and $22,000, during the three and nine months ended
September 30, 2007, respectively, based upon 34,856 units owned by
inVestin.
 
 We paid
pro rata distributions owed to Shustek Investments, a company wholly owned by
our manager’s CEO, totaling $2,000 and $37,000, during the three and nine months
ended September 30, 2008, respectively, based upon 160,857 of our units owned by
Shustek Investments.  We paid pro rata distributions owed to Shustek
Investments, a company wholly owned by our manager’s CEO, totaling $23,000 and
$63,000, during the three and nine months ended September 30, 2007,
respectively, based upon 110,349 units owned by Shustek
Investments.
 
 During
the three and nine months ended September 30, 2008, we incurred $2,000 and
$6,000, 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.  During the three and nine months ended September 30,
2007, we incurred $3,000 and $8,000, respectively, for legal fees to the law
firm of Levine, Garfinkel & Katz.
 
 NOTE
H — MEMBERS’ EQUITY
 
 Allocations
and Distributions
 
 In
accordance with our Operating Agreement, profits, gains and losses are to be
credited to and charged against each member’s capital account in proportion to
their respective capital accounts as of the close of business on the last day of
each calendar month.
 
 Distributions
are paid monthly to members.  For the nine months ended September 30,
2008, distributions to members were approximately $0.7 million.
 
 Working
Capital Reserves
 
 We are
required by our Operating Agreement to maintain working capital reserves of
approximately 3% of the aggregate capital accounts of the
members.  This reserve is available to pay any future expenses in
excess of revenues, satisfy obligations of underlying secured properties, expend
money to satisfy our unforeseen obligations and other permitted uses of our
working capital.  Working capital reserves up to 3% in cash, cash
equivalents, certificates of deposit, short term investments and marketable
securities are excluded from the funds committed to investments in determining
what proportion of the offering proceeds and reinvested distributions have been
invested in real estate loans or real property.
 
 Value
of Members’ Capital Accounts
 
  See
review report of Independent Registered Public Accounting Firm.
 - 23
-
 Table of Contents
  In
accordance with Section 7.8 of our Operating Agreement, our manager reviewed the
value of our assets during the three months ended September 30,
2008.  Based on this review the value of members’ capital accounts was
adjusted from $8.49 per unit to $7.55 per unit, as of October 1,
2008.  The change in valuation is primarily for tax and capital
account purposes and does not reflect the change in the value of the units
calculated in accordance with GAAP.  Accordingly, unit prices
calculated under GAAP may be different than the adjusted price per
unit.
 
 Redemption
Limitation
 
 Under our
Operating Agreement, our members have limited withdrawal rights.  The
withdrawal rights are subject to various limitations set forth in our Operating
Agreement intended to protect our financial health and our status under the
Internal Revenue Code.  These limitations provide, among other things,
that withdrawals may not exceed 10% of the aggregate Members’ capital in any
calendar year and no more than $100,000 per members’ account in any calendar
year, subject to our manager’s discretion which my be excised in accordance to
our Operating Agreement.  As of September 30, 2008, the total
redemptions made from inception were approximately $9.0
million.  Balances in Members’ capital accounts as of January 1, 2008
were approximately $26.3 million, including deferred income of approximately
$1.0 million, which limited redemptions to approximately $2.6 million for
calendar 2008.  Total redemptions during the nine months ended
September 30, 2008, were approximately $2.8 million.  The remaining
requests to redeem, as of September 30, 2008, were estimated at approximately,
$1.9 million in 2009, $1.8 million in 2010, $1.6 million in 2011, $0.8 million
in 2012, $0.8 million in 2013, $0.6 million in 2014, $0.6 million in 2015, $0.4
million in 2016, $0.2 million in 2017, $0.2 million in 2018, $0.2 million in
2019, $0.1 million in 2020, $0.1 million in 2021 and $8,000 in 2022, subject to
unit valuation adjustments and results of operations.
 
 NOTE
I — FAIR VALUE
 
 As of
September 30, 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 and real
estate held for sale.
 
 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.  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 September 30, 2008 measured at fair value on a recurring basis by the
input levels prescribed by FAS 157:
  See
review report of Independent Registered Public Accounting Firm.
 - 24
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 Table of Contents
  
 Quoted
      Prices in Active Markets For Identical Assets (Level 1)
              
              
              Significant
      Other Observable Inputs (Level 2)
              
              
              Significant
      Unobservable Inputs (Level 3)
              
              
              Balance
      at 09/30/2008AssetsInvestment
      in marketable securities - related party
              
              $
              444,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              444,000Real
      estate held for sale
              
              $
              --
              
              
              $
              --
              
              
              $
              3,567,000
              
              
              $
              3,567,000Investment
      in real estate loans
              
              $
              --
              
              
              $
              --
              
              
              $
              10,776,000
              
              
              $
              10,776,000
 
 NOTE
J — RECENT ACCOUNTING PRONOUNCEMENTS
 
 On
October 10, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-3 – Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
clarifies the application of FAS 157 – Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  Additionally, this FSP
specifies that in situations in which there is little, if any, market activity
for an asset at the measurement date, the fair value measurement objective
remains the same, that is, the price that would be received by the holder of the
financial asset in an orderly transaction (an exit price notion) that is not a
forced liquidation or distressed sale at the measurement date.  This
FSP shall be effective upon issuance, including prior periods for which
financial statements have not been issued.  Revisions resulting from a
change in the valuation technique or its application shall be accounted for as a
change in accounting estimate (FASB Statement No. 154, Accounting Changes and
Error Corrections, paragraph 19).  The adoption of FSP FAS 157-3 has
not had a material impact on our financial condition or results of
operation.
 
 NOTE
K— 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 VRM II.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
 In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of our units and units in Fund II, the
predecessor to VRM II.  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.
  See
review report of Independent Registered Public Accounting Firm.
 - 25
-
 Table of Contents
  
 The state
court complaint further alleges that Desert Land is entitled to void such
transfers and that pursuant to NRS 112.20, Desert Land is entitled to an
injunction to enjoin defendants from further disposition of
assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin
Group and Vestin Mortgage for any losses and expenses in connection with the
action, and Mr. Shustek has guaranteed the indemnification.
 
 On
October 16, 2008 the Court granted partial summary judgment in favor of Desert
Land on a $2.5 million claim against Del Mar Mortgage Company,
Inc.  Judgment has not yet been entered, but the plaintiffs are asking
the Court to make Vestin Mortgage, Inc., the judgment debtor, which Vestin
Mortgage is opposing.
 
 The
remainder of the plaintiffs' claims have been scheduled for trial on December 4,
2008.  The Defendants intend to vigorously defend the claims, as well
as ask the Court to reconsider and vacate its October 16 order granting the
summary judgment described in the preceding paragraph.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage, Inc. and VRM II alleging that these Vestin
entities improperly influenced the former RightStar trustees to transfer trust
funds to VRM II.
 
 On May 9,
2007, VRM I, VRM II, 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, VRM II and Vestin Mortgage in part to fund the
trusts statutory minimum balances.  VRM I, VRM II, 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.  VRM I, VRM II,
Vestin Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The final outcome of this auction cannot be determined at
this time.
 
 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 March 27,
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 II
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 March 27, 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 II’s management agreement and Fund II’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM II with respect to
the above actions.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 26
-
 Table of Contents
  VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages, and a
rescission of the REIT conversion.  The 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.
 
 VRM II,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
a rescission of the REIT conversion.  The 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 II’s management agreement and Fund II’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM II 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.  Our manager believes that it is not a party to any other
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 the manager’s net income in any particular
period.
 
 NOTE
L — LEGAL MATTERS INVOLVING THE COMPANY
 
 From time
to time, we may become involved in litigation in the ordinary course of
business.  We do not believe that any pending legal proceedings are
likely to have a material adverse effect on our financial condition or results
of operations or cash flows.  It is not possible to predict the
outcome of any such proceedings.
 
 NOTE
M — SUBSEQUENT EVENTS
 
 We, VRM I
and VRM II have received a letter of intent to purchase the note and deed of
trust for the Silver Star Destinations, LLC, loan dated October 22,
2008.  The purchase agreement of $13.0 million, which our portion
would be approximately $0.1 million, is scheduled to close on or before December
19, 2008; however, there can be no assurance that the sale will be
completed.
 
 On
October 16, 2008, we, VRM I and VRM II entered into a forbearance agreement to
postpone the foreclosure date on Babuski, LLC.  On November 5, 2008,
the guarantor paid $250,000 for cost and interest due related to the
loan.
 
 On
October 30, 2008, our manager received a sales agreement to purchase Jeffrey's
Court, LLC for approximately $6.3 million, of which our portion would be
approximately $1.2 million.  The sale is scheduled to close on
December 8, 2008, where the buyer is to pay approximately $4.0 million down
along with a one year note for the remaining $2.3 million.  There can
be no assurance that the sale will be completed.
 
 
  See
review report of Independent Registered Public Accounting Firm.
 - 27
-
 Table of Contents
  REPORT
OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
 
 
 To the
Members of Vestin Fund III, LLC:
 
 We have
reviewed the accompanying balance sheet of Vestin Fund III, LLC as of September
30, 2008, and the related statements of operations for the three and nine month
periods ended September 30, 2008 and 2007, statements of members’ equity and
other comprehensive loss for the nine month period ended September 30, 2008 and
statements of cash flows for the nine month periods ended September 30, 2008 and
2007. All information included in these financial statements is the
representation of the management of Vestin Fund III, LLC.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheet of Vestin Fund
III, LLC as of December 31, 2007 and the related statements of income, members’
equity and other comprehensive income and cash flows for the year then ended
(not presented herein); and in our report dated March 24, 2008, we expressed an
unqualified opinion on those financial statements.  In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
2007, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
 
 As
discussed in Note A of the financial statements, the Company’s manager is
considering a proposal to the members to wind up the Company’s operations in
view of its limited operating assets.
 
 
 Orange,
California
 November
14, 2008
  
  - 28
-
 Table of Contents
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three and nine months ended September 30, 2008 and
2007.  This discussion should be read in conjunction with our
consolidated financial statements and accompanying notes and other detailed
information regarding us appearing elsewhere in this report on Form 10-Q and our
report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis
of Financial Conditions and Results of Operations for the year ended
December 31, 2007 and our quarterly reports filed on Form 10-Q for the periods
ended March 31, 2008 and June 30, 2008.
 
 FORWARD
- LOOKING STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 2, “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-Q.  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 II Item 1A Risk Factors of this
Quarterly Report on Form 10-Q 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.
 
  - 29
-
 Table of Contents
  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 nine months ended September 30,
2008.  As of September 30, 2008, we had 10 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 $7.9 million, net of allowance for loan losses of approximately
$2.6 million.  These loans have been placed on non-accrual of interest
status and are the subject of pending foreclosure proceedings.  As of
September 30, 2008, four loans totaling approximately $4.1 million, representing
approximately 30% of our portfolio’s total value, had a common guarantor; all
four loans were considered non-performing as of September 30,
2008.  For additional information, see “Specific Loan Allowance” in
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $11.5 million or
67% of our total assets as of September 30, 2008, as compared to approximately
$5.6 million or 21% of our total assets as of December 31, 2007.  At
September 30, 2008, non-performing assets consisted of approximately $3.6
million of real estate held for sale and approximately $7.9 million of
non-performing loans, net of allowance for loan losses.  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 I, Item 1 Consolidated
Financial Statements of this report Form 10-Q.
 
 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 distributions to our members.
 
 As of
September 30, 2008, our loan-to-value ratio was 81.88%, 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.
 
 As of
September 30, 2008, we have provided a specific reserve allowance for six
non-performing loans and two performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year ended December 31, 2007, and the nine
months ended September 30, 2008.  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 I,
Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 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 to materially increase the funds we will have available to
invest from any other sources.  See discussion under – “Capital and
Liquidity.”
 
  - 30
-
 Table of Contents
  From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 As of
September 30, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.  The weighted average term of our
outstanding loans, including extensions, was 21 months and 17 months as of
September 30, 2008 and December 31, 2007, respectively.
 
 Comparison
of Operating Results for the three and nine months ended September 30, 2008 to
the three and nine months ended September 30, 2007.
 
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Total
      revenues
              
              $
              151,000
              
              
              $
              508,000
              
              
              $
              856,000
              
              
              $
              1,966,000Total
      operating expenses
              
              
              1,040,000
              
              
              
              110,000
              
              
              
              3,548,000
              
              
              
              354,000Non-operating
      income (loss)
              
              
              (1,195,000
              )
              
              
              84,000
              
              
              
              (1,098,000
              )
              
              
              171,000Loss
      from real estate held for sale
              
              
              (1,352,000
              )
              
              
              (22,000
              )
              
              
              (2,583,000
              )
              
              
              (87,000
              )NET
      INCOME (LOSS)
              
              $
              (3,436,000
              )
              
              $
              460,000
              
              
              $
              (6,373,000
              )
              
              $
              1,696,000Net
      income (loss) allocated to members per weighted average membership
      units
              
              $
              (1.51
              )
              
              $
              0.18
              
              
              $
              (2.70
              )
              
              $
              0.65Weighted
      average membership units
              
              
              2,271,557
              
              
              
              2,525,561
              
              
              
              2,357,451
              
              
              
              2,597,429Annualized
      rate of return to members (a)
              
              
              -59.65%
              
              
              
              7.16%
              
              
              
              -35.79%
              
              
              
              8.65%Cash
      distributions
              
              $
              39,000
              
              
              $
              521,000
              
              
              $
              689,000
              
              
              $
              1,685,000Cash
      distributions per weighted average membership units
              
              $
              0.02
              
              
              $
              0.21
              
              
              $
              0.29
              
              
              $
              0.65Weighted
      average term of outstanding loans
              
              21
      months
              
              
              16
      months
              
              
              21
      months
              
              
              16
      months
 
 (a)
              The
      annualized rate of return to members is calculated based upon the net GAAP
      income allocated to members per weighted average unit as of September 30,
      2008 and 2007, divided by the number of days during the period (92/92 and
      274/273 days for the three and nine months ended September 30, 2007 and
      2008) and multiplied by 366/365 days, then divided by the weighted average
      cost per unit ($10.09 for each period,
  respectively).
 
 Comparison
of Operating Results for the three months ended September 30, 2008 to the three
months ended September 30, 2007.
 
 Total
Revenues:  For the three months ended September 30, 2008, total
revenues were $151,000 compared to $508,000 during the three months ended
September 30, 2007, a decrease of $357,000 or 70% due in significant part to the
following factor:
  - 31
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 ·
              Interest
      income from investments in real estate loans decreased to $151,000 during
      the three months ended September 30, 2008, compared to $498,000 during the
      same period in 2007, primarily due to the increase in non-performing loans
      during the three months ended September 30, 2008, compared to three months
      ended September 30, 2007.  As of September 30, 2008,
      approximately $10.5 million of our loans were non-performing compared to
      approximately $5.1 million as of September 30, 2007.  For
      additional information on our loan portfolio, see Note D – Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements of this
      Interim Report Form 10-Q.
 
 Total Operating
Expenses:  For the three months ended September 30, 2008, total
operating expenses were approximately $1.0 million compared to approximately
$110,000 during the three months ended September 30, 2007, an increase of
approximately $0.9 million or 845% due in significant part to the following
factor:
 
 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the three months ended September 30,
      2008, we recognized provisions for loan loss related to four
      non-performing loans totaling approximately $944,000.  The
      significant increase in loan losses is primarily a result of declining
      values in real estate as reflected in updated appraisals obtained by our
      manager in 2008.  We believe that the continued weakness in real
      estate markets may result in our recording additional losses related to
      the declining value of real estate securing our non-performing
      loans.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statements of this Interim Report Form 10-Q.  During the
      three months ended September 30, 2007, management recognized a provision
      for loan loss of approximately $35,000 related to a land loan on property
      located in Glendale, AZ.  During the three months ended
      September 30, 2008, we, VRM II and Fund III foreclosed upon four loans and
      classified the collateralized properties as real estate held for
      sale.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 Total Non-Operating Income
(Loss):  For the three months ended September 30, 2008, total
non-operating loss was approximately $1.2 million compared to income of $84,000
during the three months ended September 30, 2007, a decrease of approximately
$1.3 million or 1,523%.  This decrease is mainly due to the
recognition of an other than temporary impairment of our marketable securities –
related party, totaling  approximately $1.2 million, for the three
months ended September 30, 2008.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended September 30, 2008, total
losses from real estate held for sale were approximately $1.4 million compared
to $22,000 during the three months ended September 30, 2007, an increase of
approximately $1.3 million or 6,045%.  As detailed below, such losses
are primarily a result of declining real estate values as reflected in updated
appraisals obtained in 2008.  We believe that the continued weakness
in real estate markets may result in additional losses on our real estate held
for sale.
 
 ·
              During
      the three months ended September 30, 2008, we, VRM I and VRM II acquired
      through foreclosure proceedings a 106 Unit Townhouse Project known as
      Cliff Shadows Townhomes located in, Las Vegas, NV, (Cliff Shadows
      Properties, LLC).  Our manager evaluated the carrying value of
      the acquired property and estimated the net realizable value of the asset
      totaled approximately $9.7 million of which our portion totaled
      approximately $0.5 million.  Based on this estimate, our write
      down on this real estate held for sale totaled approximately $0.3 million
      during the three months ended September 30, 2008.  In October
      2008, we entered into a sales contract with a third party at a price
      approximating the net realizable value.  The sales contract
      requires that the buyer complete the purchase within 30 days, however,
      there can be no assurance that the sale will be
  completed.
  - 32
-
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 ·
              During
      the three months ended September 30, 2008, our manager evaluated the
      carrying value of a 25 acre parcel in Brawley, CA, (Brawley CA 122, LLC),
      and estimated the net realizable value of the asset totaled approximately
      $0.9 million of which our portion totaled approximately $0.3
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $0.1 million during the three
      months ended September 30, 2008.  In addition, our manager
      estimated a write down of approximately $1.7 million, of which our portion
      was approximately $0.3 million, related to 46.75 acres of land in
      Galveston, TX, based on the current sales price of $2.0
      million.
 
 ·
              During
      the three months ended September 30, 2008, we, VRM I and VRM II acquired
      through foreclosure proceedings 132.03 acres of Land within the Wolf Creek
      Estates Master Planned Community, located in Mesquite, NV, (MRPE,
      LLC).  Our manager evaluated the carrying value of the acquired
      property and estimated the net realizable value of the asset totaled
      approximately $7.6 million of which our portion totaled approximately $1.5
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $0.5 million during the three
      months ended September 30, 2008.
 
 ·
              We
      recorded a loss on sale of real estate held for sale of approximately
      $38,000 during the three months ended September 30, 2008, on the sale of
      real estate located on Mt. Charleston, NV, (Forest Development,
      LLC).  There was no loss on sale of real estate held for sale
      during the same period in 2007.
 
 Comparison
of Operating Results for the nine months ended September 30, 2008 to the nine
months ended September 30, 2007
 
 Total
Revenues:  For the nine months ended September 30, 2008, total
revenues were approximately $0.9 million compared to approximately $2.0 million
during the nine months ended September 30, 2007, a decrease of approximately
$1.1 million or 57%.  Revenues were primarily affected by the
following factor:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $0.8 million during the nine months ended September 30, 2008, compared to
      approximately $2.0 million during the same period in 2007, primarily due
      to the increase in non-performing loans during the nine months ended
      September 30, 2008 referred 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 September 30, 2008, our
      investment in real estate loans was approximately $13.7 million compared
      to our investment in real estate loans of approximately $20.4 million as
      of September 30, 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.  For additional
      information see Note D- Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 Total Operating
Expenses:  For the nine months ended September 30, 2008, total
operating expenses were approximately $3.5 million compared to approximately
$354,000 during the nine months ended September 30, 2007, an increase of
approximately $3.2 million or 902%.
 
 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the nine months ended September 30,
      2008, we recognized provisions for loan losses totaling approximately $3.3
      million, compared to $35,000 for the same period in 2007.  See
      “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statements of this Interim Report Form 10-Q.  During the
      nine months ended September 30, 2008, we foreclosed upon seven loans and
      classified the collateralized properties as real estate held for
      sale.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
  - 33
-
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  Total Non-Operating Income
(Loss):  For the nine months ended September 30, 2008, total
non-operating loss was approximately $1.1 million compared to income of $171,000
during the nine months ended September 30, 2007, a decrease of approximately
$1.3 million or 742%.  This decrease is mainly due to the recognition
of an other than temporary impairment of our marketable securities – related
party, as discussed above in Total Non-Operating Income
(Loss) for the three months ended September 30, 2008.
 
 Total Loss from Real Estate Held for
Sale:  For the nine months ended September 30, 2008, total
losses from real estate held for sale were approximately $2.6 million compared
to $87,000 during the nine months ended September 30, 2007, an increase of
approximately $2.5 million or 2,869% due in significant part to the following
factors:
 
 ·
              In
      addition to the write downs and loss on real estate held for sale
      discussed above in Total
      Loss from Real Estate Held for Salefor the three months ended
      September 30, 2008, we wrote down approximately $1.2 million on four
      properties held for sale, totaling approximately $1.2 million for the nine
      months ended September 30, 2008.  For additional information see
      Note F- Real Estate Held
      For Sale of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form 10-Q.  As of
      September 30, 2008, we had seven properties held for sale totaling
      approximately $3.6 million compared to one property held for sale as of
      September 30, 2007 totaling
$550,000.
 
 Distributions to
Members:  The following is a schedule of distributions made to
members for the nine months ended September 30, 2008 and 2007.
 
 For
      the Nine Months Ended9/30/2008
              
              
              9/30/2007Distribution
      of net income available for distribution
              
              $
              --
              
              
              $
              1,685,000Reduction
      to working capital due to net loss
              
              
              (1,718,000
              )
              
              
              --Distribution
      in excess of net income available for distribution
              
              
              2,407,000
              
              
              
              --Total
      distributions
              
              $
              689,000
              
              
              $
              1,685,000
 
 Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in our Operating Agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to
members.  Although we generally do not plan to make distributions in
excess of net income available for distribution, we may do so from time to
time.  Any such distribution will be treated as a return of capital
for income tax purposes.  In addition, cash flows from operations,
which are the significant component of net income available for distribution,
affect the capital available for investment in new loans.  This
non-GAAP financial measure should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP or as an
alternative to cash flows from operating activities as a measure of our
liquidity.  We compensate for these limitations by relying primarily
on our GAAP results and using net income available for distribution only
supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
  - 34
-
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 For
      the Nine Months Ended9/30/2008
              
              
              9/30/2007Distribution
      of net income available for distribution
              
              $
              --
              
              
              $
              1,685,000Distribution
      of working capital
              
              
              689,000
              
              
              
              --Additions
      (reductions) to working capital reserves
              
              
              (2,407,000
              )
              
              
              71,000Net
      loss on foreclosure of loans realized
              
              
              2,280,000
              
              
              
              --Loss
      on sale of real estate held for sale
              
              
              38,000
              
              
              
              --Change
      in operating assets and liabilities:Interest
      receivable
              
              
              157,000
              
              
              
              56,000Accounts
      payable
              
              
              (12,000
              )
              
              
              84,000Due
      to related parties
              
              
              12,000
              
              
              
              11,000Other
      assets
              
              
              3,000
              
              
              
              6,000Net
      cash provided by operating activities
              
              $
              760,000
              
              
              $
              1,913,000Net
      cash provided (used) by investing activities
              
              $
              1,237,000
              
              
              $
              5,827,000Net
      cash (used) provided by financing activities
              
              $
              (3,461,000
              )
              
              $
              (4,432,000
              )
 
 Stated Unit Value
Adjustment:  In accordance with Section 7.8 of our Operating
Agreement, our manager reviewed the value of our assets during the three months
ended September 30, 2008.  Based on this review the value of members’
capital accounts was adjusted from $8.49 per unit to $7.55 per unit, as of
October 1, 2008.  The periodic review of the estimated net unit value
includes an analysis of unrealized gains that our manager reasonably believes
exist at the time of the review, but that cannot be added to net asset value
under GAAP.
 
 Redemptions:  Under our Operating Agreement, our
members have limited withdrawal rights.  The withdrawal rights are
subject to various limitations set forth in our Operating Agreement intended to
protect our financial health and our status under the Internal Revenue
Code.  These limitations provide, among other things, that withdrawals
may not exceed 10% of the aggregate Members’ capital in any calendar year and no
more than $100,000 per members’ account in any calendar year, subject to our
manager’s discretion which my be excised in accordance to our Operating
Agreement.  As of September 30, 2008, the total redemptions made from
inception were approximately $9.0 million.  Balances in Members’
capital accounts as of January 1, 2008 were approximately $26.3 million,
including deferred income of approximately $1.0 million, which limited
redemptions to approximately $2.6 million for calendar 2008.  Total
redemptions during the nine months ended September 30, 2008, were approximately
$2.8 million.  The remaining requests to redeem, as of September 30,
2008, were estimated at approximately, $1.9 million in 2009, $1.8 million in
2010, $1.6 million in 2011, $0.8 million in 2012, $0.8 million in 2013, $0.6
million in 2014, $0.6 million in 2015, $0.4 million in 2016, $0.2 million in
2017, $0.2 million in 2018, $0.2 million in 2019, $0.1 million in 2020, $0.1
million in 2021 and $8,000 in 2022, subject to unit valuation adjustments and
results of operations.
 
 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 members unless they have
elected to reinvest their distributions.  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.
 
 During
the nine months ended September 30, 2008, net cash flows provided by operating
activities approximated $0.8 million.  In addition, we incurred
approximately $2.4 million in write-downs on real estate held for sale and
approximately $3.3 million in provisions for loan losses, during the nine months
ended September 30, 2008.  Cash flows related to investing activities
consisted of cash provided by loan payoffs of approximately $1.7 million and
cash used for new investments of real estate loans of approximately $0.7
million.  Cash flows used for financing activities consisted of cash
used for members’ distributions, net of reinvestments, of approximately $0.7
million and members’ redemptions of approximately $2.8 million.
 
  - 35
-
 Table of Contents
  At
September 30, 2008, we had approximately $1.3 million in cash, $0.4 million in
marketable securities – related party and approximately $17.2 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 there is not
a significant increase in our non-performing assets.  In addition, as
of September 30, 2008, we had approximately $1.0 million in restricted cash,
which relates to a cash deposit held as collateral by a banking institution to
support rent payments on the property we sold during November 2006.
 
 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.
 
 Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale not sold through seller financing, totaling
approximately $7.9 million and $3.6 million, respectively, as of September 30,
2008, compared to approximately $5.0 million and $0.6 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.
 
 We have
no current plans to sell any new units.  In addition, any significant
level of redemptions by our members would reduce the capital we have available
for investment.  In order to comply with our Operating Agreement and
the Internal Revenue Code, we may redeem no more than 10% of the aggregate
Members’ capital in any calendar year and no more than $100,000 per members’
account in any calendar year subject to our manager’s discretion.  As
of September 30, 2008, the total redemptions made from inception were
approximately $9.0 million.  Balances in Members’ capital accounts as
of January 1, 2008 were approximately $26.3 million, including deferred income
of approximately $1.0 million, which limited redemptions to approximately $2.6
million for calendar 2008.  Total redemptions during the nine months
ended September 30, 2008, were approximately $2.8 million.  The
remaining requests to redeem, as of September 30, 2008, were estimated at
approximately, $1.9 million in 2009, $1.8 million in 2010, $1.6 million in 2011,
$0.8 million in 2012, $0.8 million in 2013, $0.6 million in 2014, $0.6 million
in 2015, $0.4 million in 2016, $0.2 million in 2017, $0.2 million in 2018, $0.2
million in 2019, $0.1 million in 2020, $0.1 million in 2021 and $8,000 in 2022,
subject to unit valuation adjustments and results of operations.
 
 At
September 30, 2008, we had restricted cash totaling approximately $1.0 million,
which relates to a cash deposit held as collateral by a banking institution to
support rent payments on the property we sold during November
2006.  The requirement for the deposit expires at the end of the lease
on August 31, 2014.
 
 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.  We currently do not have in place any commitments to
borrow any funds or securitize any of our assets.  No assurance can be
given that, if we should seek to borrow funds or to securitize our assets we
would be able to do so on commercially attractive terms.  Our ability
to expand our capital resources in this manner is subject to many factors, some
of which are beyond our control, including the state of the economy, the state
of the capital markets and the perceived quality of our loan
portfolio.
 
  - 36
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  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 6.0 % to 15.0
%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 20 real estate loans, as of
September 30, 2008, with a balance of approximately $13.7 million as compared to
investments in 26 real estate loans, as of December 31, 2007, with a balance of
approximately $21.9 million.
 
 As of
September 30, 2008, we had 10 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 $7.9 million, net of
allowance for loan losses of approximately $2.6 million, which does not include
the allowances of approximately $0.3 million relating to the decrease in the
property value for a performing loan as of September 30, 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.
 
 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 September 30, 2008, we have
provided a specific reserve related to six non-performing loans and two
performing loans, based on updated appraisals and evaluation of the borrower
obtained by our manager during the year ended December 31, 2007, and the nine
months ended September 30, 2008.  Our manager evaluated these loans
and concluded that the remaining underlying collateral was sufficient to protect
us against further losses of principal or interest.  Our manager will
continue to evaluate these loans in order to determine if any other allowance
for loan losses should be recorded.  For additional information on our
investments in real estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 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.
  - 37
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 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 nine months ended
September 30, 2008, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 Investments
in Real Estate Held for Sale
 
 At
September 30, 2008, we held seven properties with a total carrying value of
approximately $3.6 million, which were acquired through foreclosure and recorded
as investments in real estate held for sale.  Our investments in real
estate held for sale are accounted for at the lower of cost or fair value less
costs to sell with fair value based on appraisals and knowledge of local market
conditions.  It is not our intent to invest in or own real estate as a
long-term investment.  We seek to sell properties acquired through
foreclosure as quickly as circumstances permit.  For additional
information on our investments in real estate held for sale, refer to Note F –
Real Estate Held for Sale of the Notes to the Consolidated Financial Statements
included in Part I, Item 1 Consolidated Financial Statements of this Interim
Report Form 10-Q.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities nor do we have
any interests in non-exchange traded commodity contracts.
 
 CONTRACTUAL
OBLIGATIONS
 
 As of
September 30, 2008, we had no contractual obligations nor do we have any
interests in non-exchange traded commodity contracts.
 
 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 September 30, 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
              
              $
              197,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              986,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (197,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (986,000
              )
 
 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.
 
  - 38
-
 Table of Contents
  Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment 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 September 30, 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
              
              $
              137,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              687,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (137,000
              )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
              
              $
              (687,000
              )
 
 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
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
  - 39
-
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  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.
 
 ITEM
      3.
              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.  We do not have a significant amount of
debt.
 
 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 September 30, 2008, our aggregate investment in real
estate loans was approximately $10.8 million, net of allowance of approximately
$2.9 million, with a weighted average effective interest rate of
11.49%.  The weighted average interest rate of 11.49% is base 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 September 30, 2008, was 11.81%.  Most of the real estate loans
had an initial term of 12 months.  The weighted average term of
outstanding loans, including extensions, at September 30, 2008, was 21
months.  All but one of the outstanding real estate loans at September
30, 2008, was a fixed rate loan.  The variable interest rate loan was
considered non-performing as of September 30, 2008, see Note D – Investments in
Real Estate Loans in the Notes to the Consolidated Financial Statements included
in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form
10-Q.  All of the real estate loans are held for investment purposes;
none are held for sale.  We intend to hold such real estate loans to
maturity.  None of the real estate loans had prepayment penalties and
15 loans, totaling approximately $8.4 million, had an exit fee.  Out
of the 15 loans with an exit fee, 6 loans, totaling approximately $5.7 million,
were considered non-performing as of September 30, 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.
  - 40
-
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 The
following table contains information about the investment of real estate loans
in our portfolio as of September 30, 2008.  The presentation
aggregates the investment in real estate loans by their maturity dates for
maturities occurring in each of the years 2008 through 2012 and thereafter and
separately aggregates the information for all maturities arising after
2012.  The carrying values of these assets approximate their fair
value as of September 30, 2008.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at September 30, 2008Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              Total(a)Investments
      In Real Estate Loans
              
              $
              12,395,000
              
              
              $
              672,000
              
              
              $
              663,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              13,730,000Weighted
      Average Interest Rates
              
              
              11.62%
              
              
              
              11.85%
              
              
              
              8.72%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              11.49%
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to September 30,
2008.
 
 At
September 30, 2008, we also had approximately $1.7 million invested in cash and
marketable securities – related party (VRM II).  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.
 
 ITEM
      4.
              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 manager, including our manager’s 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-Q, our manager carried out an
evaluation, under the supervision and with the participation of our manager’s
CEO and CFO, as of September 30, 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 manager’s
evaluation, our manager’s CEO and CFO concluded that, as of September 30, 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 manager’s CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure.
 
 Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been or will be detected.  Even effective internal control over
financial reporting can only provide reasonable assurance with respect to
financial statement preparation.  Furthermore, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.  Our manager, including our manager’s CEO and CFO,
does not expect that our controls and procedures will prevent all
errors.
 
 The
certifications of the our manager’s 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.
  - 41
-
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 Changes in Internal Control
Over Financial Reporting
 
 As
required by Rule 13a-15(d) under the Exchange Act, our management, including our
manager’s CEO and our CFO, has evaluated our internal control over financial
reporting to determine whether any changes occurred during the third 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 third fiscal quarter of 2008.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
 
 Not
applicable.
 
 PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note K – Legal Matters Involving the Manager and Note L – Legal Matters
Involving the Company in Part I, Item 1 Financial Statements of this Form 10-Q
for information regarding our legal proceedings, which are incorporated herein
by reference.
 
 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 members’
distributions.  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
September 30, 2008, we had in our portfolio approximately $7.9 million in
non-performing loans, net of allowance for loan losses of approximately $2.6
million, which does not include allowances of approximately $0.3 million for
performing loans, and approximately $3.6 million of real estate held for sale
for a total of approximately $11.5 million in non-performing assets, which
represented approximately 72% of our members’ equity.  We believe this
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.
 
 Our
weighted average loan-to-value ratio, not including allowance for loan losses,
as of September 30, 2008, was 126.73%, as compared to 78.27% as of December 31,
2007, primarily as a result of declining real estate values which 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 distributions we pay to members and, most
likely, the value of members’ units.  Similarly, any failure of a
borrower to repay loans when due may reduce the capital we have available to
make new loans, thereby adversely affecting our operating results.  As
of September 30, 2008 and December 31, 2007, we had approximately $2.9 million
and $1.0 million in allowances for loan losses, respectively, resulting in net
weighted average loan-to-value ratios of 81.88% and 72.70%,
respectively.
  - 42
-
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 A
prolonged economic slowdown, lengthy or severe recession and constraints in the
credit markets could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the nine months ended
September 30, 2008, we conducted updated appraisals on 17 properties securing
our loans, representing approximately 94% of our total loan portfolio value, and
concluded that the estimated value of such properties should be reduced by
approximately $4.1 million, which negatively impacted our weighted average loan
to value ratio.  As a commercial real estate lender willing to invest
in riskier loans, rates of delinquencies, foreclosures and losses on our loans
could be higher than those generally experienced in the commercial mortgage
lending industry during periods of economic slowdown or recession.  We
are of the opinion that problems in the sub-prime residential mortgage market
have adversely affected the general economy and the availability of funds for
commercial real estate developers.  We believe this lack of available
funds has led to an increase in defaults on our loans.  Furthermore,
problems experienced in U.S. credit markets since the summer of 2007 have
reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary to pay back our
loans.  Thus, an extended period of illiquidity in the credit markets
could result in a material increase in the number of our loans that are not paid
back on time.  Any sustained period of increased delinquencies,
defaults or foreclosures will likely have an adverse affect upon our ability to
originate, purchase and securitize loans, which could significantly harm our
business, financial condition, liquidity and results of operations.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.  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.
 
 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.
 
  - 43
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  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.
 
 As
a result of our small size, we are not able to build a diversified loan
portfolio, thereby increasing our risk that defaults on one or more loans could
have a material adverse effect upon our operating results.
 
 We are
limited in the number of real estate loans in which we may invest and the value
of members’ investment will fluctuate with the performance of the specific
investments we make.  As of September 30, 2008, we had approximately
$16.1 million in members’ equity and $10.8 million in outstanding loans, net of
allowance of approximately $2.9 million, and we currently are not raising
additional funds through the sale of units.  Accordingly, we are a
relatively small fund and will make a limited number of investments resulting in
less diversification in terms of the number of investments owned, the geographic
regions in which our investments are located and the types of investments that
we make as compared with larger funds.  As a result, our performance
will be closely tied to the performance of each loan we invest in and a default
on a loan could materially reduce the funds available for
distribution.  Our profitability may be affected by the performance of
any one of our investments and members’ investment in our units will be subject
to greater risk.
 
 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 September 30, 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 members.
 
  - 44
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  Any
borrowing by us will increase members risk and may reduce the amount we have
available to distribute.
 
 We may
borrow funds 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.  Any such borrowings will
require us to carefully manage our cost of funds.  No assurance can be
given that we will be successful in this effort.  Should we be unable
to repay the indebtedness and make the interest payments on the loans, the
lender will likely declare us in default and require that we repay all amounts
owing under the loan facility.  Even if we are repaying the
indebtedness in a timely manner, interest payments owing on the borrowed funds
may reduce our income and the distributions members receive.
 
 We may
borrow funds from several sources, and the terms of any indebtedness we incur
may vary.  However, some lenders may require as a condition of making
a loan to us that the lender will receive a priority on loan repayments received
by us.  As a result, if we do not collect 100% on our investments, the
first dollars may go to our lenders and we may incur a loss that will result in
a decrease of the amount available for distribution.  In addition, we
may enter into securitization arrangements in order to raise additional
funds.  Such arrangements could increase our leverage and adversely
affect our cash flow and our ability to make distributions.
 
 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;
 
 ·
              We
      may not be able to pursue deficiency judgments after we foreclose on
      collateral; and
 
 ·
              State
      and federal bankruptcy laws can prevent us from pursuing any actions,
      regardless of the progress in any of these suits or
      proceedings.
 
 By
becoming the owner of property, we may incur additional obligations, which may
reduce the amount of funds available for distribution.
 
 We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  If we foreclose on
the security property, we expect to obtain the services of a real estate broker
and pay the broker’s commission in connection with the sale of the
property.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.
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  See Note
F – Real Estate Held for
Sale in the notes to the consolidated financial statement under Part I,
Item 1 Consolidated Financial
Statementsof this Interim Report Form 10-Q.
 
 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 the
distributions.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 ·
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and distributions will decline if we are unable to reinvest at
      higher rates or if an increasing number of borrowers default on their
      loans; and
 
 ·
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if a borrower should prepay
      obligations that have a higher interest rate from an earlier period, we
      will likely not be able to reinvest the funds in real estate loans earning
      that higher rate of interest.  In the absence of a prepayment
      fee, we will receive neither the anticipated revenue stream at the higher
      rate nor any compensation for its loss.  As of September 30,
      2008, none of our loans had a prepayment penalty, although 15 of our
      loans, totaling approximately $8.4 million, had an exit
      fee.  Out of the 15 loans with an exit fee, 6 loans, totaling
      approximately $5.7 million, were considered non-performing as of September
      30, 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.
 
 We may
also invest up to 10% of our total real estate loan assets in deeds of trust
and, in rare instances, wraparound, or all-inclusive, real estate
loans.  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 September
30, 2008, approximately 6% of our loans were secured by second deeds of
trust.
 
 Investment
in large loans may reduce our ability to diversify our loan
portfolio.
 
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  We will
generally invest in loans that constitute an amount equal to less than 5% of our
total capital.  However, we may invest in a larger loan depending on
such factors as the performance of the Fund and the value of the
collateral.  These larger loans have greater risk because they may
reduce our ability to diversify our loan portfolio.  As of September
30, 2008, our largest loan comprised approximately 11% of our total loan
portfolio.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
September 30, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas, with approximately 40% of our loans in
Nevada.  Our manager has limited experience outside of the Western and
Southern United States.  Real estate markets vary greatly from
location to location and the rights of secured real estate lenders vary
considerably from state to state.
 
 Our
lending operations are subject to certain regulatory requirements.
 
 As a
company investing in real estate loans and having raised funds through a public
offering, we are subject to the NASAA Guidelines promulgated by the state
securities administrators.  The NASAA Guidelines govern, among other
things, our debt to equity ratio and the diversity and composition of our
investments.  For example, the NASAA Guidelines provide that we may
not invest in or make real estate loans to or from any one borrower that would
exceed, in the aggregate, an amount greater than 20% of the capital
contributions that we have raised.  Additionally, the NASAA Guidelines
require reserves of not less than 1% of the offering proceeds.  The
NASAA Guidelines are intended to protect the interests of
investors.  However, our flexibility in making business decisions may
be limited by our obligation to comply with the NASAA Guidelines.
 
 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.  If
our co-participant affiliate determines to sell its interest in the loan, there
is no guarantee that we will have the resources to purchase such interest and we
will have no control over a sale to a third party purchaser.
 
 MANAGEMENT
AND CONFLICTS OF INTEREST RISKS
 
 We
rely on our manager to manage our day-to-day operations and select our loans for
investment.
 
 Our
ability to achieve our investment objectives and to make distributions depends
upon our manager’s and its affiliate’s performance in obtaining, processing,
making and brokering loans for us to invest in and determining the financing
arrangements for borrowers.  Members 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.  Our manager’s duties to our
members are generally governed by the terms of our Operating Agreement, 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.
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  As of
September 30, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.  Depending on the market and on
our company’s performance, we plan to expand our investments throughout the
United States.  However, our manager has limited experience outside of
the Western and Southern United States.  Real estate markets vary
greatly from location to location and the rights of secured real estate lenders
vary considerably from state to state.  Our manager’s limited
experience in most U.S. real estate markets may impact its ability to make
prudent investment decisions on our behalf.  Accordingly, where our
manager deems it necessary, it plans to utilize independent real estate advisors
and local legal counsel located in markets where it lacks experience for
consultation prior to making investment decisions.  Members 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.
 
 Any
indemnification of our manager by us will decrease the amount available for
distribution.  Pursuant to our Operating Agreement, we may be required
to indemnify our manager or any of its affiliates, agents, or attorneys from any
action, claim or liability arising from any act or omission made in good faith
and in performance of its duties under the Operating Agreement.  The
availability of such indemnification may reduce the amount of funds we have
available for distribution.
 
 Vestin
Mortgage serves as our manager pursuant to our Operating
Agreement.  It may be difficult to terminate Vestin Mortgage and our
Operating Agreement does not reflect arm’s length negotiations.
 
 Pursuant
to the terms of our Operating Agreement, Vestin Mortgage acts as our
manager.  The term of the Operating Agreement is for the duration of
our existence.  Vestin Mortgage may only be terminated as manager upon
the affirmative vote of a majority of members entitled to vote on the
matter.  Consequently, it may be difficult to replace our manager in
the event that our performance does not meet expectations or for other
reasons.  The Operating Agreement was negotiated by related parties
and may not reflect terms as favorable as those subject to arm’s length
bargaining.
 
 Our
manager will face conflicts of interest concerning the allocation of its
personnel’s time.
 
 Our
manager is also the manager of VRM I, VRM II 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 Operating
Agreement 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.
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 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
Operating Agreement under “Compensation to Vestin Mortgage and Affiliates” in
our Third Amended and Restated Operating Agreement.  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.
 
 Vestin
Mortgage and Vestin Originations received a total of approximately $3.5 million
and $1.2 million, respectively, in fees directly from borrowers for the nine
months ended September 30, 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, VRM II
and inVestin.  Our assets represented approximately 5% of the assets
managed by Vestin Mortgage as of September 30, 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, VRM II 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, VRM II, 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.
 
 INVESTMENT
RISKS
 
 Units
lack liquidity and marketability.
 
 There is
no public trading market for units, and members cannot freely sell or transfer
units or use them as collateral for a loan.  Currently, we do not
intend to list the units on any national exchange or on Nasdaq.  Our
Operating Agreement restricts the transfer of units so that we may avoid being
classified as a “publicly traded partnership” under Section 7704 of the Internal
Revenue Code.  If we were classified as a publicly traded partnership
taxable as a corporation, the taxable income derived from our operations would
be subject to the double tax system applicable to corporations and shareholders
for federal income tax purposes (i.e., the taxable income would be subject to
tax at the entity level at regular corporate tax rates and members would be
subject to tax at distribution or capital gain rates on our share of our taxable
income to the extent we distribute).  As a result of this entity level
tax, cash available for distribution to unit holders would be significantly
reduced which in turn would result in a significant reduction in the value of
members’ units.  In order to attempt to avoid these adverse income tax
consequences, members may not sell or assign their units and will not be
entitled to have their units redeemed without the consent of our
manager.  Our manager will withhold its consent to any sale,
assignment or redemption of units to the extent our manager believes such action
is necessary to prohibit transfers that could cause us to be classified as a
publicly traded partnership.  Further, the resale of units may be
restricted by state securities laws.
 
  - 49
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  Members have limited ability to have
units redeemed.
 
 Members
have limited withdrawal rights.  Requests by members for withdrawal
are honored in the order in which they are received by the
manager.  The significant limitations on our members’ withdrawal
rights are the following:
 
 ·
                There
      is no reserve fund for redemptions.
 
 ·
                Payments
      for withdrawn units are made only to the extent we have available cash
      from proceeds of repayments of principal on real estate loans and capital
      contributions; and the redemption would not impair the capital or
      operation of the Fund.  Accordingly, a significant amount of
      withdrawal requests may delay the payment of subsequent
      redemptions.
 
 ·
                The
      total amount withdrawn by all members during any calendar year cannot
      exceed 10% of the amount of capital accounts of all the members with a
      yearly limit of $100,000 per member, subject to the manager’s discretion
      to allow a greater amount.
 
 ·
                We
      will only redeem withdrawn units once a quarter, subject to limitations in
      our Operating Agreement.
 
 Because a
substantial portion of our loans are made on an “interest only” basis, we will
not receive proceeds from the repayment of principal as frequently as we would
with loans where the principal is repaid in periodic installments.  To
help permit withdrawals, we will not refinance or invest in new loans using
payments of loan principal by borrowers or new invested capital of members
unless we have sufficient funds to cover permitted
withdrawals.
 ITEM
      2.
              UNREGISTERED
      SALES OF EQUITYAND USE OF
  PROCEEDS
 
 Market
Information
 
 There is
no established public trading market for the trading of units.
 
 Holders
 
 As of
November 14, 2008, approximately 574 unit holders held 2,248,825 units in the
Company.
 
 Distribution
Policy
 
 We
generally distribute to unit holders on a monthly basis most of our Net Income
Available for Distribution (as defined in our Operating
Agreement).  Net Income Available for Distribution is based upon cash
flow from operations, less certain reserves, and may exceed net income as
calculated in accordance with accounting principles generally accepted in the
United States (“GAAP”).  Our Operating Agreement also permits
distributions of capital.  We made distributions of $689,000 during
the nine months ended September 30, 2008, which are classified as distribution
of capital.  On August 27, 2008, we temporarily suspended payment of
distributions as a result of our current losses.
 
 Recent
Sales of Unregistered Securities
 
 None.
 
 Equity
Compensation Plan Information
 
 None.
 
  - 50
-
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  Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
 
 Period
              
              Total
      Number of Units Purchased (1)
              
              
              Average
      Price Paid Per Unit
              
              Total
      Number of Units Purchased as Part of Publicly Announced Plans or
      Programs
              Maximum
      Number (or Approximate Dollar Value) of Units that May Yet be Purchased
      under the Plans or ProgramsJuly
      2008
              
              
              --
              
              
              
              --
              
              None
              NoneAugust
      2008
              
              
              --
              
              
              
              --
              
              None
              NoneSeptember
      2008
              
              
              --
              
              
              
              --
              
              None
              None
 
 (1)
              Pursuant
      to our Operating Agreement, members may request to have their units
      redeemed.  However, in order to comply with our Operating
      Agreement and the Internal Revenue Code, we may redeem no more than 10% of
      the aggregate Members’ capital in any calendar year and no more than
      $100,000 per members’ account in any calendar year subject to our
      manager’s discretion.  Balances in Members’ capital accounts as
      of January 1, 2008 were approximately $26.3 million, including deferred
      income of approximately $1.0 million, which limited redemptions to
      approximately $2.6 million for calendar 2008.  These redemptions
      have been paid as of September 30,
2008.
 
 ITEM
      3.
              DEFAULTS
      UPON SENIORSECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
    HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
    
 
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 ITEM
      6.
              EXHIBITS
 
 EXHIBIT
INDEX
 
 
 Exhibit
      No.
              
              Description
      of Exhibits3.1(1)
              
              Articles
      of Organization3.2(2)
              
              Certificate
      of Amendment to Articles of Organization3.3(3)
              
              Amended
      and Restated Operating Agreement (included as Exhibit A to the
      prospectus)4.4(4)
              
              Distribution
      Reinvestment Plan10.9(6)
              
              Office
      lease agreement dated March 31, 2003 by and between Luke Properties, LLC
      and Vestin Group, Inc.31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      1350
 
 (1)
              
              Incorporated
      herein by reference to our Pre-Effective Amendment No. 3 to Form S-11
      Registration Statement filed on September 2, 2003, File No.
      333-105017.(2)
              
              Incorporated
      herein by reference to our Form 10-Q filed on August 16, 2004, File No.
      333-105017.(3)
              
              Incorporated
      herein by reference to our Schedule 14A Definitive Proxy Statement filed
      on January 29, 2007 File No. 000-51301.(4)
              
              Incorporated
      herein by reference to Exhibit 4.4 of our Post-Effective Amendment No. 5
      to Form S-11 Registration Statement filed on April 28, 2006, File No.
      333-105017.(5)
              
              Incorporated
      herein by reference to our Form 10-Q filed on November 15, 2004, File No.
      333-105017.(6)
              
              Incorporated
      herein by reference to our Form 10-KSB filed on March 30, 2005, File No.
      333-105017.(7)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q for the three
      months ended September 30, 2006 filed on November 8, 2006, File No.
      000-51301
 
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 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
      Fund III, LLCBy:
              
              Vestin
      Mortgage, Inc., its sole ManagerBy:
              
              /s/
      Michael V. ShustekMichael
      V. ShustekChief
      Executive Officer and Sole Director of the Manager(Principal
      Executive Officer of Manager)By:
              
              /s/
      Rocio RevolloRocio
      RevolloChief
      Financial Officer of the Manager(Principal
      Financial and Accounting Officer of the
Manager)
 
 Date:  November
14, 2008
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