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 March 31,
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 May
1, 2008, 2,278,922 units of interest in the Company were
outstanding.
 
  Table of Contents
  TABLE
OF CONTENTS
 
 PagePart I
              FINANCIAL INFORMATIONItem 1.
              Financial StatementsBalance Sheets as of March 31, 2008 (unaudited) and December
      31, 2007
              1Statements of Operations (unaudited) for the Three Months
      Ended March 31, 2008 and 2007
              2Statements of Members’ Equity and Other Comprehensive
      Loss (unaudited) for the Three Months Ended March 31,
      2008
              3Statements of Cash Flows (unaudited) for the Three Months Ended
      March 31, 2008 and 2007
              4Notes to Financial Statements
(unaudited)
              5Report of Independent Registered Public Accounting
      Firm
              23Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              24Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              33Item 4.
              Controls and Procedures
              34Item 4T
              Controls and Procedures
              35Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              35Item 1A.
              Risk Factors
              35Item 2.
              Unregistered Sales of Equity – Securities and Use of
      Proceeds
              43Item 3.
              Defaults Upon Senior Securities
              44Item 4.
              Submission of Matters to a Vote of Security
      Holders
              44Item 5.
              Other Information
              44Item 6.
              Exhibits
              45SIGNATURES
              46Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
STATEMENTS
 
 VESTIN
      FUND III, LLCBALANCE SHEETSASSETSMarch
      31, 2008
              
              
              December
      31, 2007(Unaudited)AssetsCash
      and cash equivalents
              
              $
              1,158,000
              
              
              $
              2,720,000Cash
      - restricted
              
              
              985,000
              
              
              
              985,000Marketable
      securities - related party
              
              
              1,010,000
              
              
              
              1,113,000Interest
      and other receivables
              
              
              80,000
              
              
              
              198,000Real
      estate held for sale
              
              
              1,635,000
              
              
              
              546,000Investment
      in real estate loans, net of allowance for loan loss of $1,026,000 at
      March 31, 2008 and December 31, 2007
              
              
              18,281,000
              
              
              
              20,825,000Other
      assets
              
              
              2,000
              
              
              
              3,000Total
      assets
              
              $
              23,151,000
              
              
              $
              26,390,000LIABILITIES
      AND MEMBERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              132,000
              
              
              $
              125,000Due
      to related parties
              
              
              7,000
              
              
              
              1,000Deferred
      income
              
              
              985,000
              
              
              
              985,000Total
      liabilities
              
              
              1,124,000
              
              
              
              1,111,000Commitments
      and contingenciesMembers'
      equityMembers'
      units - authorized 10,000,000 units, 2,281,162 units and 2,525,561 units
      issued and outstanding at March 31, 2008 and  December 31,
      2007
              
              
              22,669,000
              
              
              
              25,818,000Accumulated
      other comprehensive loss
              
              
              (642,000
              )
              
              
              (539,000
              )Total
      members' equity
              
              
              22,027,000
              
              
              
              25,279,000Total
      liabilities and members' equity
              
              $
              23,151,000
              
              
              $
              26,390,000
 
 
  The
accompanying notes are an integral part of these statements.
 See
Review report of Independent Registered Public Accounting
Firm.
 - 1
-
 Table of Contents
  
 VESTIN
      FUND III, LLCSTATEMENTS OF OPERATIONS(UNAUDITED)For
      The Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007RevenuesInterest
      income from investment in real estate loans
              
              $
              414,000
              
              
              $
              783,000Other
      income
              
              
              11,000
              
              
              
              3,000Total
      revenues
              
              
              425,000
              
              
              
              786,000Operating
      expensesManagement
      fees - related party
              
              
              --
              
              
              
              4,000Interest
      expense related to secured borrowings
              
              
              --
              
              
              
              79,000Professional
      fees
              
              
              60,000
              
              
              
              38,000Professional
      fees - related party
              
              
              2,000
              
              
              
              6,000Other
              
              
              14,000
              
              
              
              7,000Total
      operating expenses
              
              
              76,000
              
              
              
              134,000Income
      from operations
              
              
              349,000
              
              
              
              652,000Non-operating
      incomeInterest
      income from banking institutions
              
              
              29,000
              
              
              
              22,000Dividend
      income - related party
              
              
              24,000
              
              
              
              16,000Total
      non-operating income
              
              
              53,000
              
              
              
              38,000Loss
      from real estate held for saleWrite
      down of real estate held for sale
              
              
              (612,000
              )
              
              
              --Expenses
      related to real estate held for sale
              
              
              (5,000
              )
              
              
              (3,000
              )Total
      loss from real estate held for sale
              
              
              (617,000
              )
              
              
              (3,000
              )NET
      INCOME (LOSS)
              
              $
              (215,000
              )
              
              $
              687,000Net
      income (loss) allocated to members
              
              $
              (215,000
              )
              
              $
              687,000Net
      income (loss) allocated to members per weighted average membership
      unit
              
              $
              (0.09
              )
              
              $
              0.25Weighted
      average membership units
              
              
              2,522,875
              
              
              
              2,745,524
 
 
  The
accompanying notes are an integral part of these statements.
 See
Review report of Independent Registered Public Accounting
Firm.
 - 2
-
 Table of Contents
  
 
 VESTIN
      FUND III, LLCSTATEMENTS
      OF MEMBERS'EQUITYAND OTHER COMPREHENSIVE
      LOSSFOR
      THE THREE MONTHS ENDED MARCH 31, 2008(UNAUDITED)Units
              
              
              AmountMembers'
      equity at December 31, 2007
              
              
              2,525,561
              
              
              $
              25,279,000Comprehensive
      loss:Net
      loss
              
              
              
              
              
              
              (215,000
              )Unrealized
      loss on marketable securities
              
              
              
              
              
              
              (103,000
              )Total
      comprehensive loss
              
              
              
              
              
              
              (318,000
              )Distributions
              
              
              
              
              
              
              (392,000
              )Members'
      redemptions
              
              
              (244,399
              )
              
              
              (2,542,000
              )Members'
      equity at March 31, 2008 (unaudited)
              
              
              2,281,162
              
              
              $
              22,027,000
 
  The
accompanying notes are an integral part of these statements.
 See
Review report of Independent Registered Public Accounting
Firm.
 - 3
-
 Table of Contents
  
 VESTIN
      FUND III, LLCSTATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (215,000
              )
              
              $
              687,000Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Write
      down of real estate held for sale
              
              
              612,000
              
              
              
              --Change
      in operating assets and liabilities:Interest
      receivable
              
              
              118,000
              
              
              
              27,000Accounts
      payable and accrued liabilities
              
              
              7,000
              
              
              
              15,000Due
      to related parties
              
              
              6,000
              
              
              
              12,000Other
      assets
              
              
              1,000
              
              
              
              2,000Net
      cash provided by operating activities
              
              
              529,000
              
              
              
              743,000Cash
      flows from investing activities:Investments
      in real estate loans
              
              
              (296,000
              )
              
              
              (1,500,000
              )Proceeds
      from loan payoff
              
              
              1,139,000
              
              
              
              2,533,000Sale
      of investments in real estate loans to VRM II
              
              
              --
              
              
              
              1,300,000Net
      cash provided by investing activities
              
              
              843,000
              
              
              
              2,333,000Cash
      flows from financing activities:Members'
      redemptions
              
              
              (2,542,000
              )
              
              
              (3,029,000
              )Members'
      distributions, net of reinvestments
              
              
              (361,000
              )
              
              
              (406,000
              )Members'
      distributions - related party
              
              
              (31,000
              )
              
              
              (36,000
              )Net
      cash used in financing activities
              
              
              (2,934,000
              )
              
              
              (3,471,000
              )NET
      CHANGE IN CASH
              
              
              (1,562,000
              )
              
              
              (395,000
              )Cash,
      beginning of period
              
              
              2,720,000
              
              
              
              821,000Cash,
      end of period
              
              $
              1,158,000
              
              
              $
              426,000Supplemental
      disclosures of cash flows information:Interest
      paid during the period
              
              $
              --
              
              
              $
              79,000Non-cash
      investing and financing activities:Unrealized
      gain (loss) on marketable securities - related party
              
              $
              (103,000
              )
              
              $
              3,000Payoffs
      of loans funded through secured borrowings
              
              $
              --
              
              
              $
              2,224,000Loan
      rewritten with same or similar collateral
              
              $
              468,000
              
              
              $
              --Real
      estate held for sale acquired through foreclosure
              
              $
              1,701,000
              
              
              $
              --
 
 
 
 
  The
accompanying notes are an integral part of these statements.
 See
Review report of Independent Registered Public Accounting
Firm.
 - 4
-
 Table of Contents
  VESTIN
FUND III, LLC
 
 NOTESTO FINANCIAL STATEMENTS
 
 MARCH
31, 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.  We will continue our operations until December 2023 unless
dissolved prior thereto or extended by vote of the members under the provisions
of our Operating Agreement.
 
 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 March 31, 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.  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.
  See
review report of Independent Registered Public Accounting Firm.
 - 5
-
 Table of Contents
 
 Vestin
Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the
successor by merger to Vestin Fund I, LLC, (“Fund I”), Vestin 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
  Management
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the 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 in November 2008.
 
 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.  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.
  See
review report of Independent Registered Public Accounting Firm.
 - 6
-
 Table of Contents
    The
appraisals may be for the current estimate of the “as-if developed” value of the
property, which approximates the post-construction value of the collateralized
property assuming that such property is developed.  As-if developed
values on raw land loans or acquisition and development loans often dramatically
exceed the immediate sales value and may include anticipated zoning changes and
timely successful development by the purchaser.  As most of the
appraisals will be prepared on an as-if developed basis, if a loan goes into
default prior to any development of a project, the market value of the property
may be substantially less than the appraised value.  As a result,
there may be less security than anticipated at the time the loan was originally
funded.  If there is less security and a default occurs, we may not
recover the full amount of the loan.
 
 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.  During the year
ended December 31, 2007, we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions, which can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
  See
review report of Independent Registered Public Accounting Firm.
 - 7
-
 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.
 - 8
-
 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 March 31, 2008.  All securities are classified as
available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities.
 
 Fair Value
Disclosures
 
 FAS 107 –
Disclosures about Fair Value
of Financial Instruments (“FAS 107”), requires the determination of fair
value of our financial assets.  The following methods and assumptions
were used to estimate the fair value of financial instruments included in the
following categories:
 
 (a)
              Cash:  The
      carrying value of cash approximates fair
value.
 
 (b)
              Certificate
      of Deposits:  The carrying amounts of these instruments
      approximate fair value due to their short-term
  nature.
 
 (c)
              Investment
      in Marketable Securities – Related Party:  The carrying amounts
      of these investment securities are classified as available-for-sale and
      are recorded at their fair values.  Fair values are determined
      by the quoted market price of the
investment.
 
 (d)
              Interest
      and Other Receivables:  The carrying amount of these instruments
      approximate fair value due to their short-term
  nature.
 
 (e)
              Investment
      in Real Estate Loans:  The fair value estimates for investments
      in real estate loans are based upon the present value of expected cash
      flows discounted at rates currently available for similar
      loans.  Fair value estimates are made at a specific point in
      time; based on relevant market information; are subjective in nature; and
      involve uncertainties and matters of significant judgment.  Fair
      values for loans, which are delinquent and/or in foreclosure are
      determined by underlying collateral securing the
  loans.
 
 (f)
              Assets
      under Secured Borrowing:  The carrying amount of these
      instruments approximate fair value.  The fair value is estimated
      based upon projected cash flows discounted at the estimated current
      interest rates at which similar loans would be
  made.
 
 (g)
              Accounts
      Payable and Accrued Liabilities:  The carrying amount of these
      instruments approximate fair value due to their short-term
      nature.
 
 At March
31, 2008 and December 31, 2007, the estimated fair values of the real estate
loans were approximately $18.2 million and $20.4 million,
respectively.  These estimates were based upon the present value of
expected cash flows discounted at rates currently available for similar
loans.  Fair value estimates are made at a specific point in time;
based on relevant market information; are subjective in nature; and involve
uncertainties and matters of significant judgment.  Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
would be collected upon maturity or disposition of the loans.
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
 Table of Contents
  
 On
January 1, 2008, we adopted FAS 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 March 31, 2008.  In conjunction with the adoption of
FAS 159, we also adopted FAS 157, Fair Value Measures, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.  In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access.  Fair values determined by Level 2 inputs utilize inputs other
than quoted prices included in Level 1 that are observable for the asset or
liability, such as interest rates and yield curves that are observable at
commonly quoted intervals.  Level 3 inputs are unobservable inputs for
the asset or liability, and include situations where there is little, if any,
market activity for the asset or liability.  In instances in which the
inputs used to measure fair value may fall into different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the fair
value measurement in its entirety has been determined is based on the lowest
level input that is significant to the fair value measurement in its
entirety.
 
 At March
31, 2008, the only asset measured at fair value on a recurring basis is the
investment in marketable securities – related party totaling $1.0 million, which
was estimated using Level 1 inputs, or quoted prices in active markets, as
described above.
 
 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.
 
 NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash and loans
secured by deeds of trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits.  As of March 31, 2008 and December 31, 2007,
we had approximately $4.6 million and $3.6 million, respectively, in excess of
the federally insured limits.
 
 As of
March 31, 2008, 47%, 20%, 17% and 11% of our loans were in Nevada, Arizona,
Oregon and California, respectively, compared to 46%, 18%, 15% and 10% at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, a downturn in the local real estate
markets in these states could have a material adverse effect on
us.
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
 Table of Contents
  
 At March
31, 2008, the loan to our largest borrower represented 8% of our total
investment in real estate loans.  This commercial property real estate
loan is located in Oregon, with a first lien position earning 12% and has an
outstanding balance of approximately $1.5 million.  At December 31,
2007, the loan to our largest borrower represented 7% of our total investment in
real estate loans.  This commercial property real estate loan is
located in Oregon, with a first lien position earning 12% and has an outstanding
balance of approximately $1.5 million.  We have a significant
concentration of credit risk with our largest borrower, any defaults by such
borrower could have a material adverse effect on us.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  An
increase in interest rates over the loan rate applicable at origination of the
loan may have an adverse effect on the borrower’s ability to
refinance.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
March 31, 2008, all of our loans provided for payments of interest only with a
“balloon” payment of principal payable in full at the end of the
term.
 
 In
addition, we 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 March 31, 2008, we had approximately $3.9 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 $49.5
million.  These loans had interest reserves of approximately $2.1
million, of which our portion was approximately $0.2 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
March 31, 2008, we had five real estate loan products consisting of commercial,
construction, acquisition and development, land and residential.  The
effective interest rates on all product categories range from 10.0% to
14.0%.  Revenue by product will fluctuate based upon relative balances
during the period.
 
 Investments
in real estate loans as of March 31, 2008, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              3
              
              
              $
              3,137,000
              
              
              
              12.77%
              
              
              
              16.25%
              
              
              
              76.95%Commercial
              
              
              9
              
              
              
              7,969,000
              
              
              
              11.27%
              
              
              
              41.28%
              
              
              
              97.75%Construction
              
              
              5
              
              
              
              2,433,000
              
              
              
              11.00%
              
              
              
              12.60%
              
              
              
              74.53%Land
              
              
              6
              
              
              
              5,768,000
              
              
              
              12.57%
              
              
              
              29.87%
              
              
              
              76.14%23
              
              
              $
              19,307,000
              
              
              
              11.87%
              
              
              
              100.00%
              
              
              
              78.27%
 
 Investments
in real estate loans as of December 31, 2007 were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              3
              
              
              $
              3,138,000
              
              
              
              12.77%
              
              
              
              14.36%
              
              
              
              76.95%Commercial
              
              
              10
              
              
              
              9,108,000
              
              
              
              11.17%
              
              
              
              41.68%
              
              
              
              97.41%Construction
              
              
              6
              
              
              
              2,501,000
              
              
              
              11.17%
              
              
              
              11.45%
              
              
              
              73.31%Land
              
              
              7
              
              
              
              7,104,000
              
              
              
              12.67%
              
              
              
              32.51%
              
              
              
              67.68%26
              
              
              $
              21,851,000
              
              
              
              11.89%
              
              
              
              100.00%
              
              
              
              78.27%
 
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
 Table of Contents
  
 (1)
              Loan-to-value
      ratios are based on the most recent appraisals and may not reflect
      subsequent changes in value and are prior to allowances for loan
      losses.  Such appraisals, which may be commissioned by the
      borrower, are generally dated no greater than 12 months prior to the date
      of loan origination.  The appraisals may be for the current
      estimate of the “as-if developed” value of the property, which
      approximates the post-construction value of the collateralized property
      assuming that such property is developed.  “As-if developed”
      values on raw land loans or acquisition and development loans often
      dramatically exceed the immediate sales value and may include anticipated
      zoning changes, and successful development by the purchaser; upon which
      development is dependent on availability of financing.  As most
      of the appraisals will be prepared on an “as-if developed” basis, if a
      loan goes into default prior to completion of the development of the
      project, the market value of the property may be substantially less than
      the appraised value.  As a result, there may be less security
      than anticipated at the time the loan was originally made.  If
      there is less security and a default occurs, we may not recover the full
      amount of the loan.
 
 (2)
              The
      following table reconciles the balance of the loan portfolio to the amount
      shown on the accompanying Balance
Sheets.
 
 March
      31, 2008
                Balance
              
              
              December
      31, 2007
                BalanceBalance
      per loan portfolio
              
              $
              19,307,000
              
              
              $
              21,851,000Less:Allowance
      for loan losses **
              
              
              (1,026,000
              )
              
              
              (1,026,000
              )Balance
      per balance sheet
              
              $
              18,281,000
              
              
              $
              20,825,000
 
 The
following is a schedule of priority of real estate loans as of March 31, 2008
and December 31, 2007.
 
 Loan
      Type
              
              Number
      of Loans
              
              
              March
      31, 2008 Balance*
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2007
                Balance*
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              22
              
              
              $
              18,839,000
              
              
              
              97.58%
              
              
              
              25
              
              
              $
              21,551,000
              
              
              
              98.63%Second
      deeds of trust
              
              
              1
              
              
              
              468,000
              
              
              
              2.42%
              
              
              
              1
              
              
              
              300,000
              
              
              
              1.37%23
              
              
              $
              19,307,000
              
              
              
              100.00%
              
              
              
              26
              
              
              $
              21,851,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 **  Please
refer to (3) Specific Reserve
Allowance below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of March 31, 2008:
 
 April
      2008 - June 2008 (a)
              
              $
              13,428,000July
      2008 - September 2008
              
              
              3,891,000October
      2008 - December 2008
              
              
              1,520,000January
      2009 – March 2009
              
              
              468,000Thereafter
              
              
              --Total
              
              $
              19,307,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to March 31,
2008.
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
 Table of Contents
  
 The
following is a schedule by geographic location of investments in real estate
loans as of March 31, 2008 and December 31, 2007:
 
 March
      31, 2008 Balance*
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
      PercentageArizona
              
              $
              3,864,000
              
              
              
              20.01%
              
              
              $
              3,864,000
              
              
              
              17.68%California
              
              
              2,150,000
              
              
              
              11.14%
              
              
              
              2,150,000
              
              
              
              9.84%Nevada
              
              
              8,996,000
              
              
              
              46.59%
              
              
              
              10,140,000
              
              
              
              46.41%Oklahoma
              
              
              1,000,000
              
              
              
              5.18%
              
              
              
              1,000,000
              
              
              
              4.58%Oregon
              
              
              3,297,000
              
              
              
              17.08%
              
              
              
              3,297,000
              
              
              
              15.09%Texas
              
              
              --
              
              
              
              --%
              
              
              
              1,400,000
              
              
              
              6.41%Total
              
              $
              19,307,000
              
              
              
              100.00%
              
              
              $
              21,851,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 
 At March
31, 2008, the following loans were 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); Monterrey Associates LP, Jeffrey's
Court, LLC, V & M Homes at the Palms, Inc., Brawley CA 122, LLC, Cliff
Shadows Properties, LLC and MRPE, LLC.  These loans are currently
carried on our books at a value of approximately $5.6 million, net of allowance
for loan losses of approximately $0.8 million, which does not include the
allowances of approximately $0.2 million relating to the decrease in the
property value for performing loans as of March 31, 2008.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.
 
 ·
              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 March 31, 2008, this loan has been considered
      non-performing for the last nineteen months.  Our manager
      brought foreclosure and other legal proceedings to protect our interest in
      the collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of legal
      actions commenced on our behalf with respect to other collateral securing
      the non-performing loan, of which our portion is approximately $0.5
      million net of allowance for loan loss.  We are vigorously
      contesting their position; however, we cannot determine at this time the
      outcome of these legal proceedings.  Our manager has evaluated
      this loan and based on an appraisal obtained during January 2008, a
      specific allowance of approximately $2.4 million, of which our portion was
      approximately $0.5 million, was recorded during the year ended December
      31, 2007.  No
      additional reserves were deemed necessary at March 31,
      2008.
 
 ·
              Jeffrey's
      Court, LLC, is a loan to provide financing for the development of 4.92
      acres of land into 119 condominium units in Las Vegas, NV, with an
      outstanding balance of approximately $5.1 million of which our portion is
      $1.0 million and is secured by a first lien on the property and guaranteed
      by the borrower.  As of March 31, 2008, this loan has been
      considered non-performing for the last eight months.  Our
      manager commenced foreclosure proceedings, and on December 6, 2007, the
      borrower filed for protection under Chapter 11 of the Bankruptcy Code in
      the United States Bankruptcy Court for the District of
      Nevada.  On March 14, 2008, a motion to approve an adequate
      protection agreement (the “Agreement”) was filed with the
      Court.  The motion was subsequently approved.  The
      Agreement provides for us to receive monthly payments until August 31,
      2008, when the entire loan balance shall be due and payable.  As
      of April 30, 2008, the borrower has made payments of $55,000 per the terms
      of the agreement, of which our portion was $11,000.  In
      addition, the automatic stay from foreclosure has been
      vacated.  In the event of a default under the Agreement, our
      manager may immediately proceed with foreclosure.  In addition,
      we have filed a complaint in State Court, against the guarantors of the
      loan, in order to enforce the personal guarantees.  Our manager
      has evaluated this loan and concluded that the value of the underlying
      collateral is sufficient to protect us from loss of
      principal.  No specific allowance was deemed
      necessary.
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
 Table of Contents
  
 ·
              V
      & M Homes at the Palms, Inc., is a loan, with a variable interest
      rate, to provide acquisition financing for an 80 acre parcel of land in
      Florence, AZ, with an outstanding balance of approximately $3.9 million of
      which our portion is approximately $1.4 million and is secured by a first
      lien on the property and guaranteed by the principals of the
      borrower.  As of March 31, 2008, this loan has been considered
      non-performing for the last seven months.  Our manager commenced
      foreclosure proceedings, and on December 24, 2007, the borrower filed for
      protection under Chapter 11 of the Bankruptcy Code in the United States
      Bankruptcy Court for the District of Arizona.  Our legal counsel
      is seeking relief from the automatic stay.  We are in the
      process of bringing legal action against the guarantors of this
      loan.  Our manager has evaluated this loan and concluded that
      the value of the underlying collateral is sufficient to protect us from
      loss of principal.  No specific allowance was deemed
      necessary.
 
 ·
              Brawley
      CA 122, LLC, is a loan to provide acquisition and development financing
      for a 25 acre proposed 122 single-family subdivision to be known as River
      Drive Subdivision in Brawley, CA, with an outstanding balance of
      approximately $2.3 million of which our portion is approximately $0.8
      million and is secured by a first lien on the property and guaranteed by
      the borrower.  As of March 31, 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.  Our manager has evaluated this loan and based on an
      appraisal obtained during January 2008, a specific allowance of
      approximately $0.8 million, of which our portion was approximately $0.3
      million, was recorded during the year ended December 31,
      2007.  During May 2008, we, VRM I and VRM II foreclosed upon
      Brawley CA 122, LLC and classified it as real estate held for
      sale.
 
 ·
              Cliff
      Shadows Properties, LLC is a loan to provide construction financing for a
      174 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las
      Vegas, NV, with an outstanding balance of approximately $17.0 million of
      which our portion is approximately $0.8 million and is secured by a first
      lien on the property and guaranteed by the borrower.  As of
      March 31, 2008, this loan has been considered non-performing for the last
      two months.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  In addition, our motion was
      granted for the appointment of a receiver to oversee the day to day
      operations of the borrower.  Our manager has evaluated this loan
      and concluded that the value of the underlying collateral is sufficient to
      protect us from loss of principal.  No specific allowance was
      deemed necessary.
 
 ·
              MRPE,
      LLC is a loan to provide financing for the development of 132.03 acres of
      land within the Wolf Creek Estates Master Planned Community, located in
      Mesquite, NV, with an outstanding balance of $17.0 million of which our
      portion is approximately $1.4 million and is secured by a first lien on
      the property and guaranteed by the principals of the
      borrower.  As of March 31, 2008, this loan has been considered
      non-performing for the last two months.  Our manager has
      commenced both foreclosure proceedings and litigation against the personal
      guarantors in order to enforce the personal guarantees.  Our
      manager has evaluated this loan and concluded that the value of the
      underlying collateral is sufficient to protect us from loss of
      principal.  No specific allowance was deemed
      necessary.
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  
 The
following schedule summarizes the non-performing loans as of March 31,
2008:
  Description
      of Collateral
                
                Balance
      at
                  March
      31, 2008
                
                Maturity
      Date
                
                Number
      of Months Non-Performing
                
                
                Percentage
      of Total Loan Balance248-unit
      apartment complex in Oklahoma City, OK
                
                
                1,000,000
                
                9/1/2006
                
                
                19
                
                
                
                23%4.92
      acres of land in Las Vegas, NV
                
                
                1,000,000
                
                7/17/2007
                
                
                8
                
                
                
                20%80
      acre parcel of land in Florence, AZ
                
                
                1,387,000
                
                8/16/2007
                
                
                7
                
                
                
                36%25
      acres for proposed 122 single-family subdivision  in Brawley,
      CA
                
                
                750,000
                
                8/1/2007
                
                
                5
                
                
                
                33%174
      Unit Townhouse Project known as Cliff Shadows Townhomes located in, Las
      Vegas, NV
                
                
                811,000
                
                3/16/2008
                
                
                2
                
                
                
                5%132.03
      acres of Land within the Wolf Creek Estates Master Planned Community,
      located in Mesquite, NV
                
                
                1,400,000
                
                2/27/2008
                
                
                2
                
                
                
                8%$
                6,348,000
  **  Please
refer to (3) 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 March 31, 2008, we have
provided specific reserves, related to two non-performing loans and two
performing loans, of approximately $1.0 million.  Our manager
evaluated the loans and concluded that the remaining underlying collateral was
sufficient to protect us against further losses of principal.  Our
manager will continue to evaluate these loans in order to determine if any other
allowance for loan losses should be recorded in future periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any distributions payable to our stockholders.
 
 The
following is a roll-forward of the allowance for loan losses for the three
months ended March 31, 2008:
 
 Description
              
              Balance
      at
                December
      31, 2007
              
              
              Specific
      Reserve Allocation
              
              
              Reduction
      of Reserve
              
              
              Balance
      at
                March
      31, 2008Monterrey
      Associates, L.P.
              
              $
              545,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              545,000Brawley
      CA 122, LLC
              
              
              255,000
              
              
              
              --
              
              
              
              --
              
              
              
              255,000Peoria
      180, LLC
              
              
              108,000
              
              
              
              --
              
              
              
              --
              
              
              
              108,000Terravita,
      LLC
              
              
              118,000
              
              
              
              --
              
              
              
              --
              
              
              
              118,000Total
      (3)
              
              $
              1,026,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              1,026,000
 
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  
 (3)
              Specific
      Reserve Allowance
 
 Peoria 180, LLC Loan
Allowance – As of March 31, 2008, our manager has provided a specific
reserve allowance, related to a land loan on property located in Glendale, AZ,
of approximately $1.6 million, of which our portion was approximately $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 October 2007.  As of March
31, 2008, the loan was performing as required.  Our manager will
continue to evaluate our position in the loan.
 
 Monterrey Associates, L.P. –
As of March 31, 2008, our manager has provided a specific reserve allowance,
related to a commercial loan on a 248-unit apartment complex in Oklahoma City,
OK, of approximately $2.4 million, of which our portion was approximately $0.5
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2008.  As of March 31, 2008, the loan was considered
non-performing.  Our manager will continue to evaluate our position in
the loan.
 
 Brawley CA 122, LLC – As of
March 31, 2008, our manager has provided a specific reserve allowance, related
to an acquisition and development loan on 25 acres for proposed 122
single-family subdivision in Brawley, CA, of approximately $0.8 million, of
which our portion was approximately $0.3 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during January 2008.  As of
March 31, 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, Nevada, 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 the three months ended March 31, 2008, the loans on the
Terravita LLC property, with first and second positions were rewritten into one
loan, which include 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 was performing as required as of March 31,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 In
addition, as of March 31, 2008, our manager granted extensions on 14 loans,
totaling approximately $186.6 million of which our portion was approximately
$13.2 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.  Our manager concluded that no allowance for
loan loss was necessary with respect to these loans, except for the Peoria 180,
LLC, Monterrey Associates, LP and Brawley CA 122, LLC loans referred to above,
as of March 31, 2008.
 
 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 Table of Contents
  
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the loan
      amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  As of March 31, 2008 and December 31, 2007, approximately
$4.6 million and $4.1 million, respectively, in non-performing loans had no
specific allowance for loan losses.  As of March 31, 2008 and December
31, 2007, approximately $1.8 million in non-performing loans had a specific
allowance for loan losses of $0.8 million, which does not include the allowances
of approximately $0.2 million relating to the decrease in property value for
performing loans at March 31, 2008 and December 31, 2007.  At March
31, 2008, the following loans were 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); Monterrey Associates LP, Jeffrey's
Court, LLC, V & M Homes at the Palms, Inc., Brawley CA 122, LLC, Cliff
Shadows Properties, LLC and MRPE, LLC.  These loans have been placed
on non-accrual of interest status and are the subject of pending foreclosure
proceedings.  Our manager evaluated the loans and concluded that the
underlying collateral was sufficient to protect us against further losses of
principal or interest.  Our manager will continue to evaluate these
loans in order to determine if any other allowance for loan losses should be
recorded.
 
 NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
March 31, 2008, we owned 114,117 shares of VRM II’s common stock, representing
approximately 0.77% of their total outstanding common stock.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At March
31, 2008, we held
three properties with a total carrying value of approximately $1.6 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.  The following
is a roll-forward of investments in real estate held for sale during the three
months ended March 31, 2008:
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  
 Description
              Date
      Acquired
              
              Percentage
      of Ownership
              
              
              Balance
      at
                December
      31, 2007
              
              
              Acquisitions
      (Reductions)
              
              
              Seller
      Financed Sales
              
              
              Balance
      at
                March
      31, 2008480
      residential building lots  & 2 family dwellings in Cathedral
      City, CA (1)
              12/21/2006
              
              
              2%
              
              
              
              546,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              546,00046.75
      acres of land located in Galveston, TX(2)
              2/5/2008
              
              
              17%
              
              
              
              --
              
              
              
              788,000
              
              
              
              --
              
              
              
              788,0002
      single family residences and 4 lots in Mt. Charleston, NV (3)
              3/7/2008
              
              
              12%
              
              
              
              --
              
              
              
              301,000
              
              
              
              --
              
              
              
              301,000$
              546,000
              
              
              $
              1,089,000
              
              
              $
              --
              
              
              $
              1,635,000
  (1)
                During
      November 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 estimate during the year
      ended December 31, 2007, the property was written down approximately $1.5
      million, of which our portion was $29,000.  No additional write
      off was deemed necessary as of March 31,
2008.
 
 (2)
                During
      the three months ended March 31, 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 April 2008, the
      property was written down approximately $3.7 million, of which our portion
      was approximately $0.6 million.
 
 (3)
                During
      the three months ended March 31, 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 its estimate, no write down
      was deemed necessary as of March 31,
2008.
 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 without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us 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 months ended 2007, we recorded fees to our
manager of $4,000.  No management fees were recorded during the three
months ended March 31, 2008.
 
 We paid
pro rata distributions owed to our manager totaling $9,000 and $12,000, during
the three months ended March 31, 2008 and 2007, respectively, based upon 54,863
units owned by our manager.
 
 As of
March 31, 2008 and December 31, 2007, we owed our manager of
$1,000.
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  
 Transactions with Other
Related Parties
 
 During
the three months ended March 31, 2007, we sold $1.3 million in real estate loans
to VRM II.  There was no gain or loss associated with this
transaction.  There we no similar transactions during the three months
ended March 31, 2008
 
 As of
March 31, 2008, we owned 114,117 common shares of VRM II, representing
approximately 0.77% of their total outstanding common stock.  For the
three months ended March 31, 2008 and 2007 we recorded $24,000 and $16,000,
respectively, in dividend income based on the number of shares we held on the
dividend record dates.
 
 As of
March 31, 2008 we owed VRM II $6,000.  We had no intercompany balance
with VRM II as of December 31, 2007.
 
 We paid
pro rata distributions owed to inVestin totaling $5,000 and $8,000, during
the three months ended March 31, 2008 and 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 $17,000 and $16,000, during the three months ended
March 31, 2008 and 2007, respectively, based upon 110,349 units owned by Shustek
Investments.
 
 During
the three months ended March 31, 2008 and 2007, 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.
 
 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 three months ended March 31,
2008, distributions to members were approximately $0.4 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
 
 In
accordance with Section 7.8 of our Operating Agreement, our manager reviewed the
value of our assets during the three months ended March 31,
2008.  Based on this review the value of members’ capital accounts was
adjusted from $10.40 per unit to $10.09 per unit.  As a result, units
redeemed on or after April 1, 2008, will be redeemed at $10.09 per
unit.  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.
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  
 Redemption
Limitation
 
 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 March 31, 2008, the total redemptions
made from inception were approximately $8.8 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 three months ended March 31, 2008, were approximately
$2.5 million.  The remaining requests to redeem, as of March 31, 2008,
were estimated at approximately, $2.2 million in 2009, $2.0 million in 2010,
$1.2 million in 2011, $0.5 million in 2012, $0.4 million in 2013, $0.4 million
in 2014, $0.4 million in 2015, $0.3 million in 2016, $0.3 million in 2017, $0.3
million in 2018, $0.2 million in 2019, $0.1 million in 2020, $0.1 million in
2021 and $10,000 in 2022, subject to unit valuation adjustments.
 
 NOTE
I— RECENT ACCOUNTING PRONOUNCEMENTS
 
 In March
2008, the Financial Accounting Standards Board (“FASB”) issued FAS 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No.
133.  FAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities, and is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early
application encouraged.  We will adopt FAS 161 in the first quarter of
2009.  Since FAS 161 requires only additional disclosures concerning
derivatives and hedging activities, adoption of FAS 161 will not affect our
financial statements.
 
 NOTE
J— 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 and we do not expect that
the sanctions imposed upon the Respondents will have any material affect upon
our operations.
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
Ninth Circuit United Court of Appeals, which dismissal was upheld when the
United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999.  On March 6, 2006, Desert Land amended the
state court complaint to name VRM I.  Desert Land alleges that one or
more of the defendants have transferred assets to other entities without
receiving reasonable value therefore; alleges plaintiffs are informed and
believe that defendants have made such transfers with the actual intent to
hinder, delay or defraud Desert Land; that such transfers made the transferor
insolvent and that sometime between February 27 and April 1, 2003, Vestin Group
transferred $1.6 million to VRM I for that purpose.  The state court
complaint further alleges that Desert Land is entitled to void such transfers
and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to
enjoin defendants from further disposition of assets.  Additionally,
Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any
losses and expenses in connection with the action, and Mr. Shustek has
guaranteed the indemnification.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.
 
 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 civil action filed in
San Diego Superior Court by certain plaintiffs who allege, among other things,
that they were wrongfully denied appraisal rights in connection with the merger
of Fund I into Vestin Realty Mortgage I, Inc.  The action is being
brought as a purported class action on behalf of all members of Vestin Fund I
who did not vote in favor of the merger.  The Defendants believe that
the allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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 civil action filed
in San Diego Superior Court by certain plaintiffs who allege, among other
things, that they were wrongfully denied appraisal rights in connection with the
merger of Fund II into Vestin Realty Mortgage II, Inc.  The action is
being brought as a purported class action on behalf of all members of Vestin
Fund II who did not vote in favor of the merger.  The Defendants believe
that the allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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.
 - 21
-
 Table of Contents
  
 VRM I,
Michael V. Shustek and Vestin Mortgage, Inc. (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages and a
rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM I’s management agreement and Fund I’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM I  with
respect to the above actions.
 
 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 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
K — LEGAL MATTERS INVOLVING THE COMPANY
 
 From time
to time, we 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
L — SUBSEQUENT EVENTS
 
 During
May 2008, we, VRM I and VRM II foreclosed upon Brawley CA 122, LLC and
classified it as real estate held for sale.
 
 As of
April 30, 2008, the borrower on the Jeffrey’s Court, LLC Loan, has made
payments, per the adequate protection and settlement agreement between us, VRM
I, VRM II and the borrower, of $55,000, of which our portion was
$11,000.  The borrower is required to make monthly payments on this
loan until August 31, 2008, at which time the entire loan balance is
due.
 
 During
May 2008, we, VRM I and VRM II considered the Redwood Place, LLC loan
non-performing.  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 neglected to either payoff the loan or extend the
term.  Our manager has commenced foreclosure, and is proceeding with
legal action to enforce the personal guarantees.  Our manager has
evaluated this loan and has concluded the value of the underlying collateral is
sufficient to protect us from loss of principal.
 
 
  See
review report of Independent Registered Public Accounting Firm.
 - 22
-
 Table of Contents
  REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
   To the
Members of Vestin Fund III, LLC:
 
 We have
reviewed the accompanying balance sheet of Vestin Fund III, LLC as of March 31,
2008, and the related statements of operations for the three-month periods ended
March 31, 2008 and 2007, statements of  members’ equity and other
comprehensive loss for the three-month period ended March 31, 2008 and
statements of cash flows for the three-month periods ended March 31, 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.
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 
 Orange,
California
 May 12,
2008
   - 23
-
 Table of Contents
  ITEM
      2.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three months ended March 31, 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.
 
 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.  The forward-looking statements contained in this
report are made only as of the date hereof.  We undertake no
obligation to update or revise information contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.  Our capital, subject to a 3% reserve, will
constitute the bulk of the funds we have available for investment in real estate
loans.  We do not have any arrangements in place to materially
increase the funds we will have available to invest from any other
sources.  See discussion under – “Capital and
Liquidity.”
  - 24
-
 Table of Contents
  
 Our
operating results during the past year have been adversely affected by increases
in allowances for loan losses.  At March 31, 2008, the following loans
were 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); Monterrey Associates LP, Jeffrey's Court, LLC, V & M Homes
at the Palms, Inc., Brawley CA 122, LLC, Cliff Shadows Properties, LLC and MRPE,
LLC.  These loans are currently carried on our books at a value of
approximately $5.6 million, net of allowance for loan losses of approximately
$0.8 million, which does not include the allowances of approximately $0.2
million relating to the decrease in the property value for performing loans as
of March 31, 2008.  These loans have been placed on non-accrual of
interest status and are the subject of pending foreclosure
proceedings.  On February 5, 2008, we, VRM I and VRM II foreclosed
upon Pirates Lake, Ltd. and classified it as real estate held for
sale.  On March 7, 2008, we, VRM I and VRM II foreclosed upon Forest
Development LLC and classified it as real estate held for sale. For additional
information, see Note F – Real
Estate Held for Sale and “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 $7.2 million or
31% of our total assets as of March 31, 2008, as compared to approximately $5.6
million or 21% of our total assets as of December 31, 2007.  At March
31, 2008 non-performing assets consisted of approximately $1.6 million of real
estate held for sale and approximately $5.6 million of non-performing loans, net
of allowance for loan losses.
 
 We
believe that the significant increase in the level of our non-performing assets
reflects the difficulties encountered by the real estate and credit markets
during the past year.  The risk inherent in our business strategy that
entails more lenient underwriting standards and expedited loan approval
procedures could also result in an increase in our non-performing
assets.  As the economy weakens and credit becomes more difficult to
obtain, our borrowers who develop and sell commercial real estate projects are
unable to complete their projects or obtain takeout financing or are otherwise
adversely impacted.  This has resulted in an increase in loan
defaults, which reduce the amount of funds we have to pay distributions to our
members.  Such conditions may also require us to restructure
loans.  The weighted average term of our outstanding loans, including
extensions, was 17 months as of March 31, 2008 and December 31,
2007.
 
 A
recession or uncertain economic conditions during the next year could have a
material impact on the collectibility of our loans.  The downturn in
the real estate markets where we conduct business might result in a further
increase in defaults on our loans and might require us to record additional
reserves.  The problems experienced by some lenders in the sub-prime
market may have a material adverse affect on the commercial mortgage markets in
which we operate.  We are aware that weakness in the credit markets
has had an adverse impact upon our markets.  In addition, we are aware
that weakness in residential lending has had and may continue to have an adverse
impact upon our markets.  Recognizing the risk, we seek to maintain an
adequate loan-to-value ratio, which, as of March 31, 2008, was 78.27%, prior to
allowances for loan losses, on a weighted average basis generally using
appraisals prepared on an “as-if developed basis” in connection with the loan
origination.
 
 We hope
to retain sufficient cushion in the underlying equity position to protect the
value of our loans in the event of a default.  However, a marked
increase in loan defaults accompanied by a rapid decline in real estate values
will have a material adverse effect upon our financial condition and operating
results.
 
 As of
March 31, 2008, we have provided a specific reserve allowance for two
non-performing loans and two performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year ended December 31, 2007.  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.
  - 25
-
 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
March 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma and Oregon.
 
 Comparison
of Operating Results for the three months ended March 31, 2008 to the three
months ended March 31, 2007.
 
 For
      the Three Months
                Ended
      March 31,2008
              
              
              2007Total
      revenues
              
              $
              425,000
              
              
              $
              786,000Total
      operating expenses
              
              
              76,000
              
              
              
              134,000Non-operating
      income
              
              
              53,000
              
              
              
              38,000Income
      (loss) from real estate held for sale
              
              
              (617,000
              )
              
              
              (3,000
              )NET
      INCOME (LOSS)
              
              $
              (215,000
              )
              
              $
              687,000Net
      income (loss) allocated to members per weighted average membership
      units
              
              $
              (0.09
              )
              
              $
              0.25Weighted
      average common shares / membership units
              
              
              2,522,875
              
              
              
              2,745,524Annualized
      rate of return to members (a)
              
              
              -3.29%
              
              
              
              9.23%Cash
      distributions
              
              $
              392,000
              
              
              $
              618,000Cash
      distributions per weighted average membership units
              
              $
              0.16
              
              
              $
              0.23Weighted
      average term of outstanding loans
              
              17
      months
              
              
              14
      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 March 31, 2008
      and 2007, divided by the number of days during the period (91 and 91,
      respectively) and multiplied by three hundred and sixty five (365) days,
      then divided by $10.40 and $11.00, (the cost per unit) for the three
      months ended March 31, 2008 and 2007,
  respectively.
  - 26
-
 Table of Contents
  
 Total
Revenues:  For the three months ended March 31, 2008 total
revenues were approximately $0.4 million compared to approximately $0.8 million
for the same period in 2007, a decrease of approximately $0.4 million or 46% due
in significant part to the following factor:
 
 ·
              We
      recognized interest income from investments in real estate loans of
      approximately $0.4 million, during the three months ended March 31, 2008
      compared to approximately $0.8 during the same period in
      2007.  Our revenue is dependent upon the balance of our
      investment in real estate loans and the interest earned on these
      loans.  As of March 31, 2008, our investment in real estate
      loans was approximately $19.3 million with a weighted average interest
      rate of 11.87%.  As of March 31, 2007, our investment in real
      estate loans, including loans related to seller financed real estate held
      for sale, was approximately $24.7 million with a weighted average interest
      rate of 11.38%.  In addition, our interest income was affected
      by the performances of our loans.  As of March 31, 2008, we had
      six non-performing loans totaling approximately $6.3 million, compared to
      three non-performing loans totaling approximately $1.6 million as of March
      31, 2007.  Increases in non-performing loans will reduce our
      future revenues.
 
 Total Operating
Expenses:  For the three months ended March 31, 2008, total
operating expenses were approximately $76,000 compared to approximately $134,000
during the three months ended March 31, 2007, a decrease of approximately
$58,000 or 43%.  Expenses were primarily affected by interest expense
on secured borrowings of approximately $79,000 incurred during the three months
ended March 31, 2007.  No comparable interest expense was recorded
during the same period in 2008.
 
 Non-operating
income:  Non-operating income consisted of dividend income from
marketable securities-related party and bank interest income.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended March 31, 2008, total loss
from real estate held for sale was approximately $0.6 million compared $3,000
for the three months ended March 31, 2007.  During the three months
ended March 31, 2008, we recorded a write down of approximately $0.6 million on
property acquired through foreclosure proceedings by us, VRM I and VRM
II.  Our manager evaluated the carrying value of the property and
based on an updated appraisal concluded that a write down of approximately $3.7
million, of which our portion was approximately $0.6 million, was
appropriate.
 
 Distributions to
Members:  The following is a schedule of distributions made to
members for the three months ended March 31, 2008 and 2007.
 
 For
      the Three Months
                Ended
      March 31,2008
              
              
              2007Distributions
      of net income available for distribution
              
              $
              392,000
              
              
              $
              618,000Distributions
      in excess of net Income available for distribution generated during the
      period
              
              
              --
              
              
              
              --Total
      distributions
              
              $
              392,000
              
              
              $
              618,000
 
 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.
  - 27
-
 Table of Contents
  
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
 
 For
      the Three Months
                Ended
      March 31,2008
              
              
              2007Distribution
      of net income available for distribution
              
              $
              392,000
              
              
              $
              618,000Additions
      to working capital reserves (amount not distributed)
              
              
              5,000
              
              
              
              69,000Change
      in operating assets and liabilities:Interest
      receivable
              
              
              118,000
              
              
              
              27,000Accounts
      payable
              
              
              7,000
              
              
              
              15,000Due
      to related parties
              
              
              6,000
              
              
              
              12,000Other
      assets
              
              
              1,000
              
              
              
              2,000Net
      cash provided by operating activities
              
              $
              529,000
              
              
              $
              743,000Net
      cash provided by investing activities
              
              $
              843,000
              
              
              $
              2,333,000Net
      cash used by financing activities
              
              $
              (2,934,000
              )
              
              $
              (3,471,000
              )
 
 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 March 31, 2008.  Based on this review the value of members’
capital accounts was adjusted from $10.40 per unit to $10.09 per
unit.  As a result, units redeemed on or after April 1, 2008, will be
redeemed at $10.09 per unit.  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:  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 March 31, 2008, the total
redemptions made from inception were approximately $8.8
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 three months ended March
31, 2008, were approximately $2.5 million.  The remaining requests to
redeem, as of March 31, 2008, were estimated at approximately, $2.2 million in
2009, $2.0 million in 2010, $1.2 million in 2011, $0.5 million in 2012, $0.4
million in 2013, $0.4 million in 2014, $0.4 million in 2015, $0.3 million in
2016, $0.3 million in 2017, $0.3 million in 2018, $0.2 million in 2019, $0.1
million in 2020, $0.1 million in 2021 and $10,000 in 2022, subject to unit
valuation adjustments.
 
 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 three months ended March 31, 2008, cash flows provided by operating
activities approximated $0.5 million.  Cash flows related to investing
activities consisted of cash provided by loan payoffs of approximately $1.1
million and cash used for new investments of real estate loans of approximately
$0.3 million.  Cash flows used for financing activities consisted of
cash used for members’ distributions, net of reinvestments, of approximately
$0.4 million and members’ redemptions of approximately $2.5
million.
  - 28
-
 Table of Contents
  
 At March
31, 2008, we had approximately $1.2 million in cash, $1.0 million in marketable
securities – related party and approximately $23.2 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales and/or
borrowings.  We believe we have sufficient working capital to meet our
operating needs in the near term.  In addition, as of March 31, 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 to provide capital for investment
in new loans.  Any significant level of defaults on outstanding loans
could reduce the funds we have available for investment in new
loans.  Resulting foreclosure proceedings may not generate full
repayment of our loans and may result in significant delays in the return of
invested funds.  This would diminish our capital resources and would
impair our ability to invest in new loans.  Non-performing assets
included loans in non-accrual status, net of allowance for loan losses, and real
estate held for sale not sold through seller financing totaling approximately
$5.6 million and $1.6 million, respectively, as of March 31, 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 as a result of conditions in the real estate and credit
markets.  Because of the estimated value of the underlying properties,
we do not currently believe that any losses beyond those already recognized will
be incurred from these assets upon final disposition.  However, it is
possible that we will not be able to realize the full estimated carrying values
upon disposition.
 
 We have
no current plans to sell any new 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 March 31, 2008, the total redemptions made from inception were approximately
$8.8 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 three months
ended March 31, 2008, were approximately $2.5 million.  The remaining
requests to redeem, as of March 31, 2008, were estimated at approximately, $2.2
million in 2009, $2.0 million in 2010, $1.2 million in 2011, $0.5 million in
2012, $0.4 million in 2013, $0.4 million in 2014, $0.4 million in 2015, $0.3
million in 2016, $0.3 million in 2017, $0.3 million in 2018, $0.2 million in
2019, $0.1 million in 2020, $0.1 million in 2021 and $10,000 in 2022, subject to
unit valuation adjustments.
 
 At March
31, 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 in November 2008.
 
 We
maintain working capital reserves of approximately 3% of aggregate members’
capital accounts in cash and cash equivalents, certificates of deposits and
short-term investments 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.
  - 29
-
 Table of Contents
  
 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 10.0% to
14.0%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 23 real estate loans, as of
March 31, 2008, with a balance of approximately $19.3 million as compared to
investments in 26 real estate loans, as of December 31, 2007, with a balance of
approximately $21.9 million.
 
 At March
31, 2008, the following loans were 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); Monterrey Associates LP, Jeffrey's
Court, LLC, V & M Homes at the Palms, Inc., Brawley CA 122, LLC, Cliff
Shadows Properties, LLC and MRPE, LLC.  These loans are currently
carried on our books at a value of approximately $5.6 million, net of allowance
for loan losses of approximately $0.8 million, which does not include the
allowances of approximately $0.2 million relating to the decrease in the
property value for performing loans as of March 31, 2008.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and concluded that the value of the underlying collateral is sufficient to
protect us from loss of principal.  No specific allowance was deemed
necessary.
 
 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 March 31, 2008, we have
provided a specific reserve related to two non-performing loans and two
performing loans, based on updated appraisals and evaluation of the borrower
obtained by our manager during the year ended December 31, 2007.  Our
manager evaluated these loans and concluded that the remaining underlying
collateral was sufficient to protect us against further losses of principal or
interest.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be
recorded.  For additional information on our investments in real
estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part 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.
  - 30
-
 Table of Contents
  
 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 three months ended
March 31, 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 March
31, 2008, we held
three properties with a total carrying value of approximately $1.6 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 1Consolidated
Financial Statementsof 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
March 31, 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
impaired.  A loan is impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement or when the payment of
interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at March 31, 2008, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
              
              $
              229,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              1,146,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (229,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (1,146,000
              )
 
 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.
  - 31
-
 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 March 31, 2008, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
              
              $
              193,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              965,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (193,000
              )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
              
              $
              (965,000
              )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approves loans more quickly than other real estate
lenders and, due to our expedited underwriting process, there is a risk that the
credit inquiry we perform will not reveal all material facts pertaining to a
borrower and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but 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.
  - 32
-
 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
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 QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.  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 March 31, 2008, our aggregate investment in real
estate loans was approximately $18.3 million, net of allowance of approximately
$1.0 million, with a weighted average effective interest rate of
11.87%.  Most of the real estate loans had an initial term of 12
months.  The weighted average term of outstanding loans, including
extensions, at March 31, 2008, was 17 months.  All but two of the
outstanding real estate loans at March 31, 2008, were fixed rate
loans.  One of the two variable interest rate loans was non-performing
as of March 31, 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 Statementsof 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 $10.5 million, had an exit fee.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
distribution to members.  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.
  - 33
-
 Table of Contents
  
 The
following table contains information about the investment of real estate loans
in our portfolio as of March 31, 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 March 31,
2008.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at March 31, 2008Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              TotalInvestments
      In Real Estate Loans
              
              $
              18,839,000
              
              
              $
              468,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              19,307,000Weighted
      Average Interest Rates
              
              
              11.90%
              
              
              
              10.50%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              11.87%
 
 At March
31, 2008, we also had approximately $2.2 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 management, 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 management carried out an
evaluation, under the supervision and with the participation of our management,
including our manager’s CEO and CFO, as of March 31, 2008, of the effectiveness
of the design and operation of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) under the Exchange Act.  Based
upon our evaluation, our manager’s CEO and CFO concluded that, as of March 31,
2008, our disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our 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 management, 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.
  - 34
-
 Table of Contents
  
 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 first 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 first fiscal quarter of 2008.
 
 ITEM
      4T.
              CONTROLS AND
PROCEDURES
 
 See Item
4 – Controls and
Procedures above.
 
 PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGALPROCEEDINGS
 
 Please
refer to Note J – Legal
Matters Involving the Manager and Note K – 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.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.  We seek to mitigate the risk by
estimating the value of the underlying collateral and insisting on adequate
loan-to-value ratios.  However, we cannot be assured that these
efforts will fully protect us against losses on defaulted loans.  Our
appraisals are generally dated within 12 months of the date of loan origination
and may not reflect a decrease in the value of the real estate due to events
subsequent to the date of the appraisals.  Any subsequent decline in
real estate values on defaulted loans could result in less security than
anticipated at the time the loan was originally made, which may result in our
not recovering the full amount of the loan.  Our weighted average
loan-to-value ratio, based on updated appraisals obtained during the year and
prior to allowances for loan losses, as of March 31, 2008, and December 31,
2007, was 78.27%.  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
March 31, 2008, we had in our portfolio approximately $5.6 million in
non-performing loans, net of allowance for loan losses of approximately $0.8
million, which does not include allowances of approximately $0.2 million for
performing loans, and approximately $1.6 million of real estate held for sale
for a total of approximately $7.2 million in non-performing assets, which
represented approximately 33% 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.
  - 35
-
 Table of Contents
  
 A
prolonged economic slowdown, lengthy or severe recession or significant increase
in interest rates could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the year ended December 31,
2007, we, VRM I and VRM II conducted updated appraisals on a number of
properties securing our loans, representing approximately 71% of our loan
portfolio, and concluded that the estimated value of such properties should be
reduced by approximately $19.0 million.  Our share of this reduction
was approximately $1.9 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.  For the three months ended March 31, 2008, no new loans
were origination and one loan was rewritten during the period.  The
terms of the rewritten loan remain the same and the loan was performing as
required as of March 31, 2008.  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, which may lead to an increase in
non-performing assets in our loan portfolio and create additional risks of
return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.
 
 We depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.  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.
  - 36
-
 Table of Contents
  
 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 March 31, 2008, all of our loans provided
for payments of interest only with a “balloon” payment of principal payable in
full at the end of the term.  Loans with balloon payments are riskier
than loans with payments of principal over an extended time period such as 15 or
30 years because the borrower’s repayment depends on its ability to sell the
property, obtain suitable refinancing or otherwise raise a substantial amount of
cash when the loan comes due.  The borrower’s ability to achieve a
successful sale or refinancing of the property may be adversely impacted by
deteriorating economic conditions or illiquidity in the credit
markets.  There are no specific criteria used in evaluating the credit
quality of borrowers for loans requiring balloon
payments.  Furthermore, a substantial period of time may elapse
between the review of the financial statements of the borrower and the date when
the balloon payment is due.  As a result, there is no assurance that a
borrower will have sufficient resources to make a balloon payment when
due.
 
 Our
loans are not guaranteed by any governmental agency.
 
 Our loans
are not insured or guaranteed by a federally owned or guaranteed mortgage
agency.  Consequently, our recourse, if there is a default, may be to
foreclose upon the real property securing a loan and/or pursuing the borrower’s
guarantee of the principal.  The value of the foreclosed property may
have decreased and may not be equal to the amount outstanding under the
corresponding loan, resulting in a decrease of the amount available to
distribute.
 
 Our
real estate loans may not be marketable, and we expect no secondary market to
develop.
 
 We do not
expect our real estate loans to be marketable, and we do not expect a secondary
market to develop for them.  As a result, we will generally bear all
the risk of our investment until the loans mature.  This will limit
our ability to hedge our risk in changing real estate markets and may result in
reduced returns to our members.
 
 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.
  - 37
-
 Table of Contents
  
 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.
 
 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.
  - 38
-
 Table of Contents
  
 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 March 31, 2008,
      none of our loans had a prepayment penalty, although 15 of our loans,
      totaling approximately $10.5 million, had an exit fee.  However,
      depending upon the amount by which interest rates decline, the amount of
      the exit fees is generally not significant in relation to the potential
      savings borrowers may realize as a result of prepaying their
      loans.
 
 We
face competition for real estate loans that may reduce available yields and fees
available.
 
 We
consider our direct competitors to be the providers of real estate loans who
offer short-term, equity-based loans on an expedited basis for higher fees and
rates than those charged by other financial institutional lenders such as
commercial banks, insurance companies, mortgage brokers and pension
funds.  Many of the companies against which we compete have
substantially greater financial, technical and other resources than either our
company or our manager.  Competition in our market niche depends upon
a number of factors, including price and interest rates of the loan, speed of
loan processing, cost of capital, reliability, quality of service and support
services.  If our competition decreases interest rates on their loans
or makes funds more easily accessible, yields on our loans could decrease and
the costs associated with making loans could increase, both of which would
reduce our revenues and our distributions to members.
 
 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 March 31,
2008, approximately 2.4% of our loans were secured by second deeds of
trust.
 
 Investment
in large loans may reduce our ability to diversify our loan
portfolio.
 
 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 March 31,
2008, our largest loan comprised approximately 8% of our total loan
portfolio.
  - 39
-
 Table of Contents
  
 As
a result of our small size, we will not be 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 March 31, 2008, we had approximately $22.0
million in members’ equity and $18.3 million in outstanding loans, net of
allowance of approximately $1.0 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.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
March 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma and Oregon, with approximately 47% 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.
  - 40
-
 Table of Contents
  
 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.
 
 As of
March 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma and Oregon.  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), James M. Townsend
(Chief Operating Officer) and Daniel B. Stubbs (Senior Vice President,
Underwriting) some of whom would be difficult to replace because of their
extensive experience in the field, extensive market contacts and familiarity
with our company.  If any of these 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.
  - 41
-
 Table of Contents
  
 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.
 
 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 $1.3 million
and $1.9 million, respectively, in fees directly from borrowers for the three
months ended March 31, 2008.  The amounts received from borrowers
represent fees earned by Vestin Mortgage and Vestin Originations for loans
originated for all funds managed by Vestin Mortgage, including us, VRM I, VRM II
and inVestin.  Our assets represented approximately 5% of the assets
managed by Vestin Mortgage as of March 31, 2008.
 
 Our
manager will face conflicts of interest relating to other investments in real
estate loans.
 
 We expect
to invest in real estate loans when one or more other companies managed by our
manager are also investing in real estate loans.  There is a risk that
our manager may select for us a real estate loan investment that provides lower
returns than a real estate loan investment purchased by another program or
entity managed by our manager.  Our manager also serves as the manager
for VRM I, 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.
  - 42
-
 Table of Contents
  
 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 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.
 
 Members have limited ability to have
units redeemed.
 
 Members
have a limited ability to have their units redeemed by us.  Requests
by members for redemptions are honored in the order in which they are received
by the manager.  The significant limitations on the ability to have
units redeemed are the following:
 
 ·
              There
      is no reserve fund for redemptions.
 
 ·
              Redemption
      payments 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 redemption 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 make redemption payments 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 redemptions, 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.
              UNREGISTEREDSALES OF EQUITY AND USE OF
    PROCEEDS
 
 Market
Information
 
 There is
no established public trading market for the trading of units.
 
 Holders
 
 As of May
1, 2008, approximately 572 unit holders held 2,278,922 units of interest in the
Company.
  - 43
-
 Table of Contents
  
 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 approximately $0.4
million during the three months ended March 31, 2008, all of which were paid
from Net Income Available for Distribution.  It is our intention to
continue to distribute our Net Income Available for Distribution to our unit
holders.
 
 Recent
Sales of Unregistered Securities
 
 None.
 
 Equity
Compensation Plan Information
 
 None.
 
 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 ProgramsJanuary
      2008
              
              
              --
              
              
              --
              
              None
              
              NoneFebruary
      2008
              
              
              --
              
              
              --
              
              None
              
              NoneMarch
      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 March 31,
2008.
 
 ITEM
      3.
              DEFAULTS UPON SENIOR
SECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER INFORMATION
 
 None.
 
  - 44
-
 Table of Contents
  
 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
 
  - 45
-
 Table of Contents
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      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:  May
12, 2008
 
 
  - 46
-