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,
2009
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
transition period from _________ to _________
 
 Commission
File Number: 333-105017
 
 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
11, 2009, 2,024,424 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, 2009 (unaudited) and
      December 31, 2008
              1Statements of Operations (unaudited) for the Three Months
      Ended March 31, 2009 and 2008
              2Statements of Members’ Equity and Other Comprehensive Loss
      (unaudited) for the Three Months Ended March 31, 2009
              3Statements of Cash Flows (unaudited) for the Three Months
      Ended March 31, 2009 and 2008
              4Notes to Financial Statements
(unaudited)
              5Report of Independent Registered Public Accounting
      Firm
              30Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              31Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              40Item 4.
              Controls and Procedures
              42Item 4T
              Controls and Procedures
              42Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              43Item 1A.
              Risk Factors
              43Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              52Item 3.
              Defaults Upon Senior Securities
              52Item 4.
              Submission of Matters to a Vote of Security
      Holders
              53Item 5.
              Other Information
              53Item 6.
              Exhibits
              54SIGNATURES
              55Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
      STATEMENTS
 
 VESTIN
      FUNDIII, LLCBALANCE
      SHEETSASSETSMarch
      31, 2009
                      
                      
                      December
      31, 2008(Unaudited)AssetsCash
      and cash equivalents
                      
                      $
                      567,000
                      
                      
                      $
                      1,484,000Cash
      - restricted
                      
                      
                      985,000
                      
                      
                      
                      985,000Marketable
      securities - related party
                      
                      
                      273,000
                      
                      
                      
                      360,000Interest
      and other receivables, net of allowance for doubtful accounts of $20,000
      at March 31, 2009 and $25,000 at December 31, 2008
                      
                      
                      13,000
                      
                      
                      
                      18,000Real
      estate held for sale
                      
                      
                      3,319,000
                      
                      
                      
                      2,734,000Investment
      in real estate loans, net of allowance for loan loss of $3,762,000 at
      March 31, 2009 and $5,446,000 at December 31, 2008
                      
                      
                      6,108,000
                      
                      
                      
                      7,866,000Other
      assets
                      
                      
                      6,000
                      
                      
                      
                      --Total
      assets
                      
                      $
                      11,271,000
                      
                      
                      $
                      13,447,000LIABILITIES
      AND MEMBERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
                      
                      $
                      125,000
                      
                      
                      $
                      135,000Due
      to related parties
                      
                      
                      18,000
                      
                      
                      
                      67,000Deferred
      income
                      
                      
                      985,000
                      
                      
                      
                      985,000Total
      liabilities
                      
                      
                      1,128,000
                      
                      
                      
                      1,187,000Commitments
      and contingenciesMembers'
      equityMembers'
      units - authorized 10,000,000 units, 2,024,424 issued and outstanding at
      March 31, 2009 and 2,248,825 units issued and outstanding at December 31,
      2008
                      
                      
                      10,314,000
                      
                      
                      
                      12,344,000Accumulated
      other comprehensive loss
                      
                      
                      (171,000
                      )
                      
                      
                      (84,000
                      )Total
      members' equity
                      
                      
                      10,143,000
                      
                      
                      
                      12,260,000Total
      liabilities and members' equity
                      
                      $
                      11,271,000
                      
                      
                      $
                      13,447,000
 
 
  The
accompanying notes are an integral part of these statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 1
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF OPERATIONS(UNAUDITED)For
      The Three
                        Months
      EndedMarch
      31, 2009
                      
                      
                      March
      31, 2008RevenuesInterest
      income from investment in real estate loans
                      
                      $
                      42,000
                      
                      
                      $
                      414,000Other
                      
                      
                      1,000
                      
                      
                      
                      11,000Total
      revenues
                      
                      
                      43,000
                      
                      
                      
                      425,000Operating
      expensesProvision
      for loan loss
                      
                      
                      154,000
                      
                      
                      
                      --Professional
      fees
                      
                      
                      58,000
                      
                      
                      
                      60,000Professional
      fees - related party
                      
                      
                      21,000
                      
                      
                      
                      2,000Other
                      
                      
                      22,000
                      
                      
                      
                      14,000Total
      operating expenses
                      
                      
                      255,000
                      
                      
                      
                      76,000Income
      (loss) from operations
                      
                      
                      (212,000
                      )
                      
                      
                      349,000Non-operating
      incomeInterest
      income from banking institutions
                      
                      
                      7,000
                      
                      
                      
                      29,000Dividend
      income - related party
                      
                      
                      --
                      
                      
                      
                      24,000Total
      non-operating income
                      
                      
                      7,000
                      
                      
                      
                      53,000Loss
      from real estate held for saleRevenue
      related to real estate held for sale
                      
                      
                      6,000
                      
                      
                      
                      --Write
      down of real estate held for sale
                      
                      
                      (467,000
                      )
                      
                      
                      (612,000
                      )Expenses
      related to real estate held for sale
                      
                      
                      (42,000
                      )
                      
                      
                      (5,000
                      )Total
      loss from real estate held for sale
                      
                      
                      (503,000
                      )
                      
                      
                      (617,000
                      )NET
      LOSS
                      
                      $
                      (708,000
                      )
                      
                      $
                      (215,000
                      )Net
      loss allocated to members
                      
                      $
                      (708,000
                      )
                      
                      $
                      (215,000
                      )Net
      loss allocated to members per weighted average membership
    unit
                      
                      $
                      (0.32
                      )
                      
                      $
                      (0.09
                      )Weighted
      average membership units
                      
                      
                      2,246,332
                      
                      
                      
                      2,522,875
 
 
  The
accompanying notes are an integral part of these statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 2
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE LOSSFOR
      THE THREE MONTHS ENDED MARCH 31, 2009(UNAUDITED)Units
                    
                    
                    AmountMembers'
      equity at December 31, 2008
                    
                    
                    2,248,825
                    
                    
                    $
                    12,260,000Comprehensive
      loss:Net
      loss
                    
                    
                    
                    
                    
                    
                    (708,000
                    )Unrealized
      loss on marketable securities
                    
                    
                    
                    
                    
                    
                    (87,000
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    (795,000
                    )Members'
      redemptions
                    
                    
                    (224,401
                    )
                    
                    
                    (1,322,000
                    )Members'
      equity at March 31, 2009 (unaudited)
                    
                    
                    2,024,424
                    
                    
                    $
                    10,143,000
 
 
  The
accompanying notes are an integral part of these statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 3
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF CASH FLOWS(UNAUDITED)For
      The Three
                        Months
      EndedMarch
      31, 2009
                      
                      
                      March
      31, 2008Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (708,000
                      )
                      
                      $
                      (215,000
                      )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Provision
      for loan loss
                      
                      
                      154,000
                      
                      
                      
                      --Write
      downs on real estate held for sale
                      
                      
                      467,000
                      
                      
                      
                      612,000Change
      in operating assets and liabilities:Interest
      receivable
                      
                      
                      5,000
                      
                      
                      
                      118,000Accounts
      payable and accrued liabilities
                      
                      
                      (10,000
                      )
                      
                      
                      7,000Due
      to related parties
                      
                      
                      (49,000
                      )
                      
                      
                      6,000Other
      assets
                      
                      
                      (6,000
                      )
                      
                      
                      1,000Net
      cash provided (used) by operating activities
                      
                      
                      (147,000
                      )
                      
                      
                      529,000Cash
      flows from investing activities:Investments
      in real estate loans
                      
                      
                      --
                      
                      
                      
                      (296,000
                      )Proceeds
      from loan payoff
                      
                      
                      --
                      
                      
                      
                      1,139,000Sale
      of investments in real estate loans to:Third
      parties
                      
                      
                      197,000
                      
                      
                      
                      --Proceeds
      related to investment in real estate held for sale
                      
                      
                      355,000
                      
                      
                      
                      --Net
      cash provided by investing activities
                      
                      
                      552,000
                      
                      
                      
                      843,000Cash
      flows from financing activities:Members'
      redemptions
                      
                      
                      (1,322,000
                      )
                      
                      
                      (2,542,000
                      )Members'
      distributions, net of reinvestments
                      
                      
                      --
                      
                      
                      
                      (361,000
                      )Members'
      distributions - related party
                      
                      
                      --
                      
                      
                      
                      (31,000
                      )Net
      cash used in financing activities
                      
                      
                      (1,322,000
                      )
                      
                      
                      (2,934,000
                      )NET
      CHANGE IN CASH
                      
                      
                      (917,000
                      )
                      
                      
                      (1,562,000
                      )Cash,
      beginning of period
                      
                      
                      1,484,000
                      
                      
                      
                      2,720,000Cash,
      end of period
                      
                      $
                      567,000
                      
                      
                      $
                      1,158,000Non-cash
      investing and financing activities:Adjustment
      to allowance for loan loss related to sale of investment in real estate
      loan
                      
                      $
                      985,000
                      
                      
                      $
                      --Impairment
      on restructured loan reclassified to allowance for loan
    loss
                      
                      $
                      30,000
                      
                      
                      $
                      --Loan
      rewritten with same or similar collateral
                      
                      $
                      --
                      
                      
                      $
                      468,000Real
      estate held for sale acquired through foreclosure
                      
                      $
                      (1,407,000
                      )
                      
                      $
                      1,701,000Unrealized
      loss on marketable securities - related party
                      
                      $
                      (87,000
                      )
                      
                      $
                      (103,000
                      )
 
 
  The
accompanying notes are an integral part of these statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 4
-
 Table of Contents
  VESTIN
FUNDIII, LLC
 
 NOTES
TO FINANCIAL STATEMENTS
 
 MARCH
31, 2009
 
 (UNAUDITED)
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund III, LLC was organized in April 2003 as a Nevada limited liability company
for the purpose of investing in commercial real estate loans (hereafter referred
to as “real estate loans”) and income-producing real property.  On
March 5, 2007, a majority of our members approved the Third Amended and Restated
Operating Agreement, which limits the Company’s investment objectives to
investments in real estate loans.  Prior to adopting this amendment,
we also invested in revenue-generating commercial real estate.  We
sold our real estate investment in November 2006.  In this report, we
refer to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”,
“us”, or “our”.
 
 We invest
in loans secured by real estate through deeds of trust or mortgages (hereafter
referred to collectively as “deeds of trust” and as defined in our Operating
Agreement as “Mortgage Assets”).  We commenced operations in February
2004.  Under our Operating Agreement, we would continue our operations
until December 2023 unless dissolved prior thereto or extended by vote of the
members under the provisions of our Operating Agreement.
 
 On May
11, 2009, we filed a proxy statement with the SEC seeking approval to conduct an
orderly liquidation of our assets.  A special meeting will be held on
July 2, 2009, and proxy materials describing the proposed liquidation plan and
the reasons therefore will be disseminated to all holders of record of our
limited liability company units as of May 6, 2009.  If the Plan and
Dissolution is approved by our members, members will no longer have the right to
have their units redeemed by us and we will no longer honor any and all
outstanding redemption requests effective as of the adoption of the Plan and
Dissolution by our members.
 
 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 certain of 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 certain of the North American Securities
Administration Association Real Estate Guidelines.
 
 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 have been formed to invest in real
estate loans.
 
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
financial statements of the Company have been prepared in accordance with the
accounting principles generally accepted in the United States of America
(“GAAP”).  Management has included all normal recurring adjustments
considered necessary to give a fair presentation of operating results for the
periods presented.  Interim results are not necessarily indicative of
results for a full year.  The information included in this Form 10-Q
should be read in conjunction with information included in the 2008 annual
report filed on Form 10-K.
 
 Management
Estimates
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 Restricted
Cash
 
 We have
restricted cash, which relates to a cash deposit held as collateral by a banking
institution for an irrevocable stand by letter of credit to support rent
payments on the property we sold during November 2006.  The
requirement for the deposit expires at the end of the lease on August 31,
2014.
 
 Revenue
Recognition
 
 Interest
is recognized as revenue on performing loans 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
non-performing.  A loan is non-performing when based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when the
payment of interest is 90 days past due.  Cash receipts will be
allocated to interest income, except when such payments are specifically
designated by the terms of the loan as principal reduction.  Interest
is recognized on impaired loans on the cash basis method.
 
 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
  
 Investments
in real estate loans are secured by deeds of trust or
mortgages.  Generally, our real estate loans require interest only
payments with a balloon payment of the principal at maturity.  We have
both the intent and ability to hold real estate loans until maturity and
therefore, real estate loans are classified and accounted for as held for
investment and are carried at amortized cost.  Loans sold to or
purchased from affiliates are accounted for at the principal balance and no gain
or loss is recognized by us or any affiliate.  Loan-to-value ratios
are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received or when management’s assessment of
the value has changed, to reflect subsequent changes in value
estimates.  Such appraisals are generally dated within 12 months of
the date of loan origination and may be commissioned by the
borrower.
 
 The
Company considers a loan to be impaired when, based upon current information and
events, it believes it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
Company’s impaired loans include troubled debt restructuring, and performing and
non-performing loans in which full payment of principal or interest is not
expected. The Company calculates an allowance required for impaired loans based
on the present value of expected future cash flows discounted at the loan’s
effective interest rate, or at the loan’s observable market price or the fair
value of its collateral.
 
 Loans
that have been modified from their original terms are evaluated to determine if
the loan meets the definition of a Troubled Debt Restructuring (“TDR”) in
accordance with Statement of Financial Accounting Standards
(“FAS”)  15, Accounting by Debtor and Creditors for Troubled Debt
Restructurings and FAS 114, Accounting by Creditors for Impairment of a Loan –
an amendment of FAS  5 and 15.  When the Company modifies
the terms of an existing loan that is considered a TDR, it is considered
performing as long as it is in compliance with the modified terms of the loan
agreement.  If the modification calls for deferred interest, it is
recorded as interest income as cash is collected.
 
 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, and our manager generally
approve loans more quickly than other real estate lenders and, due to our
expedited underwriting process, there is a risk that the credit inquiry we
perform will not reveal all material facts pertaining to a borrower and the
security.
 
 Additional
facts and circumstances may be discovered as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions, which can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
  See
review report of Independent Registered Public Accounting Firm.
 - 7
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 Table of Contents
  
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 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(“FAS 144”), we generally
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
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.
 
 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
closing market price as of March 31, 2009.  All securities are
classified as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”).
 
  See
review report of Independent Registered Public Accounting Firm.
 - 8
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 Table of Contents
  We
evaluate our available-for-sale investment for other-than-temporary impairment
charges in accordance with Emerging Issues Task Force, or EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and it’s Application to Certain Investments.  FAS
115 and EITF 03-1 require us to determine when an investment is considered
non-performing (i.e., decline in fair value below its amortized cost), and
evaluate whether the impairment is other than temporary (i.e., investment value
will not be recovered over its remaining life), and, if the impairment is other
than temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value.
 
 According
to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M -
Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, there
are numerous factors to be considered in such an evaluation and their relative
significance will vary from case to case.  The following are a few
examples of the factors that individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
 
 ·
              The
      length of the time and the extent to which the market value has been less
      than cost;
 
 ·
              The
      financial condition and near-term prospects of the issuer, including any
      specific events which may influence the operations of the issuer such as
      changes in technology that may impair the earnings potential of the
      investment or the discontinuance of a segment of the business that may
      affect the future earnings potential;
or
 
 ·
              The
      intent and ability of the holder to retain its investment in the issuer
      for a period of time sufficient to allow for any anticipated recovery in
      market value.
 
 Fair Value
Disclosures
 
 On
January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115 (“FAS 159”).  FAS 159 permits companies to choose to
measure certain financial assets and liabilities at fair value (the “fair value
option”).  If the fair value option is elected, any upfront costs and
fees related to the item must be recognized in earnings and cannot be deferred,
e.g. debt issue costs.  The fair value election is irrevocable and may
generally be made on an instrument-by-instrument basis, even if a company has
similar instruments that it elects not to fair value.  At the adoption
date, unrealized gains and losses on existing items for which fair value has
been elected are reported as a cumulative adjustment to beginning retained
earnings.
 
 We chose
not to elect the fair value option for our financial assets and liabilities
existing on January 1, 2008, and did not elect the fair value option for
financial assets and liabilities transacted during the three months ended March
31, 2009.  Therefore, the adoption of FAS 159 had no impact on our
financial statements.
 
 On
January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements (“FAS
157”), as required for financial assets and liabilities, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements
for non-financial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis.  The adoption of FAS
157 for our financial assets and liabilities did not have a material impact on
our financial statements.  We do not expect the adoption of FAS 157 as
it pertains to non-financial assets and liabilities to have a material impact on
our financial statements.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
 Table of Contents
  Under FAS
157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. “the exit price”) in an orderly
transaction between market participants at the measurement date.  In
determining fair value, the Company uses various valuation approaches, including
quoted market prices and discounted cash flows.  FAS 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources.  Unobservable inputs are inputs
that reflect a company’s judgment concerning the assumptions that market
participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.  The fair value
hierarchy is broken down into three levels based on the reliability of inputs as
follows:
 
 ·
              Level
      1 – Valuations based on quoted prices in active markets for identical
      instruments that the Company is able to access.  Since
      valuations are based on quoted prices that are readily and regularly
      available in an active market, valuation of these products does not entail
      a significant degree of judgment.
 
 ·
              Level
      2 – Valuations based on quoted prices in active markets for instruments
      that are similar, or quoted prices in markets that are not active for
      identical or similar instruments, and model-derived valuations in which
      all significant inputs and significant value drivers are observable in
      active markets.
 
 ·
              Level
      3 – Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, which utilize the Company’s estimates
      and assumptions.
 
 Net Income Allocated to
Members Per Weighted Average Membership Unit
 
 Net
income allocated to members per weighted average membership unit is computed by
dividing net income calculated in accordance with GAAP by the weighted average
number of membership units outstanding for the period.
 
 Segments
 
 We
operate as one business segment.
 
 Income
Taxes
 
 Income
tax effects resulting from our operations pass through to our members
individually and, accordingly, no provision for income taxes is included in the
financial statements.
 
 NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash,
marketable securities related party and loans secured by deeds of
trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits based on management review of these financial
institutions.  As of March 31, 2009 and December 31, 2008, we had
approximately $2.2 million and $1.7 million, respectively, in excess of the
federally insured limits.
 
 As of
March 31, 2009, 45%, 27%, 14% and 10% of our loans were in Nevada, Oregon,
California and Oklahoma, respectively, compared to 40%, 20%, 11% and 8% at
December 31, 2008, respectively.  As a result of this geographical
concentration of our real estate loans, the downturn in the local real estate
markets in these states has had a material adverse effect on us.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
 Table of Contents
  At March
31, 2009 and December 31, 2008, the loan to our largest borrower represented 15%
and 11%, respectively, of our total investment in real estate
loans.  This commercial property real estate loan is located in
Oregon, with a first lien position and an outstanding balance of approximately
$1.5 million.  As of March 31, 2009, this loan was considered
non-performing.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  As
the economy continues to weaken and credit continues to become more difficult to
obtain, many of our borrowers who develop and sell commercial real estate
projects have been unable to complete their projects, obtain takeout financing
or have been otherwise adversely impacted.  In addition, an increase
in interest rates over the loan rate applicable at origination of the loan may
have an adverse effect on our borrower’s ability to refinance.
 
 Common
Guarantors
 
 As of
March 31, 2009 and December 31, 2008, two loans totaling approximately $2.7
million, representing approximately 27.1% and 20.1%, respectively, of our
portfolio’s total value, had a common guarantor.  Both loans were
considered non-performing as of March 31, 2009 and December 31,
2008.
 
 As of
March 31, 2009 and December 31, 2008, five loans totaling approximately $1.7
million, representing approximately 17.7% and 13.1% of our portfolio’s total
value, had a common guarantor.  All five loans were considered
performing as of March 31, 2009 and December 31, 2008.  During the
three months ended March 31, 2009, these loans have been modified, whereby the
interest rate was reduced from 10.5% to 8% starting in January
2009.  Interest payments are payable monthly, ranging from 3.0% to
4.25%, beginning January 25, 2009, and accrued at a range of 3.75% to 5.0%
payable at the maturity of the loan.  Deferred interest on these loans
will be recorded as interest income as cash is collected.
 
 As of
December 31, 2008, we had two loans totaling approximately $2.4 million,
representing approximately 18.0% of our portfolio’s total value, with a common
guarantor.  Both loans were considered non-performing as of December
31, 2008.  During the three months ended March 31, 2009, we foreclosed
upon one of these loans, totaling $1.0 million, and classified it as real estate
held for sale; see Note F – Real Estate Held for
Sale.
 
 For
additional information regarding the above non-performing loans see
“Non-Performing Loans” in Note D – Investments In Real Estate
Loans.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
March 31, 2009 and December 31, 2008, all of our loans provided for payments of
interest only with a “balloon” payment of principal payable in full at the end
of the term.
 
 In
addition, we 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, 2009, we had approximately $0.7 million in
investments in real estate loans that had interest reserves where the total
outstanding principal due to our co-lenders and us was approximately $17.1
million.  These loans had interest reserves of approximately $0.9
million, of which our portion was $17,000.  As of March 31, 2009, one
of these loans, totaling approximately $5.9 million, which had interest
reserves, were considered non-performing.  This loan’s interest
reserves, totaling $18,000, of which our portion was $1,000, have been suspended
as of March 31, 2009 and we no longer draw monthly interest income from
it.  At December 31, 2008, we had approximately $1.1 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 $24.0
million.  These loans had interest reserves of approximately $1.5
million, of which our portion was $35,000.
 
 On March
23, 2008, we, VRM I and VRM II, sold the Peoria 180, LLC loan to an unrelated
third party for $3.0 million, of which our portion was approximately $0.2
million.  The sale resulted in no gain or loss.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
 Table of Contents
  As of
March 31, 2009, we had five real estate loan products consisting of commercial,
construction, acquisition and development, land and residential.  The
effective interest rates on all product categories range from 6% to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.
 
 Loan
Portfolio
 
 Investments
in real estate loans as of March 31, 2009, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average
                        Interest
      Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesCommercial
                      
                      
                      9
                      
                      
                      
                      6,555,000
                      
                      
                      
                      11.12%
                      
                      
                      
                      66.41%
                      
                      
                      
                      85.30%Construction
                      
                      
                      4
                      
                      
                      
                      1,622,000
                      
                      
                      
                      8.00%
                      
                      
                      
                      16.44%
                      
                      
                      
                      98.79%Land
                      
                      
                      2
                      
                      
                      
                      1,693,000
                      
                      
                      
                      12.83%
                      
                      
                      
                      17.15%
                      
                      
                      
                      89.81%Total
                      
                      
                      15
                      
                      
                      $
                      9,870,000
                      
                      
                      
                      10.90%
                      
                      
                      
                      100.00%
                      
                      
                      
                      89.15%
 
 Investments
in real estate loans as of December 31, 2008, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average
                        Interest
      Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesCommercial
                      
                      
                      10
                      
                      
                      
                      7,815,000
                      
                      
                      
                      11.24%
                      
                      
                      
                      58.71%
                      
                      
                      
                      95.54%Construction
                      
                      
                      4
                      
                      
                      
                      1,622,000
                      
                      
                      
                      10.50%
                      
                      
                      
                      12.18%
                      
                      
                      
                      102.60%Land
                      
                      
                      4
                      
                      
                      
                      3,875,000
                      
                      
                      
                      12.31%
                      
                      
                      
                      29.11%
                      
                      
                      
                      94.76%Total
                      
                      
                      18
                      
                      
                      $
                      13,312,000
                      
                      
                      
                      11.46%
                      
                      
                      
                      100.00%
                      
                      
                      
                      96.60%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
“Weighted Average Interest Rate” as shown above is based on the contractual
terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of March 31, 2009 and December 31, 2008, was 9.07% and 10.40%,
respectively.  Please see “Non-Performing Loans” and “Asset Quality
and Loan Reserves” below for further information regarding performing and
non-performing loans.
 
 Loan-to-value
ratios are generally based on the most recent appraisals and may not reflect
subsequent changes in value and include allowances for loan
losses.  Recognition of allowance for loan losses will result in a
maximum loan-to-value ratio of 100% per loan.
 
 The
following is a schedule of priority of real estate loans as of March 31, 2009
and December 31, 2008:
 
 Loan
      Type
                    
                    Number
      of Loans
                    
                    
                    March
      31, 2009
                      Balance
      *
                    
                    
                    Portfolio
                      Percentage
                    
                    
                    Number
      of Loans
                    
                    
                    December
      31, 2008
                      Balance
      *
                    
                    
                    Portfolio
                      PercentageFirst
      deeds of trust
                    
                    
                    11
                    
                    
                    $
                    8,885,000
                    
                    
                    
                    90.02%
                    
                    
                    
                    14
                    
                    
                    $
                    12,326,000
                    
                    
                    
                    92.59%Second
      deeds of trust
                    
                    
                    4
                    
                    
                    
                    985,000
                    
                    
                    
                    9.98%
                    
                    
                    
                    4
                    
                    
                    
                    986,000
                    
                    
                    
                    7.41%Total
                    
                    
                    15
                    
                    
                    $
                    9,870,000
                    
                    
                    
                    100.00%
                    
                    
                    
                    18
                    
                    
                    $
                    13,312,000
                    
                    
                    
                    100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
 Table of Contents
  The
following is a schedule of contractual maturities of investments in real estate
loans as of March 31, 2009:
 
 Non-performing
      and past due loans (a)
                    
                    $
                    7,463,000April
      2009 – June 2009
                    
                    
                    --July
      2009 – September 2009
                    
                    
                    --October
      2009 – December 2009
                    
                    
                    468,000January
      2010 – March 2010
                    
                    
                    --April
      2010 – June 2010
                    
                    
                    200,000July
      2010 – September 2010
                    
                    
                    --October
      2010 – December 2010
                    
                    
                    118,000January
      2011 – March 2011
                    
                    
                    1,621,000Thereafter
                    
                    
                    --Total
                    
                    $
                    9,870,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to March 31,
2009.
 
 The
following is a schedule by geographic location of investments in real estate
loans as of March 31, 2009 and December 31, 2008:
 
 March
      31, 2009
                        Balance
      *
                      
                      
                      Portfolio
      Percentage
                      
                      
                      December
      31, 2008
                        Balance
      *
                      
                      
                      Portfolio
      PercentageArizona
                      
                      $
                      200,000
                      
                      
                      
                      2.03%
                      
                      
                      $
                      2,672,000
                      
                      
                      
                      20.07%California
                      
                      
                      1,400,000
                      
                      
                      
                      14.18%
                      
                      
                      
                      1,400,000
                      
                      
                      
                      10.52%Nevada
                      
                      
                      4,400,000
                      
                      
                      
                      44.58%
                      
                      
                      
                      5,370,000
                      
                      
                      
                      40.34%Oklahoma
                      
                      
                      1,000,000
                      
                      
                      
                      10.13%
                      
                      
                      
                      1,000,000
                      
                      
                      
                      7.51%Oregon
                      
                      
                      2,670,000
                      
                      
                      
                      27.05%
                      
                      
                      
                      2,670,000
                      
                      
                      
                      20.06%Texas
                      
                      
                      200,000
                      
                      
                      
                      2.03%
                      
                      
                      
                      200,000
                      
                      
                      
                      1.50%Total
                      
                      $
                      9,870,000
                      
                      
                      
                      100.00%
                      
                      
                      $
                      13,312,000
                      
                      
                      
                      100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 Balance Sheet
      Reconciliation
 
 The
following table reconciles the balance of the loan portfolio to the amount shown
on the accompanying Balance Sheets.
 
 March
      31, 2009
                      Balance
      (a)
                    
                    
                    December
      31, 2008
                      Balance
      (a)Balance
      per loan portfolio
                    
                    $
                    9,870,000
                    
                    
                    $
                    13,312,000Less:Allowance
      for loan losses (b)
                    
                    
                    (3,762,000
                    )
                    
                    
                    (5,446,000
                    )Balance
      per balance sheet
                    
                    $
                    6,108,000
                    
                    
                    $
                    7,866,000
 
 (a)
              As
      of December 31, 2008, the 2503 Panorama, LLC loan included an impairment
      reserve, applied to the loan balance, of $30,000.  During March
      2009, the impairment reserve for these two loans was reclassified to their
      existing allowance for loan losses.
 
 (b)
              Please
      refer to Specific
      Reserve Allowance below.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
 Table of Contents
  Non-Performing
Loans
 
 As of
March 31, 2009, we had eight loans considered non-performing (i.e., based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due).  These loans are
currently carried on our books at a value of approximately $4.0 million, net of
allowance for loan losses of approximately $3.4 million, which does not include
the allowances of approximately $0.4 million relating to performing loans as of
March 31, 2009.  Except as otherwise provided below, these loans have
been placed on non-accrual of interest status and are the subject of pending
foreclosure proceedings.  At March 31, 2009, the following loans were
non-performing:
 
 ·
              Monterrey
      Associates, L.P. is a non-performing loan, which was originally secured by
      various real estate collateral, including a 248 unit apartment complex in
      Oklahoma City, Oklahoma.  The outstanding balance on the loan is
      approximately $4.4 million, of which our portion is $1.0
      million.  As of March 31, 2009, this loan has been considered
      non-performing for the last 31 months.  Our manager brought
      foreclosure and other legal proceedings to protect our interest in the
      collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of our
      foreclosure of a Deed of Trust and sale of other collateral located in
      Kansas City, Missouri securing the non-performing loan.  We
      filed a Petition to set aside the sale of the Missouri collateral, which
      the court dismissed and was affirmed on appeal.  We are
      vigorously contesting Monterrey’s position in Oklahoma; however, we cannot
      determine at this time the outcome of these legal
      proceedings.  As of March 31, 2009, based on our manager’s
      evaluation, our manager has provided a specific allowance for the full
      amount of the loan totaling approximately $4.4 million, of which our
      portion is approximately $1.0
million.
 
 ·
              WCP
      Warm Springs Holdings 1, LLC is a loan to provide financing for 10 acres
      of vacant land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $8.5 million,
      of which our portion is $1.4 million.  As of March 31, 2009,
      this loan has been considered non-performing for the last 10
      months.  On October 29, 2008, the borrower filed for bankruptcy
      protection.  Our manager was successful in lifting the automatic
      stay, and has commenced both foreclosure proceedings and litigation to
      enforce the personal guarantees.  On May 7, 2009, we, VRM I and
      VRM II foreclosed on this property and classified it as real estate held
      for sale.  of March 31, 2009, based on our manager’s evaluation
      and an updated appraisal, our manager has provided a specific allowance of
      approximately $4.1million, of which our portion is approximately $0.7
      million.
 
 ·
              Babuski,
      LLC is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $0.3 million.  The borrowers defaulted and the loan became
      non-performing.  On October 16, 2008, we, VRM I and VRM II
      entered into a forbearance agreement to postpone the foreclosure date on
      the property.  The guarantor paid $250,000 for cost and interest
      due related to the loan.  As of April 30, 2009, the borrower
      paid an additional $100,000 in cost and interest due, of which our portion
      was $3,000.  As of March 31, 2009, this loan has been considered
      non-performing for the last 10 months.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  As of March 31, 2009, based on
      our manager’s evaluation and an updated appraisal, our manager has
      concluded that the current value of the underlying collateral should be
      sufficient to protect us from loss of principal.  No specific
      allowance was deemed necessary as of March 31,
  2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  
 ·
              Barger
      Road Cottages, LLC is a commercial loan to provide financing for the
      Alpine Meadow Retirement Community, consisting of 23 cottage units with
      garages, community building and surplus land, located in Eugene,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $6.0 million, of which our portion is approximately
      $1.5 million.  As of March 31, 2009, this loan has been
      considered non-performing for the last 10 months.  Our manager
      has commenced foreclosure proceedings, and is proceeding with legal action
      to enforce the personal guarantees.  On January 7, 2009, the
      main principal of the borrower filed for bankruptcy protection and has
      filed a motion to enjoin us from proceeding to foreclose.  This
      motion was denied.  On March 9, 2009, the United States District
      Court for the District of Oregon, entered its Order Granting Preliminary
      Injunction and Appointing Receiver, which has the effect of enjoining us
      from proceeding with our foreclosure.  We have filed a motion to
      lift the injunction and allow us to proceed with our
      foreclosure.  We are opposing the motion and we are confident
      that we will prevail in our position.  As of March 31, 2009,
      based on our manager’s evaluation and an updated appraisal, our manager
      has concluded that the current value of the underlying collateral should
      be sufficient to protect us from loss of principal.  No specific
      allowance was deemed necessary as of March 31,
  2009.
 
 ·
              Lohrey
      Investments, LLC is a commercial loan to provide financing for income
      producing property located in Gilroy, CA.  The loan is secured
      by a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $16.0 million,
      of which our portion is $1.4 million.  As of March 31, 2009,
      this loan has been considered non-performing for the last nine
      months.  Our manager has commenced foreclosure proceedings, and
      has been awarded a default judgment against the guarantors for
      approximately $21.3 million, although it cannot be determined at this time
      how much, if any, can be recovered from the guarantors.  During
      October 2008, the tenant, who is a related party to the borrower, filed
      for bankruptcy protection.  On January 6, 2009, the borrower
      filed for bankruptcy protection and on February 11, 2009, the guarantors
      filed for bankruptcy protection.  The property is not currently
      generating any income.  As of March 31, 2009, based on our
      manager’s evaluation and an updated appraisal obtained during May 2009,
      our manager has provided a specific allowance of approximately $9.0
      million, of which our portion is approximately $0.8
    million.
 
 ·
              Cascadia
      Canyon, LLC is a commercial loan to provide financing for 12.39 acres of
      land plus the SUMCO North Campus and SUMCO South Campus located in Salem,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $19.5 million, of which our portion
      is approximately $1.2 million.  As of March 31, 2009, this loan
      has been considered non-performing for the last eight
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  As of March 31, 2009, based on our manager’s
      evaluation, an updated appraisal and current sales price, our manager has
      provided a specific allowance totaling approximately $10.3 million, of
      which our portion is approximately $0.6
million.
 
 ·
              Spectrum
      Town Center Property, LLC is a commercial loan to provide bridge financing
      for a shadow anchored multi-tenant retail property located in Gilbert,
      AZ.  The loan is secured by a second lien on the property, with
      a pre-existing first lien of $20.0 million, and is guaranteed by the
      principals of the borrower.  The outstanding balance on the
      second lien loan is approximately $14.0 million, of which our portion is
      $0.2 million.  As of March 31, 2009, this loan has been
      considered non-performing for the last month.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  As of March 31, 2009, based on
      our manager’s evaluation and an updated appraisal, our manager has
      concluded that the current value of the underlying collateral should be
      sufficient to protect us from loss of principal.  No specific
      allowance was deemed necessary as of March 31,
  2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  
 ·
              2503
      Panorama, LLC is a commercial loan for a 5,700 square foot penthouse
      located on the 25th
      floor of the Panorama Towers I, located in Las Vegas, NV.  The
      loan is secured by a first lien on the property and is guaranteed by the
      principals of the borrower.  The outstanding balance on the loan
      is approximately $6.2 million, of which our portion is $0.5
      million.  As of March 31, 2009, this loan has been
      non-performing for the last month.  Our manager has commenced
      foreclosure proceedings, and is proceeding with legal action to enforce
      the personal guarantees.  During March 2009, the impairment
      reserve for this loan, totaling approximately $0.4 million, of which our
      portion was $30,000, was reclassified to its existing allowance for loan
      losses.  As of March 31, 2009, based on our manager’s evaluation
      and an updated appraisal, our manager has provided a specific allowance of
      $4.4 million, of which our portion is approximately $0.4
      million.
 
 The
following schedule summarizes the non-performing loans as of March 31,
2009:
 
 Loan
      Name
                            
                            Balance
      at
                              March
      31, 2009
                            
                            
                            Allowance
      for Loan Loss **
                            
                            
                            Net
      Balance at
                              March
      31, 2009
                            
                            Maturity
      Date
                            
                            Number
      of Months Non-Performing
                            
                            Percentage
      of Total Loan BalanceMonterrey
      Associates, L.P.
                            
                            $
                            1,000,000
                            
                            
                            $
                            (1,000,000
                            )
                            
                            $
                            --
                            
                            9/1/2006
                            
                            31
                            
                            23%WCP
      Warm Springs Holdings 1, LLC
                            
                            
                            1,400,000
                            
                            
                            
                            (673,000
                            )
                            
                            
                            727,000
                            
                            5/10/2008
                            
                            10
                            
                            16%Babuski,
      LLC
                            
                            
                            293,000
                            
                            
                            
                            --
                            
                            
                            
                            293,000
                            
                            6/17/2008
                            
                            10
                            
                            3%Barger
      Road Cottages, LLC
                            
                            
                            1,520,000
                            
                            
                            
                            --
                            
                            
                            
                            1,520,000
                            
                            12/5/2008
                            
                            10
                            
                            25%Lohrey
      Investments, LLC
                            
                            
                            1,400,000
                            
                            
                            
                            (784,000
                            )
                            
                            
                            616,000
                            
                            10/29/2008
                            
                            9
                            
                            9%Cascadia
      Canyon, LLC
                            
                            
                            1,150,000
                            
                            
                            
                            (606,000
                            )
                            
                            
                            544,000
                            
                            2/12/2009
                            
                            8
                            
                            6%Spectrum
      Town Center Property, LLC
                            
                            
                            200,000
                            
                            
                            
                            --
                            
                            
                            
                            200,000
                            
                            4/30/2009
                            
                            1
                            
                            1%2503
      Panorama, LLC
                            
                            
                            500,000
                            
                            
                            
                            (352,000
                            )
                            
                            
                            148,000
                            
                            2/2/2010
                            
                            1
                            
                            8%$
                            7,463,000
                            
                            
                            $
                            (3,415,000
                            )
                            
                            $
                            4,048,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Management’s evaluation may include, but is not limited to,
appraisals, real estate broker comps, the borrower’s current financial standing
and other market conditions.  Additions to the allowance for loan
losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses or included as income when the asset is
disposed.  As of March 31, 2009, we have provided specific reserves,
related to five non-performing loans and six performing loans, of approximately
$3.8 million.  Our manager evaluated the loans and, based on current
estimates regarding the value of the remaining underlying collateral or the
borrowers’ ability to pay, believes that such collateral is sufficient to
protect us against further losses of principal.  However, such
estimates could change or the value of underlying real estate could
decline.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be recorded in future
periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any distributions payable to our members.
 
 Specific Reserve
      Allowances
 
 The
following table is a roll-forward of the allowance for loan losses for the three
months ended March 31, 2009.  Following the table is a discussion of
the status of each identified loan and the reasons for the recording of
additional reserves during the three months ended March 31,
2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 Table of Contents
  
 Description
                      
                      Balance
      at
                        December
      31, 2008
                      
                      
                      Specific
      Reserve Allocation
                      
                      
                      Sales
      & Transfers to REO
                      
                      
                      Balance
      at
                        March
      31, 2009Monterrey
      Associates, L.P.
                      
                      $
                      1,000,000
                      
                      
                      $
                      
                      
                      
                      $
                      
                      
                      
                      $
                      1,000,000Peoria
      180, LLC
                      
                      
                      985,000
                      
                      
                      
                      
                      
                      
                      
                      (985,000
                      )
                      
                      
                      --Terravita,
      LLC (a)
                      
                      
                      118,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      118,000Redwood
      Place, LLC (b)
                      
                      
                      601,000
                      
                      
                      
                      
                      
                      
                      
                      (601,000
                      )
                      
                      
                      --2503
      Panorama, LLC
                      
                      
                      322,000
                      
                      
                      
                      30,000
                      
                      
                      
                      
                      
                      
                      
                      352,000WCP
      Warm Springs Holdings 1, LLC
                      
                      
                      673,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      673,000Lohrey
      Investments, LLC
                      
                      
                      630,000
                      
                      
                      
                      154,000
                      
                      
                      
                      
                      
                      
                      
                      784,000World
      Capital Durango Alpha (b)
                      
                      
                      282,000
                      
                      
                      
                      
                      
                      
                      
                      (282,000
                      )
                      
                      
                      --Wolfpack
      Properties, LLC (a)
                      
                      
                      71,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      71,000ExecuSuite
      Properties, LLC (a)
                      
                      
                      34,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      34,000SE
      Property Investments, LLC (a)
                      
                      
                      26,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      26,000Devonshire,
      LLC (a)
                      
                      
                      91,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      91,000Building
      A, LLC & Building C, LLC (a)
                      
                      
                      7,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      7,000Cascadia
      Canyon, LLC
                      
                      
                      606,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      606,000Total
                      
                      $
                      5,446,000
                      
                      
                      $
                      184,000
                      
                      
                      $
                      (1,868,000
                      )
                      
                      $
                      3,762,000
 
 (a)
              As
      of March 31, 2009, these loans were considered
  performing.
 
 (b)
              During
      the three months ended March 31, 2009, these properties were foreclosed
      upon and classified as real estate held for
  sale.
 
 Monterrey Associates, L.P. –
As of March 31, 2009, our manager has provided a specific reserve allowance for
the outstanding balance of the loan, related to a non-performing commercial loan
on a 248-unit apartment complex in Oklahoma City, OK, of approximately $4.4
million, of which our portion was $1.0 million.  This specific reserve
allowance was based on our manager’s evaluation and an updated appraisal of the
underlying collateral for this loan, obtained by our manager during January
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100-unit condominium/apartment project in
North Las Vegas, NV, totaling approximately $0.7 million, of which our portion
was approximately $0.1 million.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which included a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $0.5
million.  The terms of the rewritten loan remain the same as those of
the original loans and the loan was performing as required as of March 31,
2009.  Our manager will continue to evaluate our position in the
loan.
 
 2503 Panorama, LLC – As of
March 31, 2009, our manager has provided a specific reserve allowance, related
to a non-performing loan for a 5,700 square foot penthouse located on the 25th
floor of Panorama Towers I in Las Vegas, NV, of approximately $4.4 million, of
which our portion is approximately $0.4 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during February 2009.  During
March 2009, we reclassified an impairment reserve of $30,000 to the specific
reserve allowance.  Our manager will continue to evaluate our position
in the loan.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  WCP Warm Springs Holdings 1,
LLC – As of March 31, 2009, our manager has provided a specific reserve
allowance, related to a non-performing loan on 10 acres of vacant land located
in Las Vegas, NV, of approximately $4.1 million, of which our portion is
approximately $0.7 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Lohrey Investments, LLC – As
of March 31, 2009, our manager has provided a specific reserve allowance,
related to a non-performing loan on income producing property located in Gilroy,
CA, of approximately $9.0 million, of which our portion is approximately $0.8
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during May 2009.  Our manager will continue to evaluate our position
in the loan.
 
 Casciadia Canyon, LLC, – As
of March 31, 2009, our manager has provided a specific reserve allowance,
related to an non-performing loan on 12.39 acres of land plus the SUMCO North
Campus and SUMCO South Campus located in Salem, OR, of approximately $10.3
million, of which our portion is approximately $0.6 million.  This
specific reserve allowance was based on the current sales price of the
underlying collateral for this loan.  Our manager will continue to
evaluate our position in the loan.
 
 Wolfpack Properties, LLC, –
As of March 31, 2009, our manager has provided a specific reserve allowance,
related to a performing loan on a 22,000 SqFt Class A Office Building "B" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.2 million, of which our portion is $71,000.  During
the three months ended March 31, 2009, this loan was modified, whereby the
interest rate was reduced to 8% starting in January 2009.  Interest
payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued
at 3.75% payable at the maturity of the loan.  This specific reserve
allowance was based on an updated appraisal of the underlying collateral for
this loan, obtained by our manager during January 2009.  Our manager
will continue to evaluate our position in the loan.
 
 ExecuSuite Properties, LLC, –
As of March 31, 2009, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "D" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $0.6 million, of which our portion is $34,000.  During
the three months ended March 31, 2009, this loan was modified, whereby the
interest rate was reduced to 8% starting in January 2009.  Interest
payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued
at 3.75% payable at the maturity of the loan.  This specific reserve
allowance was based on an updated appraisal of the underlying collateral for
this loan, obtained by our manager during January 2009.  Our manager
will continue to evaluate our position in the loan.
 
 SE Property Investments, LLC,
– As of March 31, 2009, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "E" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $0.4 million, of which our portion is $26,000.  During
the three months ended March 31, 2009, this loan was modified, whereby the
interest rate was reduced to 8% starting in January 2009.  Interest
payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued
at 3.75% payable at the maturity of the loan.  This specific reserve
allowance was based on an updated appraisal of the underlying collateral for
this loan, obtained by our manager during January 2009.  Our manager
will continue to evaluate our position in the loan.
 
 Devonshire, LLC, – As of
March 31, 2009, our manager has provided a specific reserve allowance, related
to a performing loan on 22,000 SqFt Class A Office Building "F" of Village
Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.6 million, of which our portion is $91,000.  During
the three months ended March 31, 2009, this loan was modified, whereby the
interest rate was reduced to 8% starting in January 2009.  Interest
payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued
at 3.75% payable at the maturity of the loan.  This specific reserve
allowance was based on an updated appraisal of the underlying collateral for
this loan, obtained by our manager during January 2009.  Our manager
will continue to evaluate our position in the loan.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  Building A, LLC & Building C,
LLC, – As of March 31, 2009, our manager has provided a specific reserve
allowance, related to a second lien position performing loan on 3.18 acres of
land lying within the Village Business Park and a 45,622 SqFt Office Building
"C" of Village Business Park located on 1.48 acres of land located in Las Vegas,
NV, of $106,000, of which our portion is $7,000.  During the three
months ended March 31, 2009, this loan was modified, whereby the interest rate
was reduced to 8% starting in January 2009.  Interest payments are
payable monthly at 3.0%, beginning January 25, 2009, and accrued at 5.0% payable
at the maturity of the loan.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan,
obtained by our manager during January 2009.  Our manager will
continue to evaluate our position in the loan.
 
 As of
March 31, 2009, our manager had granted extensions on 11 loans, totaling
approximately $97.0 million, of which our portion was approximately $7.8
million, pursuant to the terms of the original loan agreements, which permit
extensions by mutual consent.  Such extensions are generally provided
on loans where the original term was 12 months or less and where a borrower
requires additional time to complete a construction project or negotiate
take-out financing.  However, our manager generally grants extensions
when a borrower is in compliance with the material terms of the loan, including,
but not limited to the borrower’s obligation to make interest payments on the
loan.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  Subsequent to their extension, 6 of the 11 loans have
become non-performing.  The loans, which became non-performing after
their extension, had a total principal amount at March 31, 2009 of approximately
$64.9 million, of which our portion is approximately $5.7 million.
 
 Asset Quality and Loan
Reserves
 
 Losses
may occur from investing in real estate loans.  The amount of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
non-performing.  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.  The following is a breakdown of allowance for loan losses
related to performing and non-performing loans as of March 31, 2009 and December
31, 2008:
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  
 As
      of March 31, 2009Balance
                    
                    
                    Allowance
      for loan losses *
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    2,013,000
                    
                    
                    $
                    --
                    
                    
                    $
                    2,013,000Non-performing
      loans – related allowance
                    
                    
                    5,450,000
                    
                    
                    
                    (3,415,000
                    )
                    
                    
                    2,035,000Subtotal
      nonperforming loans
                    
                    
                    7,463,000
                    
                    
                    
                    (3,415,000
                    )
                    
                    
                    4,048,000Performing
      loans – no related allowance
                    
                    
                    200,000
                    
                    
                    
                    --
                    
                    
                    
                    200,000Performing
      loans – related allowance
                    
                    
                    2,207,000
                    
                    
                    
                    (347,000
                    )
                    
                    
                    1,860,000Subtotal
      performing loans
                    
                    
                    2,407,000
                    
                    
                    
                    (347,000
                    )
                    
                    
                    2,060,000Total
                    
                    $
                    9,870,000
                    
                    
                    $
                    (3,762,000
                    )
                    
                    $
                    6,108,000
 
 *           Please
refer to Specific Reserve
Allowancesabove.
 
 As
      of December 31, 2008Balance
                    
                    
                    Allowance
      for loan losses
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    1,813,000
                    
                    
                    $
                    --
                    
                    
                    $
                    1,813,000Non-performing
      loans – related allowance
                    
                    
                    8,422,000
                    
                    
                    
                    (4,777,000
                    )
                    
                    
                    3,645,000Subtotal
      nonperforming loans
                    
                    
                    10,235,000
                    
                    
                    
                    (4,777,000
                    )
                    
                    
                    5,458,000Performing
      loans – no related allowance
                    
                    
                    400,000
                    
                    
                    
                    --
                    
                    
                    
                    400,000Performing
      loans – related allowance
                    
                    
                    2,677,000
                    
                    
                    
                    (669,000
                    )
                    
                    
                    2,008,000Subtotal
      performing loans
                    
                    
                    3,077,000
                    
                    
                    
                    (669,000
                    )
                    
                    
                    2,408,000Total
                    
                    $
                    13,312,000
                    
                    
                    $
                    (5,446,000
                    )
                    
                    $
                    7,866,000
 
 Our
manager evaluated our loans and, based on current estimates with respect to the
value of the underlying collateral, believes that such collateral is sufficient
to protect us against further losses of principal or
interest.  However, such estimates could change or the value of the
underlying real estate could decline.  Our manager will continue to
evaluate our loans in order to determine if any other allowance for loan losses
should be recorded.
 
 NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
March 31, 2009, we owned 114,117 shares of VRM II’s common stock, representing
approximately 0.83% of their total outstanding common stock.
 
 In
accordance with FAS 115 and FSP FAS 115-1 and FAS 124-1, we evaluated our
investment in VRM II’s common stock and determined there was an
other-than-temporary impairment as of September 30, 2008.  Based on
this evaluation we impaired our investment to its fair value, as of September
30, 2008, to $3.89 per share.
 
 As of
March 31, 2009, our manager evaluated the near-term prospects of VRM II in
relation to the severity and duration of the unrealized loss since September 30,
2008.  Based on that evaluation and our ability and intent to hold
this investment for a reasonable period of time sufficient for a forecasted
recovery of fair value, we do not consider our investment in VRM II to be
other-than-temporarily impaired at March 31, 2009.  We will continue
to evaluate our investment in marketable securities on a quarterly
basis.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  NOTE
F — REAL ESTATE HELD FOR SALE
 
 At March
31, 2009, we held nine properties with a total carrying value of approximately
$3.3 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale.  One of these properties
generated net income from rentals or other sources during the three months ended
March 31, 2009 totaling $6,000.  Expenses incurred during the three
months ended March 31, 2009, related to our real estate held for sale totaled
$503,000.  These expenses included $467,000 in write downs on real
estate held for sale.  The summary below includes our percentage of
ownership in each of the properties.  Our investments in real estate
held for sale are accounted for at the lower of cost or fair value less costs to
sell with fair value based on appraisals and knowledge of local market
conditions.  It is not our intent to invest in or own real estate as a
long-term investment.  We seek to sell properties acquired through
foreclosure as quickly as circumstances permit taking into account current
economic conditions.  Set forth below is a roll-forward of investments
in real estate held for sale during the three months ended March 31,
2009:
 
 Description
                          
                          Date
      Acquired
                          
                          Percentage
      of Ownership
                          
                          Balance
      at
                            December
      31, 2008
                          
                          
                          Acquisitions
                          
                          
                          Write
      Downs
                          
                          
                          Net
      Cash Proceeds
                            on
      Sales
                          
                          
                          Balance
      at
                            March
      31, 2009Rio
      Vista Nevada, LLC (1)
                          
                          12/21/2006
                          
                          2%
                          
                          $
                          44,000
                          
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          44,000Pirates
      Lake, LTD (2)
                          
                          2/5/2008
                          
                          16%
                          
                          
                          303,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          303,000Brawley
      CA 122, LLC (3)
                          
                          5/1/2008
                          
                          33%
                          
                          
                          306,000
                          
                          
                          
                          --
                          
                          
                          
                          (122,000
                          )
                          
                          
                          --
                          
                          
                          
                          184,000V
      & M Homes at the Palms, Inc. (4)
                          
                          7/15/2008
                          
                          36%
                          
                          
                          418,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          418,000MRPE,
      LLC (5)
                          
                          8/11/2008
                          
                          8%
                          
                          
                          530,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          530,000Jeffrey's
      Court, LLC (6)
                          
                          9/3/2008
                          
                          20%
                          
                          
                          725,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          725,000Cliff
      Shadows Properties, LLC (7)
                          
                          9/8/2008
                          
                          5%
                          
                          
                          408,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (355,000
                          )
                          
                          
                          53,000Redwood
      Place, LLC (8)
                          
                          1/16/2009
                          
                          9%
                          
                          
                          --
                          
                          
                          
                          688,000
                          
                          
                          
                          (173,000
                          )
                          
                          
                          --
                          
                          
                          
                          515,000World
      Capital Durango Alpha (9)
                          
                          3/30/2009
                          
                          14%
                          
                          
                          --
                          
                          
                          
                          719,000
                          
                          
                          
                          (172,000
                          )
                          
                          
                          --
                          
                          
                          
                          547,000$
                          2,734,000
                          
                          
                          $
                          1,407,000
                          
                          
                          $
                          (467,000
                          )
                          
                          $
                          (355,000
                          )
                          
                          $
                          3,319,000
 
 (1)
              Rio Vista Nevada, LLC –
      During December 2006, we, VRM I and VRM II acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the three months ended March 31, 2009, our manager evaluated the carrying
      value of real estate acquired through foreclosure located in Cathedral
      City, California.  Based on our manager’s evaluation and an
      updated appraisal obtained during February 2009, no write-down was
      necessary during the three months ended March 31,
  2009.
 
 (2)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and VRM II acquired through foreclosure
      proceedings approximately 46.75 acres of land in Galveston,
      TX.  During the three months ended March 31, 2009, our manager
      has evaluated the carrying value of the property and based on an updated
      appraisal obtained in October 2008 and the current sales price, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at $1.8
      million, which approximates the total book value, plus selling costs, for
      this property held by us, VRM I and VRM
II.
 
 (3)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and VRM II acquired through foreclosure
      proceedings a 25 acre proposed 122 single-family subdivision to be known
      as River Drive Subdivision in Brawley, CA.  Our manager has
      evaluated the carrying value of the property and based on the current
      sales price, the property was written down approximately $0.3 million, of
      which our portion was approximately $0.1 million during the three months
      ended March 31, 2009.  The property is currently under contract
      for sale at $600,000, with an estimated closing date of June 12,
      2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 21
-
 Table of Contents
  
 (4)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and VRM II acquired through
      foreclosure proceedings an 80 acre parcel of land in Florence,
      AZ.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in February 2009, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at $1.5
      million.
 
 (5)
              MRPE, LLC – During
      August 2008, we, VRM I, and VRM II acquired through foreclosure
      proceedings 132.03 acres of land within the Wolf Creek Estates Master
      Planned Community, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its analysis,
      updated appraisal obtained in January 2009, and current sales price, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at
      approximately $7.0 million, which approximates the total book value, plus
      selling costs, for this property held by us, VRM I and VRM
    II.
 
 (6)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and VRM II acquired through foreclosure
      proceedings 4.92 acres of land to be developed into 119 condominium units
      in Las Vegas, NV.  Our manager has evaluated the carrying value
      of the property and based on its analysis, updated appraisal obtained in
      January 2009, and current sales price, no write-down was necessary during
      the three months ended March 31,
2009.
 
 (7)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and VRM II acquired through
      foreclosure proceedings a 106 Unit Townhouse Project known as Cliff
      Shadows Townhomes located in Las Vegas, NV.  Our manager has
      evaluated the carrying value of the property and based on an updated
      appraisal obtained in September 2008 and the current purchase agreement,
      no write-down was necessary during the three months ended March 31,
      2009.  During January 2009, our manager received a sales
      agreement to purchase the property for approximately $9.6 million, of
      which our portion would be approximately $0.5 million.  On March
      6, 2009, we, VRM I, and VRM II completed the sale of 98 units, with the
      remaining units pending final
escrow.
 
 (8)
              Redwood Place, LLC – On
      January 16, 2009, we, VRM I, and VRM II, acquired through foreclosure
      proceedings a 186-unit apartment complex located in Phoenix,
      Arizona.  During the three months ended March 31, 2009, this
      property generated net income of $6,000.  Our manager has
      evaluated the carrying value of the property and based on the current
      purchase agreement, the property was written down approximately $2.0
      million, of which our portion was approximately $0.2 million during the
      three months ended March 31, 2009.
 
 (9)
              World Capital Durango
      Alpha – On March 30, 2009, we, VRM I, and VRM II acquired through
      foreclosure proceedings 9.27 acres of land located in Las Vegas,
      NV.  The property is currently under contract to sell for
      approximately $4.3 million.  Our manager has evaluated the
      carrying value of the property and based on its estimate, the property was
      written down approximately $1.2 million, of which our portion was
      approximately $0.2 million during the three months ended March 31,
      2009.
 
 NOTE
G — RELATED PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties.  Pursuant to the terms of our
Operating Agreement, such acquisitions and sales are made without any mark up or
mark down.  No gain or loss is recorded on these transactions, as it
is not our intent to make a profit on the purchase or sale of such
investments.  The purpose is generally to diversify our portfolio by
syndicating loans, thereby providing us with additional capital to make
additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us a management (acquisition and advisory)
fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
income.  No management fees were recorded during the three months
ended March 31, 2009 and 2008.
 
 We paid
pro rata distributions owed to our manager totaling $0 and $9,000, during the
three months ended March 31, 2009 and 2008, respectively, based upon 54,863
units owned by our manager.
  See
review report of Independent Registered Public Accounting Firm.
 - 22
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 Table of Contents
  
 In
connection with the sale of an office building located in Las Vegas, Nevada, we
arranged for a $985,000 letter of credit in favor of the purchaser of the
building (the “Purchaser”), which may be drawn upon by the Purchaser should
Vestin Group default on its lease obligations.  Vestin Group is
currently engaged in a dispute with the Purchaser and has not paid certain
amounts allegedly due under its lease totaling approximately $0.5 million, as of
May 1, 2009.  Vestin Group has provided us with a written agreement to
fully indemnify and hold us harmless in the event that the Purchaser draws upon
the letter of credit and we incur an obligation to reimburse the bank which
issued the letter of credit.
 
 On March
6, 2009, we, VRM I, and VRM II completed the sale of 98 of the 106 Cliff Shadows
Properties, LLC units, to an unrelated third party, with the remaining units
pending final escrow.  In accordance with our Operating Agreement, we,
VRM I and VRM II paid our manager an administrative fee of $282,000, shared
pro-rata between us, VRM I and VRM II.
 
 As of
March 31, 2009, we owed our manager $3,000.  As of December 31, 2008,
we owed our manager $58,000, primarily related to loan extension
fees.
 
 Transactions with Other
Related Parties
 
 As of
March 31, 2009 and March 31, 2008, we owned 114,117 common shares of VRM II,
representing approximately 0.83% and 0.77%, respectively, of their total
outstanding common stock.  For the three months ended March 31, 2009
and 2008 we recognized $0 and $24,000, respectively, in dividend income from VRM
II based on the number of shares we held on the dividend record
dates.
 
 As of
March 31, 2009, we owed VRM II $11,000.  As of December 31, 2008, we
owed VRM II $9,000.
 
 As of
March 31, 2009, we owed VRM I $4,000.  As of December 31, 2008, we did
not have a balance due to or from VRM I.
 
 We paid
pro rata distributions owed to inVestin totaling $0 and $5,000, during the three
months ended March 31, 2009 and 2008, 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 $0 and $17,000, during the three months ended March
31, 2009 and 2008, respectively, based upon 160,857 units owned by Shustek
Investments.
 
 During
the three months ended March 31, 2009 and 2008, we incurred $21,000 and $2,000,
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; however, on August 27, 2008, we suspended payment
of distributions as a result of our current losses.  For the three
months ended March 31, 2009, there were no distributions to members, compared to
approximately $0.4 million during the three months ended March 31,
2008.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 23
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 Table of Contents
  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,
2009.  Based on this review the value of members’ capital accounts was
adjusted from $5.89 per unit to $5.50 per unit, as of April 1,
2009.  The change in valuation is primarily for tax and capital
account purposes and does not reflect the change in the value of the units
calculated in accordance with GAAP.  Accordingly, unit prices
calculated under GAAP may be different than the adjusted price per
unit.
 
 Redemption
Limitation
 
 Under our
Operating Agreement, our members have limited withdrawal rights.  The
withdrawal rights are subject to various limitations set forth in our Operating
Agreement intended to protect our financial health and our status under the
Internal Revenue Code.  These limitations provide, among other things,
that withdrawals may not exceed 10% of the aggregate Members’ capital in any
calendar year and no more than $100,000 per members’ account in any calendar
year, subject to our manager’s discretion which may be exercised in accordance
to our Operating Agreement.  As of March 31, 2009, the total
redemptions made from inception were approximately $10.4
million.  Balances in Members’ capital accounts as of January 1, 2009
were approximately $13.2 million, including deferred income of approximately
$1.0 million, which limited redemptions to approximately $1.3 million for
calendar 2009.  Total redemptions during the three months ended March
31, 2009, were approximately $1.3 million.  The remaining requests to
redeem, as of March 31, 2009, were estimated at approximately, $1.1 million in
2010, $1.0 million in 2011, $0.8 million in 2012, $0.4 million in 2013, $0.2
million in 2014, $0.2 million in 2015, $0.4 million in 2016, $0.1 million in
2017 and $0.1 million in 2018, subject to unit valuation adjustments and results
of operations.
 
 On May
11, 2009, we filed a proxy statement with the SEC seeking approval to conduct an
orderly liquidation of our assets.  A special meeting will be held on
July 2, 2009, and proxy materials describing the proposed liquidation plan and
the reasons therefore will be disseminated to all holders of record of our
limited liability company units as of May 6, 2009.  If the Plan and
Dissolution is approved by our members, members will no longer have the right to
have their units redeemed by us and we will no longer honor any and all
outstanding redemption requests effective as of the adoption of the Plan and
Dissolution by our members.
 
 NOTE
I — FAIR VALUE
 
 As of
March 31, 2009, financial assets and liabilities utilizing Level 1 inputs
included investment in marketable securities - related party.  We had
no assets or liabilities utilizing Level 2 inputs and assets and liabilities
utilizing Level 3 inputs included investments in real estate loans.
 
 To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment.  Accordingly, our degree of judgment exercised in
determining fair value is greatest for instruments categorized in Level
3.  In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy.  In such cases, FAS
157 requires that an asset or liability be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair
value.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 24
-
 Table of Contents
  Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure.  Therefore, even when market assumptions are
not readily available, our own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement
date.  We use prices and inputs that are current as of the measurement
date, including during periods of market dislocation, such as the recent
illiquidity in the auction rate securities market.  In periods of
market dislocation, the observability of prices and inputs may be reduced for
many instruments.  This condition may cause our financial instruments
to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
 
 FAS 157
requires that the valuation techniques used by us be consistent with at least
one of the three possible approaches: the market approach, income approach
and/or cost approach.  Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active
securities exchanges.  Our Level 2 inputs are primarily based on the
market approach of quoted prices in active markets or current transactions in
inactive markets for the same or similar collateral that do not require
significant adjustment based on unobservable inputs.  Our Level 3
inputs are primarily based on the income and cost approaches, specifically,
discounted cash flow analyses, which utilize significant inputs based on our
estimates and assumptions.
 
 The
following table presents the valuation of our financial assets and liabilities
as of March 31, 2009 measured at fair value on a recurring basis by the input
levels prescribed by FAS 157:
 
 Quoted
      Prices in Active Markets For Identical Assets (Level 1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservable Inputs (Level 3)
                    
                    
                    Balance
      at
                      3/31/2009AssetsInvestment
      in marketable securities - related party
                    
                    $
                    273,000
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    273,000Investment
      in real estate loans
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    5,981,000
                    
                    
                    $
                    5,981,000
 
 The
following table presents the changes in our financial assets and liabilities
that are measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from December 31, 2008 to March 31,
2009.  There were no liabilities measured at fair value on a recurring
basis using significant unobservable inputs as of December 31, 2008 and March
31, 2009.
 
 AssetsInvestment
      in real estate loansBalance
      on December 31, 2008
                    
                    $
                    7,863,000Change
      in temporary valuation adjustment included in net lossIncrease
      in allowance for loan losses
                    
                    
                    (184,000
                    )Change
      in impairment on restructured loans
                    
                    
                    30,000Purchase
      and additions of assetsTransfer
      of real estate loans to real estate held for sale
                    
                    
                    (2,290,000
                    )Transfer
      of allowance on real estate loans to real estate held for
    sale
                    
                    
                    883,000Sales,
      pay downs and reduction of assetsCollections
      of principal and sales of investment in real estate loans
                    
                    
                    (1,182,000
                    )Reduction
      of allowance for loan loss related to sale of investment in real estate
      loan
                    
                    
                    985,000Temporary
      change in estimated fair value based on future cash flows
                    
                    
                    (124,000
                    )Transfer
      to Level 1
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --Balance
      on March 31, 2009, net of temporary valuation adjustment
                    
                    $
                    5,981,000
 
  See
review report of Independent Registered Public Accounting Firm.
 - 25
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 Table of Contents
  NOTE
J — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In April
2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"), to address
challenges in estimating fair value when the volume and level of activity for an
asset or liability have significantly decreased.  This FSP emphasizes
that even if there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation technique(s)
used, the objective of a fair value measurement remains the
same.  Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions.  This FSP is effective for
interim and annual reporting periods ending after June 15, 2009.  We
have concluded that FSP FAS 157-4 will not have an impact on our consolidated
financial statements upon adoption.
 
 In April
2009, the FASB issued FSP FAS 115-2 and 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments" ("FSP FAS 115-2 and 124-2").  This
FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements.  This FSP does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities.  This FSP is effective for interim and annual
reporting periods ending after June 15, 2009.  We have concluded that
FSP FAS 115-2 and 124-2 will not have an impact on our disclosures upon
adoption.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosure about Fair
Value of Financial Instruments" ("FSP FAS 107-1 and APB 28-1").  This
FSP amends FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments, " to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements.  This FSP also amends APB Opinion No. 28,
"Interim Financial Reporting," to require those disclosures in summarized
financial information at interim reporting periods.  This FSP is
effective for interim reporting periods ending after June 15,
2009.  We have concluded that FSP FAS 107-1 and APB 28-1 will not have
a material impact on our consolidated financial statements upon
adoption.
 
 NOTE
K— LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and VRM II.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
 In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of our units and units in Fund II, the
predecessor to VRM II.  The Respondents consented to the entry of a
cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr.
Shustek’s suspension from association with any broker or dealer for a period of
six months, which expired in March 2007.  In addition, the Respondents
agreed to implement certain undertakings with respect to future sales of
securities.  We are not a party to the Order.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 26
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 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
United States Court of Appeals for the Ninth Circuit, which dismissal was upheld
when the United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, prior to the formation of Fund II.  On March
6, 2006, Desert Land amended the state court complaint to name VRM
I.  Desert Land alleges that one or more of the defendants have
transferred assets to other entities without receiving reasonable value
therefore; alleges plaintiffs are informed and believe that defendants have made
such transfers with the actual intent to hinder, delay or defraud Desert Land;
that such transfers made the transferor insolvent and that sometime between
February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I
for that purpose.
 
 The state
court complaint further alleges that Desert Land is entitled to void such
transfers and that pursuant to NRS 112.20, Desert Land is entitled to an
injunction to enjoin defendants from further disposition of
assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin
Group and Vestin Mortgage for any losses and expenses in connection with the
action, and Mr. Shustek has guaranteed the indemnification.  In
December 2008, this lawsuit was settled.  The settlement has no effect
on us.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and VRM II alleging that these Vestin
entities improperly influenced the former RightStar trustees to transfer trust
funds to VRM II.
 
 On May 9,
2007, VRM I, VRM II, Vestin Mortgage, the State of Hawaii and Comerica
Incorporated announced that an arrangement had been reached to auction the
RightStar assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, VRM II and Vestin Mortgage in part to fund the
trusts statutory minimum balances.  VRM I, VRM II, Vestin Mortgage,
the State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  VRM I, VRM II,
Vestin Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The final outcome of this auction cannot be determined at
this time.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The court certified a class of all former Fund I unit holders
who voted against the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The trial is currently scheduled to begin on June 19,
2009.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM II
and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund II into Vestin Realty Mortgage II,
Inc.  The court certified a class of all former Fund II unit holders
who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc.,
and a subclass of all class members who were over the age of 60 and Nevada
residents at the time of the merger.  The trial is currently scheduled
to begin on June 19, 2009.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM 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.
 - 27
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 Table of Contents
  
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages, and
rescission.  The trial is currently scheduled to begin on September 6,
2010.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM II,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 sets of plaintiffs representing approximately 138
individuals (“Plaintiffs”),in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
rescission.  The trial is currently scheduled to begin on September 6,
2010.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM II’s management
agreement and Fund II’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM II with respect to the above actions.  VRM II, Vestin Mortgage,
Inc. and Michael Shustek have entered into confidential settlement agreements
with individual plaintiffs who collectively held approximately 10% of the total
shares at issue in the action.  In addition, four individual
plaintiffs have voluntarily withdrawn their claims against us, Vestin Mortgage,
Inc. and Michael Shustek with prejudice.
 
 In
addition to the matters described above, our manager is involved in a number of
other legal proceedings concerning matters arising in connection with the
conduct of its business activities.  Our manager believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously.  Our manager believes that it is not a party to any other
pending legal or arbitration proceedings that would have a material adverse
effect on our manager’s financial condition or results of operations or cash
flows, although it is possible that the outcome of any such proceedings could
have a material impact on the manager’s net income in any particular
period.
 
 NOTE
L — LEGAL MATTERS INVOLVING THE COMPANY
 
 From time
to time, we may become involved in litigation in the ordinary course of
business.  We do not believe that any pending legal proceedings are
likely to have a material adverse effect on our financial condition or results
of operations or cash flows.  It is not possible to predict the
outcome of any such proceedings.
 
 NOTE
M — SUBSEQUENT EVENTS
 
 During
April 2009, we entered into an accounting services agreement with Strategix
Solutions, LLC, a Nevada limited liability company, to provide accounting and
financial reporting services to us, VRM I and VRM II.  The CFO and the
Controller of our manager, among others, became employees of Strategix
Solutions.  Strategix Solutions is managed by LL Bradford and Company
("LL Bradford"), a certified public accounting firm that has provided non-audit
accounting services to us.  The principal manager of LL Bradford was a
former officer of our manager from April 1999 through January 1,
2005.  Strategix Solutions is owned by certain partners of LL
Bradford, none of whom were previously officers of our manager.  The
same persons who previously provided accounting and financial reporting services
to us as employees of our manager will continue to perform such duties as
employees of Strategix Solutions.
 
 We are
raising funds through the issuance of promissory notes secured by certain of our
real estate owned properties.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 28
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 Table of Contents
  On May 7,
2009, we, VRM I and VRM II foreclosed on the WCP Warm Spring Holding 1, LLC loan
and classified the property as real estate held for sale.
 
 On May
11, 2009, we filed a proxy statement with the SEC seeking approval to conduct an
orderly liquidation of our assets.  A special meeting will be held on
July 2, 2009, and proxy materials describing the proposed liquidation plan and
the reasons therefore will be disseminated to all holders of record of our
limited liability company units as of May 6, 2009.  If the Plan and
Dissolution is approved by our members, members will no longer have the right to
have their units redeemed by us and we will no longer honor any and all
outstanding redemption requests effective as of the adoption of the Plan and
Dissolution by our members.
 
 
  See
review report of Independent Registered Public Accounting Firm.
 - 29
-
 Table of Contents
  REPORT
OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
 
 
 To the
Members of Vestin Fund III, LLC:
 
 We have
reviewed the accompanying balance sheet of Vestin Fund III, LLC as of March 31,
2009, and the related statements of operations for the three month periods ended
March 31, 2009 and 2008, statements of members’ equity and other comprehensive
loss for the three month period ended March 31, 2009 and statements of cash
flows for the three month periods ended March 31, 2009 and 2008. 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.
 
 As
discussed in Note A of the financial statements, the Company’s manager filed a
proxy statement with the Securities Exchange Commission seeking approval to
conduct an orderly liquidation of the Company’s assets.
 
 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, 2008 and the related statements of income, members’
equity and other comprehensive income (loss) and cash flows for the year then
ended (not presented herein); and in our report dated March 26, 2009, 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, 2008, 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 14,
2009
 
 
 
 
  - 30
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 Table of Contents
  ITEM
      2.
              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three months ended March 31, 2009 and
2008.  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, 2008.
 
 FORWARD-LOOKING
STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 2 Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
should be read in conjunction with the consolidated financial statements,
related notes, and other detailed information included elsewhere in this report
on Form 10-Q.  We are including this cautionary statement to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.  Statements that are not
historical fact are forward-looking statements.  Certain of these
forward-looking statements can be identified by the use of words such as
“believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,”
“estimates,” “assumes,” “may,” “should,” “will,” or other similar
expressions.  Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors, which could cause
actual results, performance or achievements to differ materially from future
results, performance or achievements.  These forward-looking
statements are based on our current beliefs, intentions and
expectations.  These statements are not guarantees or indicative of
future performance.  Important assumptions and other important factors
that could cause actual results to differ materially from those forward-looking
statements include, but are not limited to, those factors, risks and
uncertainties described in Part II Item 1A Risk Factors of this
Quarterly Report on Form 10-Q and in our other securities filings with the
Securities and Exchange Commission (“SEC”).  Our future financial
condition and results of operations, as well as any forward-looking statements,
are subject to change and involve inherent risks and
uncertainties.  Our estimates of the value of collateral securing our
loans may change, or the value of the underlying property could decline
subsequent to the date of our evaluation.  As a result, such estimates
are not guarantees of the future value of the collateral.  The
forward-looking statements contained in this report are made only as of the date
hereof.  We undertake no obligation to update or revise information
contained herein to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.
 
  - 31
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  Our
recent operating results have been adversely affected by increases in allowances
for loan losses and increases in non-performing assets.  This negative
trend accelerated sharply during the year ended December 31, 2008 and continues
to affect our operations.  As of March 31, 2009, we had eight loans
considered non-performing (i.e., based on current information and events, it is
probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement or when the payment of interest is 90
days past due).  These loans are currently carried on our books at a
value of approximately $4.0 million, net of allowance for loan losses of
approximately $3.4 million.  These loans have been placed on
non-accrual of interest status and are the subject of pending foreclosure
proceedings.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $7.3 million or
65% of our total assets as of March 31, 2009, as compared to approximately $8.2
million or 61% of our total assets as of December 31, 2008.  At March
31, 2009, non-performing assets consisted of approximately $3.3 million of real
estate held for sale and approximately $4.0 million of non-performing loans, net
of allowance for loan losses.  One of the real estate held for sale
properties generated net income from rentals totaling $6,000, during the three
months ended March 31, 2009.  See Note F – Real Estate Held for Sale and
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 We
believe that the significant increase in the level of our non-performing assets
is a direct result of the deterioration of the economy and credit
markets.  As the economy has weakened and credit has become more
difficult to obtain, many of our borrowers who develop and sell commercial real
estate projects have been unable to complete their projects, obtain takeout
financing or have been otherwise adversely impacted.  Our exposure to
the negative developments in the credit markets and general economy has likely
been increased by our business strategy, which entails more lenient underwriting
standards and expedited loan approval procedures.  Moreover, declining
real estate values in the principal markets in which we operate has in many
cases eroded the current value of the security underlying our
loans.
 
 We expect
that the weakness in the credit markets and the weakness in lending will
continue to have an adverse impact upon our markets for the foreseeable
future.  This may result in a further increase in defaults on our
loans and we might be required to record additional reserves based on decreases
in market values or we may be required to restructure loans.  This
increase in loan defaults has materially affected our operating results and led
to the suspension of distributions to our members.  For additional
information regarding our non-performing loans see “Non-Performing Loans” in
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 As of
March 31, 2009, our loan-to-value ratio was 89.15%, net of allowances for loan
losses, on a weighted average basis generally using updated
appraisals.  Additional marked increases in loan defaults accompanied
by additional declines in real estate values, as evidenced by updated appraisals
generally prepared on an “as-is-basis,” will have a material adverse effect upon
our financial condition and operating results.  The current
loan-to-value ratio is primarily a result of declining real estate values, which
have eroded the market value of our collateral.
 
 As of
March 31, 2009, we have provided a specific reserve allowance for five
non-performing loans and six performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager.  For further information regarding allowance
for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated financial statements in Part I,
Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Our
capital, subject to a 3% reserve, will constitute the bulk of the funds we have
available for investment in real estate loans.
 
 As of
March 31, 2009, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.
 
  - 32
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 Table of Contents
  On May
11, 2009, we filed a proxy statement with the SEC seeking approval to conduct an
orderly liquidation of our assets.  A special meeting will be held on
July 2, 2009, and proxy materials describing the proposed liquidation plan and
the reasons therefore will be disseminated to all holders of record of our
limited liability company units as of May 6, 2009.  If the Plan and
Dissolution is approved by our members, members will no longer have the right to
have their units redeemed by us and we will no longer honor any and all
outstanding redemption requests effective as of the adoption of the Plan and
Dissolution by our members.
 
 SUMMARY
OF FINANCIAL RESULTS
 
 Comparison
of Operating Results for the three months ended March 31, 2009 to the three
months ended March 31, 2008.
 
 For
      the Three Months
                      Ended
      March 31,2009
                    
                    
                    2008Total
      revenues
                    
                    $
                    43,000
                    
                    
                    $
                    425,000Total
      operating expenses
                    
                    
                    255,000
                    
                    
                    
                    76,000Non-operating
      income
                    
                    
                    7,000
                    
                    
                    
                    53,000Loss
      from real estate held for sale
                    
                    
                    (503,000
                    )
                    
                    
                    (617,000
                    )NET
      LOSS
                    
                    $
                    (708,000
                    )
                    
                    $
                    (215,000
                    )Net
      loss allocated to members per weighted average membership
      units
                    
                    $
                    (0.32
                    )
                    
                    $
                    (0.09
                    )Weighted
      average membership units
                    
                    
                    2,246,332
                    
                    
                    
                    2,522,875Annualized
      rate of return to members (a)
                    
                    
                    -12.67%
                    
                    
                    
                    -3.40%Cash
      distributions
                    
                    $
                    --
                    
                    
                    $
                    392,000Cash
      distributions per weighted average membership units
                    
                    $
                    --
                    
                    
                    $
                    0.16Weighted
      average term of outstanding loans
                    
                    26
      months
                    
                    
                    17
      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, 2009
      and 2008, 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 $10.09 (the cost per unit) for the three months ended
      March 31, 2009 and 2008,
respectively.
 
 Total
Revenues:  For the three months ended March 31, 2009 total
revenues were $43,000 compared to $425,000 for the same period in 2008, a
decrease of $382,000 or 90% due in significant part to the following
factors:
 
 ·
              Interest
      income from investments in real estate loans was $42,000 during the three
      months ended March 31, 2009 compared to $414,000 during the same period in
      2008.  Our revenue is dependent upon the balance of our
      investment in real estate loans and our ability to collect the interest
      earned on these loans.  As of March 31, 2009, our performing
      loans totaled approximately $2.4 million.  As of March 31, 2008,
      our performing loans totaled approximately $13.0 million.  The
      decline in interest income is largely attributable to the decrease in
      performing loans, which has reduced the amount of cash available for
      investment in new loans, and the increase of real estate owned properties
      acquired through the foreclosures of our investments in real estate
      loans.  For additional information on our loan portfolio and
      real estate held for sale, see Note D – Investment Real Estate
      Loans and Note E – Real Estate Held for
      Sale of the Notes to the Consolidated Financial Statements of this
      Quarterly Report Form 10-Q.
  - 33
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 ·
              In
      addition, during the three months ended March 31, 2009, we modified five
      loans totaling approximately $1.7 million, representing approximately
      17.7% of our portfolio’s total value, whereby the interest rate was
      reduced from 10.5% to 8% starting in January 2009.  Interest
      payments are payable monthly, ranging from 3.0% to 4.25%, beginning
      January 25, 2009, and accrued at a range of 3.75% to 5.0% payable at the
      maturity of the loan.  Deferred interest on these loans will be
      recorded as interest income as cash is collected.  There were no
      similar modifications made during the three months ended March 31,
      2008.
 
 Total Operating
Expenses:  For the three months ended March 31, 2009, total
operating expenses were approximately $255,000 compared to approximately $76,000
during the three months ended March 31, 2009, an increase of $179,000 or
236%.  Expenses were primarily affected by a provision for loan losses
of $154,000 during the three months ended March 31, 2009.  No
comparable expense was recorded during the same period in 2008.
 
 Non-operating
income:  Non-operating income consisted of bank interest
income.  During the three months ended March 31, 2008, we recorded
$24,000 in dividend income – related party.  There was no similar
income recorded during the three months ended March 31, 2009.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended March 31, 2009, total loss
from real estate held for sale was $503,000 compared to $617,000 for the three
months ended March 31, 2008.  Total loss for real estate held for sale
during the three months ended March 31, 2009 and 2008, mainly consisted of write
downs on real estate held for sale.
 
 Distributions to
Members:  The following is a schedule of distributions made to
members for the three months ended March 31, 2009 and 2008.
 
 For
      the Three Months
                            Ended
      March 31,2009
                          
                          
                          2008Distributions
      of net income available for distribution
                          
                          $
                          --
                          
                          
                          $
                          392,000Total
      distributions
                          
                          $
                          --
                          
                          
                          $
                          392,000
 
 Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in our Operating Agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to
members.  Although we generally do not plan to make distributions in
excess of net income available for distribution, we may do so from time to
time.  Any such distribution will be treated as a return of capital
for income tax purposes.  In addition, cash flows from operations,
which are the significant component of net income available for distribution,
affect the capital available for investment in new loans.  This
non-GAAP financial measure should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP or as an
alternative to cash flows from operating activities as a measure of our
liquidity.  We compensate for these limitations by relying primarily
on our GAAP results and using net income available for distribution only
supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
  - 34
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 Table of Contents
  
 For
      the Three Months
                      Ended
      March 31,2009
                    
                    
                    2008Distribution
      of net income available for distribution
                    
                    $
                    --
                    
                    
                    $
                    392,000Additions
      (reductions) to working capital
                    
                    
                    (87,000
                    )
                    
                    
                    5,000Change
      in operating assets and liabilities:Interest
      receivable
                    
                    
                    5,000
                    
                    
                    
                    118,000Accounts
      payable
                    
                    
                    (10,000
                    )
                    
                    
                    7,000Due
      to related parties
                    
                    
                    (49,000
                    )
                    
                    
                    6,000Other
      assets
                    
                    
                    (6,000
                    )
                    
                    
                    1,000Net
      cash provided (used) by operating activities
                    
                    $
                    (147,000
                    )
                    
                    $
                    529,000Net
      cash provided by investing activities
                    
                    $
                    552,000
                    
                    
                    $
                    843,000Net
      cash used by financing activities
                    
                    $
                    (1,322,000
                    )
                    
                    $
                    (2,934,000
                    )
 
 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, 2009.  Based on this review the value of members’
capital accounts was adjusted from $5.89 per unit to $5.50 per unit, as of April
1, 2009.  The periodic review of the estimated net unit value includes
an analysis of unrealized gains that our manager reasonably believes exist at
the time of the review, but that cannot be added to net asset value under
GAAP.
 
 Redemptions:  Under
our Operating Agreement, our members have limited withdrawal
rights.  The withdrawal rights are subject to various limitations set
forth in our Operating Agreement intended to protect our financial health and
our status under the Internal Revenue Code.  These limitations
provide, among other things, that withdrawals may not exceed 10% of the
aggregate Members’ capital in any calendar year and no more than $100,000 per
members’ account in any calendar year, subject to our manager’s discretion which
may be exercised in accordance to our Operating Agreement.  As of
March 31, 2009, the total redemptions made from inception were approximately
$10.4 million.  Balances in Members’ capital accounts as of January 1,
2009 were approximately $13.2 million, including deferred income of
approximately $1.0 million, which limited redemptions to approximately $1.3
million for calendar 2009.  Total redemptions during the three months
ended March 31, 2009, were approximately $1.3 million.  These
redemptions have been paid as of March 31, 2009.  For additional
information regarding members redemptions, see Note H – Members’ Equity of the Notes
to the Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 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, 2009, net cash flows used by operating
activities approximated $0.1 million.  Operating cash flows were
adversely impacted by the decrease in interest income related to the decrease in
our investments in real estate loans of approximately $9.4 million, during the
three months ended March 31, 2009 compared to the same period in
2008.  In addition, we incurred approximately $0.5 million in
write-downs on real estate held for sale and approximately $0.2 million in
provisions for loan losses, during the three months ended March 31,
2009.  These write-downs and provisions represent the decreases in the
fair value of these properties, which will affect the amount of proceeds we will
receive from future sales of these assets.  Cash flows related to
investing activities consisted of cash provided by loan payoffs and sales of
real estate loans of approximately $0.6 million.  Cash flows used for
financing activities consisted of cash used for members’ redemptions of
approximately $1.3 million.
  - 35
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 At March
31, 2009, we had approximately $0.6 million in cash, $0.3 million in marketable
securities – related party and approximately $11.3 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales, sales of real estate held
for sale and/or borrowings.  We believe we have sufficient working
capital to meet our operating needs in the near term.  In addition to
the foregoing assets, as of March 31, 2009, 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.  The requirement for the deposit expires at the end of the lease
on August 31, 2014.  Vestin Group is currently engaged in a dispute
with the Purchaser and has not paid certain amounts allegedly due under its
lease totaling approximately $0.5 million, as of May 1, 2009.  Vestin
Group has provided us with a written agreement to fully indemnify and hold us
harmless in the event that the Purchaser draws upon the letter of credit and we
incur an obligation to reimburse the bank which issued the letter of
credit.
 
 We rely
primarily upon repayment of outstanding loans and proceeds from sales of real
estate held for sale to provide capital for investment in new
loans.  The significant level of defaults on outstanding loans has
reduced the funds we have available for investment in new
loans.  Resulting foreclosure proceedings may not generate full
repayment of our loans and may result in significant delays in the return of
invested funds.  This has diminished our capital resources and
impaired our ability to invest in new loans.
 
 Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale totaling approximately $4.0 million and $3.3
million, respectively, as of March 31, 2009, compared to approximately $5.5
million and $2.7 million, respectively, as of December 31, 2008.  It
is possible that no earnings will be recognized from these assets until they are
disposed of, or that no earnings will be recognized at all, and the time it will
take to dispose of these assets cannot be predicted.  Our manager
believes that these non-performing assets have increased in significant part as
a result of conditions in the real estate and credit markets.  We
believe that the continued weakness in real estate markets may result in
additional losses on our real estate held for sale.
 
 As a
commercial real estate lender willing to invest in riskier loans, rates of
delinquencies, foreclosures and losses on our loans could be higher than those
generally experienced in the commercial mortgage lending industry during periods
of economic slowdown or recession.  Problems in the sub-prime
residential mortgage market have adversely affected the general economy and the
availability of funds for commercial real estate developers.  We
believe this lack of available funds has led to an increase in defaults on our
loans.  Furthermore, problems experienced in U.S. credit markets since
the summer of 2007 have reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary in many cases to pay
back our loans.  Thus, we have had to work with some of our borrowers
to either modify, restructure and/or extend their loans in order to keep or
restore the loans to performing status.  Our manager will continue to
evaluate our loan portfolio in order to minimize risk associated with current
market conditions.
 
 We have
no current plans to sell any new 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, 2009, the total redemptions made from inception were approximately
$10.4 million.  Balances in Members’ capital accounts as of January 1,
2009 were approximately $13.2 million, including deferred income of
approximately $1.0 million, which limited redemptions to approximately $1.3
million for calendar 2009.  Total redemptions during the three months
ended March 31, 2009, were approximately $1.3 million.  For additional
information regarding members redemptions, see Note H – Members’ Equity of the Notes
to the Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
  - 36
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  We are
considering various options to enhance the company’s capital
resources.  We are raising funds through the issuance of promissory
notes secured by certain of our real estate owned properties.
 
 We have
no current plans, other than stated above, 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.  Given the state of our loan portfolio and current
conditions in the credit markets, we believe it would be very difficult for us
to expand our capital resources through borrowings or securitization
arrangements.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 6 % to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 15 real estate loans, as of
March 31, 2009, with a balance of approximately $9.9 million as compared to
investments in 18 real estate loans, as of December 31, 2008, with a balance of
approximately $13.3 million.
 
 As of
March 31, 2009, we had eight loans considered non-performing (i.e., based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due).  These loans are
currently carried on our books at a value of approximately $4.0 million, net of
allowance for loan losses of approximately $3.4 million, which does not include
the allowances of approximately $0.4 million relating to the decrease in the
property value for performing loans as of March 31, 2009.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and, based on current estimates, believes that the value of the underlying
collateral is sufficient to protect us from loss of
principal.  However, such estimates may change, or the value of the
underlying collateral may deteriorate, in which case further losses may be
incurred.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of March 31, 2009, we have
provided a specific reserve related to five non-performing loans and six
performing loans, based on updated appraisals and evaluation of the borrower
obtained by our manager.  Our manager evaluated these loans and
concluded that the remaining underlying collateral was sufficient to protect us
against further losses of principal or interest.  Our manager will
continue to evaluate these loans in order to determine if any other allowance
for loan losses should be recorded.
 
 During
the three months ended March 31, 2009, we foreclosed upon two properties,
totaling approximately $1.4 million, and classified them are real estate held
for sale.  For additional information on our investments in real
estate loans, refer to Note D – Investments In Real Estate
Loans and Note F – Real
Estate Held for Sale of the Notes to the Consolidated Financial
Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on 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
non-performing.  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:
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 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the real
      estate loan amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses.  For additional information regarding
the roll-forward of the allowance for loan losses for the three months ended
March 31, 2009, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item I Consolidated
FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Investments
in Real Estate Held for Sale
 
 At March
31, 2009, we held nine properties with a total carrying value of approximately
$3.3 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 taking into account current
economic conditions.  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 I
Consolidated FinancialStatements of this Quarterly Report on 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, 2009, we had no contractual obligations nor do we have any interests
in non-exchange traded commodity contracts.
 
 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.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financial statements in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
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  CRITICAL
ACCOUNTING ESTIMATES
 
 Revenue
Recognition
 
 Interest
income on loans is accrued by the effective interest method.  We do
not accrue interest income from loans once they are determined to be
non-performing.  A loan is considered non-performing when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at March 31, 2009, 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
                    
                    $
                    162,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
                    
                    $
                    808,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
                    
                    $
                    (162,000
                    )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
                    
                    $
                    (808,000
                    )
 
 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
financial statements.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment in our investment in real estate loans
portfolio.  Our manager’s estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrower’s ability to repay, prevailing
economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Subsequent recoveries of amounts previously charged off are
added back to the allowance or included as income.
 
 The
following table presents a sensitivity analysis to show the impact on our
financial condition at March 31, 2009, 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
                    
                    $
                    99,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
                    
                    $
                    494,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
                    
                    $
                    (99,000
                    )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
                    
                    $
                    (494,000
                    )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
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 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.
 
 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, subject to
current economic conditions.  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 DISCLOSURESABOUT 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.
 
  - 40
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  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, 2009, our aggregate investment in real
estate loans was approximately $6.1 million, net of allowance of approximately
$3.8 million, with a weighted average effective interest rate of
10.9%.  The weighted average interest rate of 10.9% is based on the
contractual terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of March 31, 2009, was 9.07%.  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, 2009, was 26 months.  All of
the outstanding real estate loans at March 31, 2009, were fixed rate
loans.  All of the real estate loans are held for investment purposes;
none are held for sale.  We intend to hold such real estate loans to
maturity.  As of March 31, 2009, none of our loans had a prepayment
penalty, although 11 of our loans, totaling approximately $5.9 million, had an
exit fee.  Out of the 11 loans with an exit fee, 5 loans, totaling
approximately $3.9 million, were considered non-performing as of March 31,
2009.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
dividend distribution to stockholders.  On the other hand, a
significant increase in interest rates could result in a slowdown in real estate
development activity that would reduce the demand for commercial real estate
loans.  As a result, we might encounter greater difficulty in
identifying appropriate borrowers.  We are not in a position to
quantify the potential impact on our operating results from a material change in
interest rates.
 
 The
following table contains information about the investment of real estate loans
in our portfolio as of March 31, 2009.  The presentation aggregates
the investment in real estate loans by their maturity dates for maturities
occurring in each of the years 2009 through 2013 and thereafter and separately
aggregates the information for all maturities arising after 2013.  The
carrying values of these assets approximate their fair value as of March 31,
2009.
 
 Interest
      Earning Assets
                    Aggregated
      by Maturity at March 31, 2009Interest
      Earning Assets
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  Thereafter
                  
                  
                  Total(a)Investments
      In Real Estate Loans
                  
                  $
                  7,931,000
                  
                  
                  $
                  318,000
                  
                  
                  $
                  1,621,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  9,870,000Weighted
      Average Interest Rates
                  
                  
                  11.43%
                  
                  
                  
                  12.40%
                  
                  
                  
                  8.00%
                  
                  
                  
                  --%
                  
                  
                  
                  --%
                  
                  
                  
                  --%
                  
                  
                  
                  10.90%
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to March 31,
2009.
 
 At March
31, 2009, we also had approximately $0.8 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.
 
  - 41
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  ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our manager, including our manager’s Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely
decisions regarding required financial disclosure.  In connection with
the preparation of this Report on Form 10-Q, our manager carried out an
evaluation, under the supervision and with the participation of our manager’s
CEO and CFO, as of March 31, 2009, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) under the Exchange Act.  Based upon our manager’s
evaluation, our manager’s CEO and CFO concluded that, as of March 31, 2009, our
disclosure controls and procedures are designed at a reasonable assurance level
and are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our manager’s CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure.
 
 Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been or will be detected.  Even effective internal control over
financial reporting can only provide reasonable assurance with respect to
financial statement preparation.  Furthermore, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.  Our manager, including our manager’s CEO and CFO,
does not expect that our controls and procedures will prevent all
errors.
 
 The
certifications of the our manager’s CEO and CFO required under Section 302 of
the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this
report.
 
 Changes in Internal Control
Over Financial Reporting
 
 As
required by Rule 13a-15(d) under the Exchange Act, our management, including our
CEO and our CFO, has evaluated our internal control over financial reporting to
determine whether any changes occurred during the first fiscal quarter of 2009
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
2009.
 
 During
April 2009, we entered into an accounting services agreement with Strategix
Solutions, LLC, a Nevada limited liability company, for the provision of
accounting and financial reporting services to us, VRM I and VRM
II.  The CFO and the Controller of our manager became employees of
Strategix Solutions.  Strategix Solutions is managed by LL Bradford
and Company ("LL Bradford"), a certified public accounting firm that has
provided non-audit accounting services to us.  The principal manager
of LL Bradford was a former officer of our manager from April 1999 through
January 1, 2005.  Strategix Solutions is owned by certain partners of
LL Bradford, none of whom were previously officers of our
manager.  The same persons who previously provided accounting and
financial reporting services to us as employees of our manager, will continue to
perform such duties as employees of Strategix Solutions.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
 
 Not
applicable.
 
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  PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note K – Legal Matters Involving the Manager and Note L – Legal Matters
Involving the Company in Part I, Item 1 Financial Statements of this Form 10-Q
for information regarding our legal proceedings, which are incorporated herein
by reference.
 
 ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and members’
distributions.  Current economic conditions increase the risk of
defaults on our loans.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.
 
 As of
March 31, 2009, our non-performing assets were approximately $7.3 million,
representing approximately 73% of our members’ equity.  Non-performing
assets included approximately $4.0 million in non-performing loans, net of
allowance for non-performing loan losses of approximately $3.4 million, and
approximately $3.3 million of real estate held for sale.  We believe
that the level of non-performing assets is largely attributable to difficulties
in the real estate and credit markets.  Our exposure to the negative
developments in the credit markets and general economy has likely been increased
by our business strategy, which entails more lenient underwriting standards and
expedited loan approval procedures.  At this time, we are not able to
predict how long such difficult economic conditions will continue.  At
this time, we are not able to predict how long such difficult economic
conditions will continue.
 
 As of
March 31, 2009 and December 31, 2008, we had approximately $3.8 million and $5.4
million in allowances for loan losses, respectively, resulting in net weighted
average loan-to-value ratios of 87.92% and 96.60%, respectively.  Not
including allowance for loan losses, our weighted average loan-to-value ratio,
as of March 31, 2009 and December 31, 2008, was 151.40%, and 212.43%,
respectively, primarily as a result of declining real estate values that have
eroded the market value of our collateral.  As a result, we may not be
able to recover the full amount of our loans if the borrower
defaults.  Moreover, any failure of a borrower to pay interest on
loans will reduce our revenues, the distributions we pay to members and, most
likely, the value of our 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.
 
 The
current recession and constraints in the credit markets are adversely affecting
our operating results and financial condition.
 
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  As a
commercial real estate lender willing to invest in riskier loans, rates of
delinquencies, foreclosures and losses on our loans could be higher than those
generally experienced in the commercial mortgage lending industry during periods
of economic slowdown or recession.  Problems in the sub-prime
residential mortgage market have adversely affected the general economy and the
availability of funds for commercial real estate developers.  We
believe this lack of available funds has led to an increase in defaults on our
loans.  Furthermore, problems experienced in U.S. credit markets since
the summer of 2007 have reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary in many cases to pay
back our loans.  Thus, an extended period of illiquidity in the credit
markets has resulted in a material increase in the number of our loans that are
not paid back on time.  A continuation of increased delinquencies,
defaults or foreclosures will have an adverse affect upon our ability to
originate, purchase and securitize loans, which could significantly harm our
business, financial condition, liquidity and results of operations.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.  This may lead to an
increase in non-performing assets in our loan portfolio and create additional
risks of return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.  We
are currently experiencing a trend of declining real estate values which
increases the risk that our collateral will prove insufficient to protect our
loans.
 
 We depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.  Since the summer of 2007, there has been
a significant decline in real estate values in many of the markets where we
operate, resulting in a decline in the estimated value of the real estate
securing our loans.
 
 In
addition, most of the appraisals are prepared on an as-if developed basis, which
approximates the post-construction value of the collateralized property assuming
such property is developed.  As-if developed values on raw land loans
or acquisition and development loans often dramatically exceed the immediate
sales value and may include anticipated zoning changes and successful
development by the purchaser upon which development is dependent on availability
of financing.  As most of the appraisals will be prepared on an as-if
developed basis, if the loan goes into default prior to completion of the
project, the market value of the property may be substantially less than the
appraised value.  As a result, there may be less security than
anticipated at the time the loan was originally made.  If there is
less security and a default occurs, we may not recover the full amount of our
loan, thus reducing the amount of funds available to distribute.
 
 As
a result of our small size, we are not able to build a diversified loan
portfolio, thereby increasing our risk that defaults on one or more loans could
have a material adverse effect upon our operating results.
 
  - 44
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  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, 2009, we had approximately $10.1
million in members’ equity and $6.1 million in outstanding loans, net of
allowance of approximately $3.8 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.  For additional information about concentrations of
credit risk, see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Financial Statements
included in Part I, Item I FinancialStatements of this
Quarterly Report on Form 10-Q.
 
 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, 2009, 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.
 
 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 second 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,
2009, approximately 9.98% of our loans were secured by second deeds of
trust.  Subsequent decreases in the value of loans secured by first
deeds of trust, due to sales and foreclosures, may result in an increase in the
percentage of our portfolio secured by second deeds of trust.
 
 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.
 
  - 45
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  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.
 
 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.
 
  - 46
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  We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  If we foreclose on
the security property, we expect to obtain the services of a real estate broker
and pay the broker’s commission in connection with the sale of the
property.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.  See Note F – Real Estate Held for Sale in
the notes to the financial statement under Part I, Item I FinancialStatements of this
Quarterly Report on Form 10-Q.
 
 Under
applicable environmental laws, any owner of real property may be fully liable
for the costs involved in cleaning up any contamination by materials hazardous
to the environment.  Even though we might be entitled to
indemnification from the person that caused the contamination, there is no
assurance that the responsible person would be able to indemnify us to the full
extent of our liability.  Furthermore, we would still have court and
administrative expenses for which we may not be entitled to
indemnification.
 
 Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 Our
results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets.  If the economy is
healthy, we expect that more people will be borrowing money to acquire, develop
or renovate real property.  However, if the economy grows too fast,
interest rates may increase too much and the cost of borrowing may become too
expensive.  Alternatively, if the economy enters a recession, real
estate development may slow.  A slowdown in real estate lending may
mean we will have fewer loans to acquire, thus reducing our revenues and
distributions to our members.  As a result of the current economic
recession, our revenues and distributions have been reduced.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 ·
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and 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, 2009,
      none of our loans had a prepayment penalty, although 11 of our loans,
      totaling approximately $5.9 million, had an exit fee.  Out of
      the 11 loans with an exit fee, 5 loans, totaling approximately $3.9
      million, were considered non-performing as of March 31,
      2009  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.
 
 Investment
in large loans may reduce our ability to diversify our loan
portfolio.
 
 We
generally seek to diversify our loan portfolio by not investing more than 5% of
our capital in any single loan.  However, subject to complying with
NASAA Guidelines, we may invest a higher percentage of our capital in a single
loan based upon our evaluation of the adequacy of the collateral and the overall
mix of our loan portfolio.  These larger loans have greater risk
because they may reduce our ability to diversify our loan
portfolio.  As of March 31, 2009, our largest loan, which was
considered non-performing, comprised approximately 15% of our total loan
portfolio.
 
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  Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
March 31, 2009, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas, with approximately 45% of our loans in
Nevada.  Our manager has limited experience outside of the Western and
Southwestern United States.  Real estate markets vary greatly from
location to location and the rights of secured real estate lenders vary
considerably from state to state.
 
 Our
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 certain of the NASAA Guidelines promulgated by the
state securities administrators.  The NASAA Guidelines govern, among
other things, our debt to equity ratio and the diversity and composition of our
investments.  For example, the NASAA Guidelines provide that we may
not invest in or make real estate loans to or from any one borrower that would
exceed, in the aggregate, an amount greater than 20% of the capital
contributions that we have raised.  Additionally, the NASAA Guidelines
require reserves of not less than 1% of the offering proceeds.  The
NASAA Guidelines are intended to protect the interests of
investors.  However, our flexibility in making business decisions may
be limited by our obligation to comply with the NASAA Guidelines.
 
 We
may have a lack of control over participations.
 
 We will
consider investing in or purchasing loans jointly with other lenders and
purchasers, some of whom might be affiliates of Vestin Mortgage.  We
will initially have, and will maintain a controlling interest as lead lender in
participations with non-affiliates.  Although it is not our intention
to lose control, there is a risk that we will be unable to remain as the lead
lender in the loans in which we participate in the future.  In the
event of participation with a publicly registered affiliate, the investment
objectives of the participants shall be substantially
identical.  There shall be no duplicate fees.  The
compensation to the sponsors must be substantially identical, and the investment
of each participant must be on substantially the same terms and
conditions.
 
 Each
participant shall have a right of first refusal to buy the other's interest if
the co-participant decides to sell its interest.  We will not
participate in joint ventures or partnerships with affiliates that are not
publicly registered except as permitted in the NASAA Guidelines.  If
our co-participant affiliate determines to sell its interest in the loan, there
is no guarantee that we will have the resources to purchase such interest and we
will have no control over a sale to a third party purchaser.
 
 MANAGEMENT
AND CONFLICTS OF INTEREST RISKS
 
 We
rely on our manager to manage our day-to-day operations and select our loans for
investment.
 
 Our
ability to achieve our investment objectives and to make distributions depends
upon our manager’s and its affiliate’s performance in obtaining, processing,
making and brokering loans for us to invest in and determining the financing
arrangements for borrowers.  Members have no opportunity to evaluate
the financial information or creditworthiness of borrowers, the terms of
mortgages, the real property that is our collateral or other economic or
financial data concerning our loans.  Our manager’s duties to our
members are generally governed by the terms of our Operating Agreement, rather
than by common law principles of fiduciary duty.  Moreover, our
manager is not required to devote its employees’ full time to our business and
may devote time to business interests competitive to our business.
 
 Our
manager’s lack of experience with certain real estate markets could impact its
ability to make prudent investments on our behalf.
 
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  As of
March 31, 2009, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.  Depending on the market and on
our company’s performance, we may expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southwestern United States.  Real estate markets vary
greatly from location to location and the rights of secured real estate lenders
vary considerably from state to state.  Our manager’s limited
experience in most U.S. real estate markets may impact its ability to make
prudent investment decisions on our behalf.  Accordingly, where our
manager deems it necessary, it plans to utilize independent real estate advisors
and local legal counsel located in markets where it lacks experience for
consultation prior to making investment decisions.  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 certain key personnel, 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) and Daniel B. Stubbs (Senior Vice President,
Underwriting).  Both Mr. Shustek and Mr. Stubbs have extensive
experience in our line of business, extensive market contacts and familiarity
with our company.  We also rely upon Rocio Revollo who functions as
the equivalent of our Chief Financial Officer and who has extensive familiarity
with the company and our accounting systems.  Ms. Revollo’s services
are furnished to us pursuant to an accounting services agreement entered into by
our manager and Strategix Solutions, LLC.  If Mr. Shustek or Mr.
Stubbs were to cease their employment with our manager, or if Ms. Revollo’s
services were no longer available through Stratgix Solutions, they might be
difficult to replace and 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.  Strategix Solutions has
the right to terminate its agreement with our manager on 90 days
notice.  Ms. Revollo does not have an employment agreement with
Strategix Solutions.  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.  We do not have an independent board of directors to
review and approve any proposed indemnification of our manager pursuant to the
Operating Agreement.
 
 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.
 
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  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 $1.7 million
and $0.2 million, respectively, in fees directly from borrowers for the three
months ended March 31, 2009.  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 4% of the assets
managed by Vestin Mortgage as of March 31, 2009.
 
 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.
 
 We
might incur losses if our manager’s parent defaults on a lease obligation,
thereby triggering certain obligations under an outstanding letter of
credit.
 
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  Vestin
Group, the parent of our manager, was previously our tenant in building we owned
in Las Vegas, Nevada.  In connection with the sale of such building,
we arranged for a $985,000 letter of credit in favor of the purchaser of the
building (the “Purchaser”), which may be drawn upon by the Purchaser should
Vestin Group default on its lease obligations.  Vestin Group is
currently engaged in a dispute with the Purchaser and has not paid certain
amounts allegedly due under its lease totaling approximately $0.5 million, as of
May 1, 2009.  Vestin Group has provided us with a written agreement to
fully indemnify and hold us harmless in the event that the Purchaser draws upon
the letter of credit and we incur an obligation to reimburse the bank which
issued the letter of credit.  Nonetheless, a continuation of the
dispute between Vestin Group and the Purchaser could result in our suffering
losses which may not be immediately or fully reimbursed.
 
 INVESTMENT
RISKS
 
 Units
lack liquidity and marketability.
 
 There is
no public trading market for units, and members cannot freely sell or transfer
units or use them as collateral for a loan.  Currently, we do not
intend to list the units on any national exchange or on Nasdaq.  Our
Operating Agreement restricts the transfer of units so that we may avoid being
classified as a “publicly traded partnership” under Section 7704 of the Internal
Revenue Code.  If we were classified as a publicly traded partnership
taxable as a corporation, the taxable income derived from our operations would
be subject to the double tax system applicable to corporations and shareholders
for federal income tax purposes (i.e., the taxable income would be subject to
tax at the entity level at regular corporate tax rates and members would be
subject to tax at distribution or capital gain rates on our share of our taxable
income to the extent we distribute).  As a result of this entity level
tax, cash available for distribution to unit holders would be significantly
reduced which in turn would result in a significant reduction in the value of
members’ units.  In order to attempt to avoid these adverse income tax
consequences, members may not sell or assign their units and will not be
entitled to have their units redeemed without the consent of our
manager.  Our manager will withhold its consent to any sale,
assignment or redemption of units to the extent our manager believes such action
is necessary to prohibit transfers that could cause us to be classified as a
publicly traded partnership.  Further, the resale of units may be
restricted by state securities laws.
 
 Members have limited ability to have
units redeemed.
 
 Members
have limited withdrawal rights.  Requests by members for withdrawal
are honored in the order in which they are received by the
manager.  The significant limitations on our members’ withdrawal
rights are the following:
 
 ·
              There
      is no reserve fund for redemptions.
 
 ·
              Payments
      for withdrawn units are made only to the extent we have available cash
      from proceeds of repayments of principal on real estate loans and capital
      contributions; and the redemption would not impair the capital or
      operation of the Fund.  Accordingly, a significant amount of
      withdrawal requests may delay the payment of subsequent
      redemptions.
 
 ·
              The
      total amount withdrawn by all members during any calendar year cannot
      exceed 10% of the amount of capital accounts of all the members with a
      yearly limit of $100,000 per member, subject to the manager’s discretion
      to allow a greater amount.
 
 ·
              We
      will only redeem withdrawn units once a quarter, subject to limitations in
      our Operating Agreement.
 
 Because a
substantial portion of our loans are made on an “interest only” basis, we will
not receive proceeds from the repayment of principal as frequently as we would
with loans where the principal is repaid in periodic installments.  To
help permit withdrawals, we will not refinance or invest in new loans using
payments of loan principal by borrowers or new invested capital of members
unless we have sufficient funds to cover permitted withdrawals.  For
additional information regarding members redemptions, see Note H – Members’ Equity of the Notes
to the Financial Statements included in Part I, Item I FinancialStatements of this
Quarterly Report on Form 10-Q.
 
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  ITEM
      2.
              UNREGISTERED
      SALES OF EQUITYAND USE OF
  PROCEEDS
 
 Market
Information
 
 There is
no established public trading market for the trading of units.
 
 Holders
 
 As of May
1, 2009, approximately 504 unit holders held 2,024,424 units in the
Company.
 
 Distribution
Policy
 
 We
generally distribute to unit holders on a monthly basis most of our Net Income
Available for Distribution (as defined in our Operating
Agreement).  Net Income Available for Distribution is based upon cash
flow from operations, less certain reserves, and may exceed net income as
calculated in accordance with accounting principles generally accepted in the
United States (“GAAP”).  Our Operating Agreement also permits
distributions of capital.  On August 27, 2008, we suspended payment of
distributions as a result of our current losses. We made no distributions during
the three months ended March 31, 2009.
 
 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
      2009
                        
                        
                        --
                        
                        
                        
                        --
                        
                        None
                        
                        NoneFebruary
      2009
                        
                        
                        --
                        
                        
                        
                        --
                        
                        None
                        
                        NoneMarch
      2009
                        
                        
                        --
                        
                        
                        
                        --
                        
                        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, 2009 were approximately $13.2 million, including deferred
      income of approximately $1.0 million, which limited redemptions to
      approximately $1.3 million for calendar 2009.  These redemptions
      have been paid as of March 31, 2009.  For additional information
      regarding members redemptions, see Note H – Members’ Equity of the
      Notes to the Financial Statements included in Part I, Item I FinancialStatements of
      this Quarterly Report on Form 10-Q.
 
 ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
 
 None.
 
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  ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
    HOLDERS
 
 On May
11, 2009, we filed a proxy statement with the SEC seeking approval to conduct an
orderly liquidation of our assets.  A special meeting will be held on
July 2, 2009, and proxy materials describing the proposed liquidation plan and
the reasons therefore will be disseminated to all holders of record of our
limited liability company units as of May 6, 2009.  If the Plan and
Dissolution is approved by our members, members will no longer have the right to
have their units redeemed by us and we will no longer honor any and all
outstanding redemption requests effective as of the adoption of the Plan and
Dissolution by our members.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 None.
 
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 ITEM
      6.
              EXHIBITS
 
 EXHIBIT
INDEX
 
 
 
 Exhibit
      No.
              
              Description
      of Exhibits3.1(1)
              
              Articles
      of Organization3.2(2)
              
              Certificate
      of Amendment to Articles of Organization3.3(3)
              
              Amended
      and Restated Operating Agreement (included as Exhibit A to the
      prospectus)4.4(4)
              
              Distribution
      Reinvestment Plan10.9(6)
              
              Office
      lease agreement dated March 31, 2003 by and between Luke Properties, LLC
      and Vestin Group, Inc.10.10(7)
              
              Indemnification
      agreement dated March 25, 2009 by and between Vestin Group, Inc. and
      Vestin Fund III, LLC10.11
              
              Agreement between Strategix Solutions, LLC and
      Vestin Fund III, LLC for accounting services.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-K for the year
      ended December 31, 2008 filed on March 27, 2009, File No.
      000-51301
 
 
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 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Fund III, LLCBy:
              
              Vestin
      Mortgage, Inc., its sole ManagerBy:
              
              /s/
      Michael V. ShustekMichael
      V. ShustekChief
      Executive Officer and Sole Director of the Manager(Principal
      Executive Officer of Manager)By:
              
              /s/
      Rocio RevolloRocio
      RevolloChief
      Financial Officer of the Manager(Principal
      Financial and Accounting Officer of the
Manager)
 
 Date:  May
14, 2009
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