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: 333-125121
 
 VESTIN
      REALTY MORTGAGE II, INC.(Exact
      name of registrant as specified in its
charter)
 
 
 MARYLAND
              
              61-1502451(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
 
 6149
SOUTH RAINBOW BOULEVARD, LAS VEGAS, NEVADA 89118
 (Address
of Principal Executive Offices)(Zip
Code)
 
 Registrant’s
Telephone Number: 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
4, 2009, there were 13,785,040 shares of the Company’s Common Stock
outstanding.
 
  
  TABLE
OF CONTENTS
 
 PagePart I
              FINANCIAL INFORMATIONItem 1.
              Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2009
      (unaudited) and December 31, 2008
              1Consolidated Statements of Operations (unaudited) for the
      Three Months Ended March 31, 2009 and 2008
              2Consolidated Statements of Equity and Other Comprehensive
      Loss (unaudited) for the Three Months Ended March 31,
    2009
              3Consolidated Statements of Cash Flows (unaudited) for the
      Three Months Ended March 31, 2009 and 2008
              4Notes to Consolidated Financial Statements
      (unaudited)
              6Report of Independent Registered Public Accounting
      Firm
              41Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              42Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              53Item 4.
              Controls and Procedures
              53Item 4T
              Controls and Procedures
              54Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              54Item 1A.
              Risk Factors
              55Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              68Item 3.
              Defaults Upon Senior Securities
              68Item 4.
              Submission of Matters to a Vote of Security
      Holders
              68Item 5.
              Other Information
              68Item 6.
              Exhibits
              69SIGNATURES
              70Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              CONSOLIDATEDFINANCIAL
STATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSMarch
      31, 2009
                      
                      
                      December
      31, 2008(Unaudited)AssetsCash
                      
                      $
                      6,664,000
                      
                      
                      $
                      8,026,000Cash
      - restricted
                      
                      
                      5,000,000
                      
                      
                      
                      5,000,000Investment
      in marketable securities - related party
                      
                      
                      427,000
                      
                      
                      
                      496,000Interest
      and other receivables, net of allowance of $482,000 at March 31, 2009 and
      $593,000 at December 31, 2008
                      
                      
                      1,329,000
                      
                      
                      
                      1,345,000Notes
      receivable, net of allowance of $2,340,000 at March 31, 2009 and
      $2,340,000 at December 31, 2008
                      
                      
                      --
                      
                      
                      
                      --Real
      estate held for sale
                      
                      
                      32,092,000
                      
                      
                      
                      24,433,000Investment
      in real estate loans, net of allowance for loan losses of $51,332,000 at
      March 31, 2009 and $78,208,000 at December 31, 2008
                      
                      
                      138,087,000
                      
                      
                      
                      146,834,000Due
      from related parties
                      
                      
                      255,000
                      
                      
                      
                      --Investment
      in equity affiliate
                      
                      
                      100,000
                      
                      
                      
                      100,000Assets
      under secured borrowings
                      
                      
                      10,600,000
                      
                      
                      
                      10,600,000Deferred
      financing costs
                      
                      
                      2,358,000
                      
                      
                      
                      2,504,000Other
      assets
                      
                      
                      341,000
                      
                      
                      
                      144,000Total
      assets
                      
                      $
                      197,253,000
                      
                      
                      $
                      199,482,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
                      
                      $
                      3,989,000
                      
                      
                      $
                      2,154,000Due
      to related parties
                      
                      
                      --
                      
                      
                      
                      522,000Secured
      borrowings
                      
                      
                      9,907,000
                      
                      
                      
                      9,907,000Junior
      subordinated notes payable
                      
                      
                      56,350,000
                      
                      
                      
                      56,350,000Note
      payable
                      
                      
                      3,000,000
                      
                      
                      
                      24,000Total
      liabilities
                      
                      
                      73,246,000
                      
                      
                      
                      68,957,000Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
                      
                      
                      --
                      
                      
                      
                      --Treasury
      stock, at cost 1,212,323 shares at March 31, 2009 and 1,198,573 at
      December 31, 2008
                      
                      
                      (5,734,000
                      )
                      
                      
                      (5,692,000
                      )Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 14,997,363 shares
      issued and 13,785,040 outstanding at March 31, 2009 and 14,997,363 shares
      issued and 13,798,790 outstanding at December 31, 2008
                      
                      
                      1,000
                      
                      
                      
                      1,000Additional
      paid in capital
                      
                      
                      278,550,000
                      
                      
                      
                      278,550,000Accumulated
      deficit
                      
                      
                      (148,034,000
                      )
                      
                      
                      (141,627,000
                      )Accumulated
      other comprehensive loss
                      
                      
                      (776,000
                      )
                      
                      
                      (707,000
                      )Total
      stockholders' equity
                      
                      
                      124,007,000
                      
                      
                      
                      130,525,000Total
      liabilities and stockholders' equity
                      
                      $
                      197,253,000
                      
                      
                      $
                      199,482,000
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 1
-
    VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(UNAUDITED)For
      The Three
                            Months
      Ended3/31/2009
                          
                          
                          3/31/2008RevenuesInterest
      income from investment in real estate loans
                          
                          $
                          2,135,000
                          
                          
                          $
                          7,087,000Other
      income
                          
                          
                          13,000
                          
                          
                          
                          69,000Total
      revenues
                          
                          
                          2,148,000
                          
                          
                          
                          7,156,000Operating
      expensesManagement
      fees - related party
                          
                          
                          274,000
                          
                          
                          
                          274,000Provision
      for loan loss
                          
                          
                          1,274,000
                          
                          
                          
                          --Interest
      expense
                          
                          
                          1,649,000
                          
                          
                          
                          1,359,000Professional
      fees
                          
                          
                          2,055,000
                          
                          
                          
                          193,000Professional
      fees - related party
                          
                          
                          133,000
                          
                          
                          
                          27,000Provision
      for doubtful accounts related to receivable
                          
                          
                          53,000
                          
                          
                          
                          --Other
                          
                          
                          375,000
                          
                          
                          
                          250,000Total
      operating expenses
                          
                          
                          5,813,000
                          
                          
                          
                          2,103,000Income
      (loss) from operations
                          
                          
                          (3,665,000
                          )
                          
                          
                          5,053,000Non-operating
      income (loss)Dividend
      income - related party
                          
                          
                          --
                          
                          
                          
                          44,000Interest
      income from banking institutions
                          
                          
                          19,000
                          
                          
                          
                          141,000Settlement
      expense
                          
                          
                          (76,000
                          )
                          
                          
                          --Total
      other non-operating income (loss)
                          
                          
                          (57,000
                          )
                          
                          
                          185,000Loss
      from real estate held for saleRevenue
      related to real estate held for sale
                          
                          
                          51,000
                          
                          
                          
                          --Expenses
      related to real estate held for sale
                          
                          
                          (258,000
                          )
                          
                          
                          (173,000
                          )Write
      downs on real estate held for sale
                          
                          
                          (2,478,000
                          )
                          
                          
                          (1,792,000
                          )Total
      loss from real estate held for sale
                          
                          
                          (2,685,000
                          )
                          
                          
                          (1,965,000
                          )Income
      (loss) before provision for income taxes
                          
                          
                          (6,407,000
                          )
                          
                          
                          3,273,000Provision
      for income taxes
                          
                          
                          --
                          
                          
                          
                          --NET
      INCOME (LOSS)
                          
                          $
                          (6,407,000
                          )
                          
                          $
                          3,273,000Basic
      and diluted earnings (loss) per weighted average common
                          
                          $
                          (0.46
                          )
                          
                          $
                          0.22Dividends
      declared per common share
                          
                          $
                          --
                          
                          
                          $
                          0.32Weighted
      average common shares
                          
                          
                          13,788,859
                          
                          
                          
                          14,872,330
   See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 2
-
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSSFOR
      THE THREE MONTHS ENDED MARCH 31, 2009(UNAUDITED)Treasury
      Stock
                    
                    
                    Common
      StockNumber
      of Shares
                    
                    
                    Amount
                    
                    
                    Number
      of Shares
                    
                    
                    Amount
                    
                    
                    Additional
      Paid-in-Capital
                    
                    
                    Accumulated
      deficit
                    
                    
                    Accumulated
      Other Comprehensive Loss
                    
                    
                    TotalStockholders'
      Equity at
                      December
      31, 2008
                    
                    
                    1,198,573
                    
                    
                    $
                    (5,692,000
                    )
                    
                    
                    13,798,790
                    
                    
                    $
                    1,000
                    
                    
                    $
                    278,550,000
                    
                    
                    $
                    (141,627,000
                    )
                    
                    $
                    (707,000
                    )
                    
                    $
                    130,525,000Comprehensive
      Loss:Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (6,407,000
                    )
                    
                    
                    
                    
                    
                    
                    (6,407,000
                    )Unrealized
      Loss on Marketable Securities - Related Party
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (69,000
                    )
                    
                    
                    (69,000
                    )Comprehensive
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (6,476,000
                    )Purchase
      of Treasury Stock
                    
                    
                    13,750
                    
                    
                    
                    (42,000
                    )
                    
                    
                    (13,750
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (42,000
                    )Stockholders'
      Equity at
                      March
      31, 2009 (Unaudited)
                    
                    
                    1,212,323
                    
                    
                    $
                    (5,734,000
                    )
                    
                    
                    13,785,040
                    
                    
                    $
                    1,000
                    
                    
                    $
                    278,550,000
                    
                    
                    $
                    (148,034,000
                    )
                    
                    $
                    (776,000
                    )
                    
                    $
                    124,007,000
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 3
-
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Three
                            Months
      Ended3/31/2009
                          
                          
                          3/31/2008Cash
      flows from operating activities:Net
      income (loss)
                          
                          $
                          (6,407,000
                          )
                          
                          $
                          3,273,000Adjustments
      to reconcile net income (loss) to net cash provided (used) by operating
      activities:Provision
      for doubtful accounts related to receivable
                          
                          
                          53,000
                          
                          
                          
                          --Write
      downs on real estate held for sale
                          
                          
                          2,478,000
                          
                          
                          
                          1,792,000Provision
      for loan loss
                          
                          
                          1,274,000
                          
                          
                          
                          --Amortized
      financing costs, included in interest expense
                          
                          
                          146,000
                          
                          
                          
                          45,000Change
      in operating assets and liabilities:Interest
      and other receivables
                          
                          
                          (37,000
                          )
                          
                          
                          2,366,000Due
      to/from related parties
                          
                          
                          (777,000
                          )
                          
                          
                          (168,000
                          )Other
      assets
                          
                          
                          (197,000
                          )
                          
                          
                          40,000Accounts
      payable and accrued liabilities
                          
                          
                          1,835,000
                          
                          
                          
                          (1,000
                          )Net
      cash provided (used) by operating activities
                          
                          
                          (1,632,000
                          )
                          
                          
                          7,347,000Cash
      flows from investing activities:Investments
      in real estate loans
                          
                          
                          (15,753,000
                          )
                          
                          
                          (32,361,000
                          )Proceeds
      from loan payoffs
                          
                          
                          136,000
                          
                          
                          
                          14,797,000Sale
      of investments in real estate loans to:
                          
                          
                          --VRM
      I
                          
                          
                          --
                          
                          
                          
                          500,000Third
      party
                          
                          
                          6,214,000
                          
                          
                          
                          --Proceeds
      from sale of real estate held for sale
                          
                          
                          6,739,000
                          
                          
                          
                          150,000Purchase
      of investments in certificates of deposit
                          
                          
                          --
                          
                          
                          
                          (1,000
                          )Net
      cash used by investing activities
                          
                          
                          (2,664,000
                          )
                          
                          
                          (16,915,000
                          )Cash
      flows from financing activities:Principal
      payments on notes payable
                          
                          
                          (24,000
                          )
                          
                          
                          --Proceeds
      from issuance of notes payable
                          
                          
                          3,000,000
                          
                          
                          
                          --Dividends
      paid to stockholders, net of reinvestments
                          
                          
                          --
                          
                          
                          
                          (4,464,000
                          )Dividends
      paid to stockholders - related party
                          
                          
                          --
                          
                          
                          
                          (137,000
                          )Purchase
      of treasury stock at cost
                          
                          
                          (42,000
                          )
                          
                          
                          --Net
      cash provided (used) by financing activities
                          
                          
                          2,934,000
                          
                          
                          
                          (4,601,000
                          )NET
      CHANGE IN CASH
                          
                          
                          (1,362,000
                          )
                          
                          
                          (14,169,000
                          )Cash,
      beginning of period
                          
                          
                          8,026,000
                          
                          
                          
                          20,241,000Cash,
      end of period
                          
                          $
                          6,664,000
                          
                          
                          $
                          6,072,000
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 4
-
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Three
                      Months
      Ended3/31/2009
                    
                    
                    3/31/2008Supplemental
      disclosures of cash flows information:Interest
      paid
                    
                    $
                    1,649,000
                    
                    
                    $
                    1,359,000Non-cash
      investing and financing activities:Dividend
      payable
                    
                    $
                    --
                    
                    
                    $
                    1,577,000Reinvestment
      of dividends
                    
                    $
                    --
                    
                    
                    $
                    98,000Impairment
      on restructured loan re-classed to allowance for loan loss
                    
                    $
                    799,000
                    
                    
                    $
                    --Real
      estate held for sale acquired through foreclosure, net of prior
      allowance
                    
                    $
                    16,877,000
                    
                    
                    $
                    --Loan
      rewritten with same or similar collateral
                    
                    $
                    6,981,000
                    
                    
                    $
                    1,690,000Write
      off of interest receivable and related allowance
                    
                    $
                    163,000
                    
                    
                    
                    --Adjustment
      to note receivable and related allowance
                    
                    $
                    --
                    
                    
                    $
                    (184,000
                    )Prepaid
      amount applied to accounts payable
                    
                    $
                    --
                    
                    
                    $
                    41,000Unrealized
      loss on marketable securities - related party
                    
                    $
                    (69,000
                    )
                    
                    $
                    (304,000
                    )
 
 
 
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 5
-
  
 VESTIN
REALTY MORTGAGEII, INC
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
31, 2009
 
 (UNAUDITED)
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
liability company for the purpose of investing in commercial real estate loans
(hereafter referred to as “real estate loans”).  Vestin Realty
Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
corporation for the sole purpose of effecting a merger with Fund
II.  On March 31, 2006, Fund II merged into VRM II and the members of
Fund II received one share of VRM II’s common stock for each membership unit of
Fund II.  References in this report to the “Company”, “we”, “us” or
“our” refer to Fund II with respect to the period prior to April 1, 2006 and to
VRM II with respect to the period commencing on April 1,
2006.  Because we were a limited liability company (“LLC”) during the
prior periods reflected in this report, we make reference to Fund II’s “members”
rather than “stockholders” in reporting our financial results.
 
 We invest
in loans secured by real estate through deeds of trust or mortgages (hereafter
referred to collectively as “deeds of trust” and as defined in our Management
Agreement as “Mortgage Assets”).  We commenced operations in June
2001.
 
 We
operate as a real estate investment trust (“REIT”).  We are not a
mutual fund or an investment company within the meaning of the Investment
Company Act of 1940, nor are we subject to any regulation
thereunder.  As a REIT, we are required to have a December 31 fiscal
year end.
 
 Our
manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
Group”), a Delaware corporation.  Michael Shustek, the CEO and
director of our manager and CEO, President and a director of us, wholly owns
Vestin Group, which is engaged in asset management, real estate lending and
other financial services through its subsidiaries.  Our manager, prior
to June 30, 2006, also operated as a licensed Nevada mortgage broker and was
generally engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property.  On July 1, 2006, a
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. (“Vestin Originations”) that has continued the business of
brokerage, placement and servicing of real estate loans.  Vestin
Originations is a wholly owned subsidiary of Vestin Group.  On
September 1, 2007, the servicing of real estate loans was assumed by our
manager.
 
 Pursuant
to our management agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us, and provides similar
services to our subsidiaries.  Without limiting the foregoing, our
manager performs other services as may be required from time to time for
management and other activities relating to our assets, as our manager shall
deem appropriate.  Consequently, our operating results are dependent
upon our manager’s ability and performance in managing our operations and
servicing our assets.
 
 Vestin
Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the
successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III, LLC
(“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned by
our manager’s CEO.  These entities have been formed to invest in real
estate loans.
 
 The
consolidated financial statements include the accounts of us and our wholly
owned taxable REIT subsidiary, TRS II, Inc.  All significant
inter-company transactions and balances have been eliminated in
consolidation.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 6
-
  On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through Vestin II Capital Trust I (“VCT I”), a special
purpose business trust.  VCT I, is a Delaware statutory
trust.  Our interest in VCT I is accounted for using the equity method
and the assets and liabilities are not consolidated into our financial
statements due to our determination that VCT I is a variable interest entity in
which we are not the primary beneficiary under Financial Accounting Standards
Board Interpretation No. 46R (“FIN 46R”).  See Note – Secured Borrowings for
additional information.
 
 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 consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 Restricted
Cash
 
 On
November 7, 2008, we entered into an agreement with Taberna Capital Management,
LLC (“Taberna”), in its capacity as collateral manager for certain collateral
debt obligation vehicles that are the holders of the Junior Subordinated Notes,
providing for an amendment of the tangible net worth covenant (the “First
Supplemental Indenture”).  As of March 31, 2009, we had restricted
cash of $5.0 million in the form of letters of credit upon which Taberna is
entitled to draw if we default upon our obligation to pay principal and interest
on the Junior Subordinated Notes.  The letters of credit may not be
subordinated to any of our Senior Debt.  On December 31, 2008, we were
not in compliance with the revised tangible net worth covenant and the debt to
tangible net worth covenant in the First Supplemental Indenture.  On
March 25, 2009, we entered into a letter agreement with Taberna providing for a
waiver of all financial covenants effective December 31, 2008 through June 30,
2009.  In addition, pursuant to the letter agreement we exchanged $20
million of the Junior Subordinated Notes for certain replacement securities,
which we acquired for approximately $10 million, in April 2009.  The
transaction will reduce our obligation on the Junior Subordinated Notes to
approximately $36.3 million, which we expect will facilitate future compliance
with financial covenants.  This transaction will result in a net gain
of approximately $9 million, net of transaction costs.  In addition,
we are to pay additional interest equal to $250,000 per year, payable quarterly
on the same payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  The replacement securities were acquired with funds
consisting of $5 million from our operating and financing funds and $5 million
from the letters of credit.  For additional information regarding the
First Supplemental Indenture see Note I – Junior Subordinated
Notes.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 7
-
  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 Management
Agreement without a premium.  The primary purpose is to either free up
capital to provide liquidity for various reasons, such as loan diversification,
or place excess capital in investments to maximize the use of our
capital.  Selling or buying loans allows us to diversify our loan
portfolio within these parameters.  Due to the short-term nature of
the loans we make and the similarity of interest rates in loans we normally
would invest in, the fair value of a loan typically approximates its carrying
value.  Accordingly, discounts or premiums typically do not apply upon
sales of loans and therefore, generally no gain or loss is recorded on these
transactions, regardless of whether to a related or unrelated
party.
 
 Investments
in real estate loans are secured by deeds of trust or
mortgages.  Generally, our real estate loans require interest only
payments with a balloon payment of the principal at maturity.  We have
both the intent and ability to hold real estate loans until maturity and
therefore, real estate loans are classified and accounted for as held for
investment and are carried at amortized cost.  Loans sold to or
purchased from affiliates are accounted for at the principal balance and no gain
or loss is recognized by us or any affiliate.  Loan-to-value ratios
are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received or when management’s assessment of
the value has changed, to reflect subsequent changes in value
estimates.  Such appraisals are generally dated within 12 months of
the date of loan origination and may be commissioned by the
borrower.
 
 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 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 FASB Statements No. 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 8
-
  
 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;
 
 ·
              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
Statement of Financial Accounting Standards (“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
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
  
 ·
              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 consolidated statements of
income.
 
 Secured
Borrowings
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue for any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).
 
 The
Inter-creditor Agreements provide us additional funding sources for real estate
loans whereby an unaffiliated investor (the “Investor”) may participate on a
non-pari passu basis in certain real estate loans with us and/or VRM I and/or
Fund III (collectively, the “Lead Lenders”).  In the event of borrower
non-performance, the Inter-creditor Agreements generally provide that the Lead
Lenders must repay the Investor’s loan amount either by (i) continuing to remit
to the Investor the interest due on the participated loan amount; (ii)
substituting an alternative loan acceptable to the Investor; or (iii)
repurchasing the participation from the Investor for the outstanding balance
plus accrued interest.
 
 Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowing arrangements.
 
 Investment in Marketable
Securities – Related Party
 
 Investment
in marketable securities – related party consists of stock in VRM
I.  The securities are stated at fair value as determined by the
closing market price as of 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”).
 
 We
evaluate our available-for-sale investment for other-than-temporary impairment
charges in accordance with Emerging Issues Task Force, or EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and it’s Application to Certain Investments.  FAS
115 and EITF 03-1 require us to determine when an investment is considered impaired(i.e., decline in fair value below its amortized cost), and evaluate
whether the impairment is other than temporary (i.e., investment value will not
be recovered over its remaining life), and, if the impairment is other than
temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value.
 
 According
to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M -
Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, there
are numerous factors to be considered in such an evaluation and their relative
significance will vary from case to case.  The following are a few
examples of the factors that individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
  
 ·
              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
consolidated 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 consolidated financial statements.  We do not expect the adoption
of FAS 157 as it pertains to non-financial assets and liabilities to have a
material impact on our consolidated financial statements.
 
 Under FAS
157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. “the exit price”) in an orderly
transaction between market participants at the measurement date.  In
determining fair value, the Company uses various valuation approaches, including
quoted market prices and discounted cash flows.  FAS 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources.  Unobservable inputs are inputs
that reflect a company’s judgment concerning the assumptions that market
participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.  The fair value
hierarchy is broken down into three levels based on the reliability of inputs as
follows:
 
 ·
              Level
      1 – Valuations based on quoted prices in active markets for identical
      instruments that the Company is able to access.  Since
      valuations are based on quoted prices that are readily and regularly
      available in an active market, valuation of these products does not entail
      a significant degree of judgment.
 
 ·
              Level
      2 – Valuations based on quoted prices in active markets for instruments
      that are similar, or quoted prices in markets that are not active for
      identical or similar instruments, and model-derived valuations in which
      all significant inputs and significant value drivers are observable in
      active markets.
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
  
 ·
              Level
      3 – Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, which utilize the Company’s estimates
      and assumptions.
 
 Basic and Diluted Earnings
Per Common Share
 
 Basic
earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share, by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding.  Diluted EPS is similar to basic
EPS except that the weighted average number of common shares outstanding is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
exercised.  We had no outstanding common share equivalents during the
three months ended March 31, 2009 and 2008.  The following is a
computation of the EPS data for the three months ended March 31, 2009 and
2008:
 
 For
      the Three Months
                      Ended
      March 31,2009
                    
                    
                    2008Net
      income (loss) to common stockholders
                    
                    $
                    (6,407,000
                    )
                    
                    $
                    3,273,000Weighted
      average number of common shares outstanding during the
    period
                    
                    
                    13,788,859
                    
                    
                    
                    14,872,330Basic
      and diluted earnings (loss) per weighted average common
    share
                    
                    $
                    (0.46
                    )
                    
                    $
                    0.22
 
 Common Stock
Dividends
 
 During
June 2008, our Board of Directors decided to suspend the payment of
dividends.  We will continue to comply with the REIT requirements and
will distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 Treasury
Stock
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws,
repurchases may be made at such times and in such amounts, as our management
deems appropriate.  The share repurchase program may be discontinued
or terminated at any time and we have not established a date for completion of
the share repurchase program.  The repurchases will be funded from our
available cash.  As of March 31, 2009, we had purchased 1,198,573
shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $5.7 million.  In addition, as part of a settlement
agreement, we repurchased 13,750 shares of stock and classified them as treasury
stock and incurred $76,000 in settlement expenses.  These shares are
carried on our books at cost totaling $42,000 and are not part of the repurchase
program.  As of March 31, 2009, we had a total of 1,212,323 shares of
treasury stock carried on our books at cost totaling approximately $5.7
million.  As of December 31, 2008, we had a total of 1,198,573 shares
of treasury stock carried on our books at cost totaling approximately $5.7
million.
 
 Segments
 
 We
operate as one business segment.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
  Principles of
Consolidation
 
 The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary.  All significant intercompany balances and transactions
have been eliminated in consolidation.  Our interest in VCT I (see
Note I – Junior Subordinated
Notes) is accounted for using the equity method and the assets and
liabilities are not consolidated into our financial statements due to our
determination that VCT I is a variable interest entity in which we are not the
primary beneficiary under FIN 46R.
 
 Income
Taxes
 
 We are
organized and conduct our operations to qualify as a real estate investment
trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the “Code”) and to comply with the provisions of the Internal
Revenue Code with respect thereto.  A REIT is generally not subject to
federal income tax on that portion of its REIT taxable income (“Taxable Income”)
which is distributed to its stockholders, provided that at least 90% of Taxable
Income is distributed and provided that certain other requirements are
met.  Our taxable income may substantially exceed or be less than our
net income as determined based on GAAP, because, differences in GAAP and taxable
net income consist primarily of allowances for loan losses or doubtful account,
write downs on real estate held for sale, amortization of deferred financing
cost, capital gains and losses, and deferred income.  Certain assets
of ours are held in a taxable REIT subsidiary (“TRS”).  The income of
a TRS is subject to federal and state income taxes.  The net income
tax provision for the three months ended March 31, 2009 and 2008, was
approximately zero.
 
 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 $10.3 million and $11.4 million, respectively, in excess of the
federally insured limits.
 
 As of
March 31, 2009, 44%, 18%, 13% and 9% of our loans were in Nevada, Arizona,
California and Hawaii, respectively, compared to 40%, 27%, 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.
 
 At March
31, 2009, the aggregate amount of loans to our three largest borrowers
represented approximately 18% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in Oregon and Hawaii, with first lien positions, interest rates between 12% and
14%, with an aggregate outstanding balance of approximately $33.3
million.  As of March 31, 2009, our three largest loans were
considered non-performing, see Note D – Investments in Real Estate
Loans.  At December 31, 2008, the aggregate amount of loans to
our three largest borrowers represented approximately 15% of our total
investment in real estate loans.  These real estate loans consisted of
commercial loans, located in Oregon and Hawaii, with first lien positions,
interest rates between 12% and 14%, with an aggregate outstanding balance of
approximately $33.3 million.  As of December 31, 2008, our three
largest loans were considered non-performing.  We have a significant
concentration of credit risk with our largest borrowers.  Any
additional defaults could have a material adverse effect on us.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  As
the economy 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
  
 Common
Guarantors
 
 As of
March 31, 2009, three loans totaling approximately $18.3 million, representing
approximately 9.7% of our portfolio’s total value, had a common
guarantor.  All three loans were considered non-performing as of March
31, 2009.  As of December 31, 2008, we had five loans totaling
approximately $23.7 million, representing approximately 10.5% of our portfolio’s
total value, with the same guarantor.  All five loans were considered
non-performing as of December 31, 2008.
 
 As of
March 31, 2009, four loans totaling approximately $19.8 million, representing
approximately 10.5% of our portfolio’s total value, had a common
guarantor.  All four loans were considered performing as of March 31,
2009.  As of December 31, 2008, we had three loans totaling
approximately $17.9 million, representing approximately 7.9% of our portfolio’s
total value, with the same common guarantor.  All three loans were
considered performing as of December 31, 2008.
 
 As of
March 31, 2009, six loans totaling approximately $23.9 million, representing
approximately 13.0% of our portfolio’s total value, had a common guarantor; of
these six loans, three loans were related to our secured borrowings of
approximately $10.6 million, including approximately $0.7 million in interest
reserves.  These loans were considered performing as of March 31,
2009.  As of December 31, 2008, we had six loans totaling
approximately $23.6 million, representing approximately 10.5% of our portfolio’s
total value, with the same common guarantor; of these six loans, three loans
were related to our secured borrowings of approximately $10.6 million, including
approximately $0.7 million in interest reserves.  One of the six
loans, totaling approximately $7.2 million, was considered non-performing as of
December 31, 2008.  During the three months ended March 31, 2009,
these loans were modified, whereby the interest rate was reduced to 8% starting
in January 2009.  Interest payments are payable monthly, ranging from
3.0% to 4.25%, beginning January 25, 2009, and accrue in amounts ranging from of
3.75% to 5.0% payable at the maturity of the loan for five of the six
loans.  The remaining loan’s interest payments are payable quarterly
at 3.0% beginning March 25, 2009, and accrued at 5.0% payable at the maturity of
the loan.  Deferred
interest on these loans will be recorded as interest income as cash is
collected.
 
 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 $47.5 million in
investments in real estate loans that had interest reserves where the total
outstanding principal due to our co-lenders and us was approximately $53.2
million.  These loans had interest reserves of approximately $4.9
million, of which our portion was approximately $4.2 million.  As of
March 31, 2009, two of our loans, totaling approximately $18.8 million, which
had interest reserves, were considered non-performing.  These loans’
interest reserves, totaling approximately $3.8 million, of which our portion was
$3.2 million, have been suspended as of March 31, 2009, and we no longer draw
monthly interest income from them.  At December 31, 2008, we had
approximately $52.7 million in investments in real estate loans that had
interest reserves where the total outstanding principal due to our co-lenders
and us was approximately $60.0 million.  These loans had interest
reserves of approximately $5.7 million, of which our portion was approximately
$4.9 million.  As of December 31, 2008, two of these loans, totaling
approximately $18.8 million, which had interest reserves, were considered
non-performing.  These loans’ interest reserves, totaling
approximately $3.8 million, of which our portion was $3.2 million, were
suspended as of December 31, 2008.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
  During
the three month ended March 31, 2009, the following transactions took place
regarding our loan portfolio:
 
 ·
              On
      January 7, 2009, we sold the Preston Hollow Assisted Living, L.P. loan to
      an unaffiliated third party for approximately $1.1 million, which
      approximated our book value of the loan, net of allowances.  No
      gain or loss was recognized.
 
 ·
              On
      February 11, 2009, we sold the Trinity Theo, LLC loan to an unaffiliated
      third party for approximately $1.6 million.  The sale resulted
      in no gain or loss.
 
 ·
              On
      March 13, 2009, we refinanced the Rancho Santalina, LLC loan with the same
      collateral totaling approximately $7.0
million.
 
 ·
              On
      March 23, 2008, we, VRM I and Fund III, sold the Peoria 180, LLC loan to
      an unaffiliated third party for $3.0 million, of which our portion was
      approximately $2.5 million, which approximated our book value of the loan,
      net of allowances.  The sale resulted in no gain or
      loss.
 
 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
      LossesAcquisition
      and Development
                      
                      
                      --
                      
                      
                      $
                      --
                      
                      
                      
                      --%
                      
                      
                      
                      --%
                      
                      
                      
                      --%Commercial
                      
                      
                      20
                      
                      
                      
                      106,384,000
                      
                      
                      
                      13.04%
                      
                      
                      
                      56.16%
                      
                      
                      
                      68.63%Construction
                      
                      
                      6
                      
                      
                      
                      26,056,000
                      
                      
                      
                      8.97%
                      
                      
                      
                      13.76%
                      
                      
                      
                      91.31%Land
                      
                      
                      8
                      
                      
                      
                      56,979,000
                      
                      
                      
                      11.52%
                      
                      
                      
                      30.08%
                      
                      
                      
                      74.58%Total
                      
                      
                      34
                      
                      
                      $
                      189,419,000
                      
                      
                      
                      12.02%
                      
                      
                      
                      100.00%
                      
                      
                      
                      74.14%
 
 Investments
in real estate loans as of December 31, 2008, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average Interest Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and Development
                      
                      
                      1
                      
                      
                      $
                      13,000,000
                      
                      
                      
                      13.00%
                      
                      
                      
                      5.78%
                      
                      
                      
                      92.00%Commercial
                      
                      
                      20
                      
                      
                      
                      107,456,000
                      
                      
                      
                      12.64%
                      
                      
                      
                      47.75%
                      
                      
                      
                      81.09%Construction
                      
                      
                      7
                      
                      
                      
                      27,612,000
                      
                      
                      
                      10.55%
                      
                      
                      
                      12.27%
                      
                      
                      
                      103.26%Land
                      
                      
                      11
                      
                      
                      
                      76,974,000
                      
                      
                      
                      11.87%
                      
                      
                      
                      34.20%
                      
                      
                      
                      78.59%Total
                      
                      
                      39
                      
                      
                      $
                      225,042,000
                      
                      
                      
                      12.14%
                      
                      
                      
                      100.00%
                      
                      
                      
                      84.01%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
  
 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 12.59% and 12.42%,
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
                  
                  
                  25
                  
                  
                  $
                  150,672,000
                  
                  
                  
                  79.54%
                  
                  
                  
                  31
                  
                  
                  $
                  188,219,000
                  
                  
                  
                  83.64%Second
      deeds of trust
                  
                  
                  9
                  
                  
                  
                  38,747,000
                  
                  
                  
                  20.46%
                  
                  
                  
                  8
                  
                  
                  
                  36,823,000
                  
                  
                  
                  16.36%Total
                  
                  
                  34
                  
                  
                  $
                  189,419,000
                  
                  
                  
                  100.00%
                  
                  
                  
                  39
                  
                  
                  $
                  225,042,000
                  
                  
                  
                  100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of March 31, 2009:
 
 Non-performing
      and past due loans (a)
                    
                    $
                    107,244,000April
      2009 – June 2009
                    
                    
                    --July
      2009 – September 2009
                    
                    
                    6,980,000October
      2009 – December 2009
                    
                    
                    15,597,000January
      2010 – March 2010
                    
                    
                    7,431,000April
      2010 – June 2010
                    
                    
                    22,575,000July
      2010 – September 2010
                    
                    
                    --October
      2010 – December 2010
                    
                    
                    14,486,000January
      2011 – March 2011
                    
                    
                    15,106,000Thereafter
                    
                    
                    --Total
                    
                    $
                    189,419,000
 
 (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
                      
                      $
                      33,471,000
                      
                      
                      
                      17.67%
                      
                      
                      $
                      59,628,000
                      
                      
                      
                      26.50%California
                      
                      
                      24,748,000
                      
                      
                      
                      13.07%
                      
                      
                      
                      24,298,000
                      
                      
                      
                      10.80%Hawaii
                      
                      
                      17,291,000
                      
                      
                      
                      9.13%
                      
                      
                      
                      17,291,000
                      
                      
                      
                      7.68%Nevada
                      
                      
                      83,502,000
                      
                      
                      
                      44.08%
                      
                      
                      
                      89,917,000
                      
                      
                      
                      39.95%Oklahoma
                      
                      
                      2,155,000
                      
                      
                      
                      1.14%
                      
                      
                      
                      2,155,000
                      
                      
                      
                      0.96%Oregon
                      
                      
                      16,048,000
                      
                      
                      
                      8.47%
                      
                      
                      
                      16,048,000
                      
                      
                      
                      7.13%Texas
                      
                      
                      12,204,000
                      
                      
                      
                      6.44%
                      
                      
                      
                      13,904,000
                      
                      
                      
                      6.18%Washington
                      
                      
                      --
                      
                      
                      
                      --%
                      
                      
                      
                      1,801,000
                      
                      
                      
                      0.80%Total
                      
                      $
                      189,419,000
                      
                      
                      
                      100.00%
                      
                      
                      $
                      225,042,000
                      
                      
                      
                      100.00%
 
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
  
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 Balance Sheet
      Reconciliation
 
 The
following table reconciles the balance of the loan portfolio to the amount shown
on the accompanying Consolidated Balance Sheets.
 
 March
      31, 2009
                        Balance
      (a)
                      
                      
                      December
      31, 2008
                        Balance
      (a)Balance
      per loan portfolio
                      
                      $
                      189,419,000
                      
                      
                      $
                      225,042,000Less:Allowance
      for loan losses (b)
                      
                      
                      (51,332,000
                      )
                      
                      
                      (78,208,000
                      )Balance
      per consolidated balance sheet
                      
                      $
                      138,087,000
                      
                      
                      $
                      146,834,000
 
 (a)
              As
      of December 31, 2008, the 2503 Panorama, LLC loan and the VBP Partners,
      LLC loan included an impairment reserve, applied to the loan balance, of
      approximately $0.3 million and $0.5 million,
      respectively.  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.
 
 Non-Performing
Loans
 
 As of
March 31, 2009, we had 15 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 $63.7 million, net of
allowance for loan losses of approximately $43.4 million, which does not include
the allowances of approximately $7.9 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:
 
 ·
              RightStar,
      Inc. (Part I & Part II), are loans secured by a lien on the business
      and virtually all of the property of RightStar, which includes 4
      cemeteries and 8 mortuaries in Hawaii with an outstanding balance of
      approximately $32.3 million of which our portion is approximately $17.3
      million ($8.2 million for Part I and $9.1 million for Part
      II).  As of March 31, 2009, this loan has been considered
      non-performing for the last 60 months.  The lenders have
      commenced a judicial foreclosure on the loans, Part I and Part
      II.  As of March 31, 2009, based on our manager’s evaluation and
      an updated appraisal, our manager has provided a specific allowance of
      approximately $14.4 million, of which our portion is approximately $9.8
      million.  See Note O – Legal Matters Involving The
      Company for further
information.
 
 ·
              Monterrey
      Associates, L.P. is a non-performing loan, which was originally secured by
      various real estate collateral, including a 248 unit apartment complex in
      Oklahoma City, Oklahoma.  The outstanding balance on the loan is
      approximately $4.4 million, of which our portion is approximately $2.2
      million.  As of 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 $2.2
million.
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
  
 ·
              3900,
      LLC, is a second position loan that provided bridge financing for an
      approximate 7.66 acre neighborhood retail center, located in Tempe,
      Arizona.  The loan is secured by a second position lien, junior
      to a first position lien in the amount of $6.0 million.  In
      addition, the loan is guaranteed by principals of the
      borrower.  The outstanding balance of the loan is approximately
      $3.3 million.  On April 5, 2008, this loan was considered to be
      in default due to the default of the Redwood Place, LLC loan, as a result
      of cross-default provisions.  Our manager has commenced
      foreclosure, and is proceeding with legal action to enforce the personal
      guarantees.  On October 17, 2008, the borrower filed for
      bankruptcy protection.  A settlement agreement was negotiated
      with the borrower and guarantors; however, they are currently in default
      under the settlement agreement.  We intend to proceed against
      them; however, it cannot be determined at this time how much, if any, will
      be collected.  As of March 31, 2009, this loan has been
      considered non-performing for the last 11 months, and based on our
      manager’s evaluation and an updated appraisal, our manager has provided a
      specific allowance for the full amount of the loan totaling approximately
      $3.3 million.
 
 ·
              WCP
      Warm Springs Holdings 1, LLC is a loan to provide financing for 10 acres
      of vacant land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $8.5 million,
      of which our portion is approximately $5.1 million.  As of 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 Fund III foreclosed on this property and
      classified it as real estate held for sale.  As of March
      31, 2009, based on our manager’s evaluation and an updated appraisal, our
      manager has provided a specific allowance of approximately $4.1 million,
      of which our portion is approximately $2.5
  million.
 
 ·
              Babuski,
      LLC is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $7.7 million.  The borrowers defaulted and the loan became
      non-performing.  On October 16, 2008, we, VRM I and Fund III
      entered into a forbearance agreement to postpone the foreclosure date on
      the property.  The guarantor paid $250,000 for cost and interest
      due related to the loan.  As of April 30, 2009, the borrower
      paid an additional $100,000 in cost and interest due, of which our portion
      was $61,000.  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.
 
 ·
              South
      Bay Villas, LLC is a construction loan to provide financing for a 48 unit
      condominium building which is part of the Desert Sands Condominiums Phase
      2 located in Laughlin, NV.  The loan is secured by a first lien
      on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $6.0 million,
      of which our portion is approximately $5.8 million.  As of March
      31, 2009, this loan has been considered non-performing for the last 10
      months.  A settlement agreement has been negotiated with the
      borrower, wherein they will be responsible for the completion of the
      property at the borrower’s expense, with the lenders to receive 100% of
      the net sales proceeds from the sale of condominiums units until the loan
      has been repaid in full.  As of March 31, 2009, based on our
      manager’s evaluation of completion costs for the project and an updated
      appraisal, our manager has provided a specific allowance of approximately
      $1.2 million, of which our portion is approximately $1.2
      million.
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
  
 ·
              Barger
      Road Cottages, LLC is a commercial loan to provide financing for the
      Alpine Meadow Retirement Community, consisting of 23 cottage units with
      garages, community building and surplus land, located in Eugene,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $6.0 million, of which our portion is
      $46,000.  As of 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 $11.6 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 in May 2009, our
      manager has provided a specific allowance of approximately $9.0 million,
      of which our portion is approximately $6.5
  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 $16.0 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 $8.4
million.
 
 ·
              WHM
      Copper Mountain Investments, LLC is a land loan to provide financing for
      various parcels of land within Copper Mountain Ranch Master Planned
      Community totaling approximately 2,330 acres lying within sections 15, 16,
      21, 28 & 33 of the Copper Mountain Ranch Master Planned Community
      located in Casa Grande, AZ.  The loan is secured by a first lien
      on the property and is guaranteed by the principals of the
      borrower.  The outstanding balance on the loan is $22.3 million,
      of which our portion is approximately $15.6 million.  As of
      March 31, 2009, this loan has been considered non-performing for the last
      six months.  On October 31, 2008, the borrower filed for
      bankruptcy protection.  Our manager has commenced 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
      provided a specific allowance of approximately $4.9 million, of which our
      portion is approximately $4.1
million.
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
  
 ·
              Meadowlark
      Assisted Living Community, LLC is a commercial loan to provide financing
      for a 74 bed Assisted Living/Memory Care residential facility, located on
      approximately 4.35 acres of land, located in the Yreka, CA.  The
      loan is secured by a second lien on the property, with a preexisting first
      lien of approximately $3.5 million, and is guaranteed by the principals of
      the borrower.  The outstanding balance on the second lien loan
      is approximately $3.8 million, of which our portion is approximately $2.2
      million.  As of March 31, 2009, this loan has been considered
      non-performing for the last six 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 foreclosure of the first lien position, our
      manager has provided a specific allowance for the full amount of the loan
      totaling approximately $3.8 million, of which our portion is approximately
      $2.2 million.
  ·
                Essex
      Real Estate Partners, LLC is a commercial loan on five parcels in the
      Inspirada Town Center Project 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 $3.0 million.  As of March 31, 2009, this loan has been
      considered non-performing for the last three months.  Our
      manager has commenced foreclosure proceedings, and is proceeding with
      legal action to enforce the personal guarantees.  As of 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.
 
 ·
                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
      approximately $12.6 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.
 
 ·
                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 approximately $4.7
      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 approximately $0.3 million, 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
      $3.3 million.
 See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 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
      BalanceRightStar,
      Inc. (Part I & Part II)
                                    
                                    $
                                    17,291,000
                                    
                                    
                                    $
                                    (9,757,000
                                    )
                                    
                                    $
                                    7,534,000
                                    
                                    3/31/2004
                                    
                                    60
                                    
                                    45%
      of Part I
                                      65%
      of Part IIMonterrey
      Associates, L.P.
                                    
                                    
                                    2,155,000
                                    
                                    
                                    
                                    (2,155,000
                                    )
                                    
                                    
                                    --
                                    
                                    9/1/2006
                                    
                                    31
                                    
                                    49%3900
      LLC
                                    
                                    
                                    3,276,000
                                    
                                    
                                    
                                    (3,276,000
                                    )
                                    
                                    
                                    --
                                    
                                    6/10/2008
                                    
                                    11
                                    
                                    100%WCP
      Warm Springs Holdings 1, LLC
                                    
                                    
                                    5,114,000
                                    
                                    
                                    
                                    (2,457,000
                                    )
                                    
                                    
                                    2,657,000
                                    
                                    5/10/2008
                                    
                                    10
                                    
                                    60%Babuski,
      LLC
                                    
                                    
                                    7,707,000
                                    
                                    
                                    
                                    --
                                    
                                    
                                    
                                    7,707,000
                                    
                                    6/17/2008
                                    
                                    10
                                    
                                    81%South
      Bay Villas, LLC
                                    
                                    
                                    5,800,000
                                    
                                    
                                    
                                    (1,188,000
                                    )
                                    
                                    
                                    4,612,000
                                    
                                    5/6/2008
                                    
                                    10
                                    
                                    97%Barger
      Road Cottages, LLC
                                    
                                    
                                    46,000
                                    
                                    
                                    
                                    --
                                    
                                    
                                    
                                    46,000
                                    
                                    12/5/2008
                                    
                                    10
                                    
                                    1%Lohrey
      Investments, LLC
                                    
                                    
                                    11,600,000
                                    
                                    
                                    
                                    (6,497,000
                                    )
                                    
                                    
                                    5,103,000
                                    
                                    10/29/2008
                                    
                                    9
                                    
                                    73%Cascadia
      Canyon, LLC
                                    
                                    
                                    16,002,000
                                    
                                    
                                    
                                    (8,434,000
                                    )
                                    
                                    
                                    7,568,000
                                    
                                    2/12/2009
                                    
                                    8
                                    
                                    82%WHM
      Copper Mountain Investments, LLC
                                    
                                    
                                    15,555,000
                                    
                                    
                                    
                                    (4,093,000
                                    )
                                    
                                    
                                    11,462,000
                                    
                                    12/11/2009
                                    
                                    6
                                    
                                    83%Meadowlark
      Assisted Living Community, LLC
                                    
                                    
                                    2,217,000
                                    
                                    
                                    
                                    (2,217,000
                                    )
                                    
                                    
                                    --
                                    
                                    8/7/2009
                                    
                                    6
                                    
                                    59%Essex
      Real Estate Partners, LLC
                                    
                                    
                                    3,000,000
                                    
                                    
                                    
                                    --
                                    
                                    
                                    
                                    3,000,000
                                    
                                    3/1/2008
                                    
                                    3
                                    
                                    100%Spectrum
      Town Center Property, LLC
                                    
                                    
                                    12,600,000
                                    
                                    
                                    
                                    --
                                    
                                    
                                    
                                    12,600,000
                                    
                                    4/30/2009
                                    
                                    1
                                    
                                    90%2503
      Panorama, LLC
                                    
                                    
                                    4,740,000
                                    
                                    
                                    
                                    (3,343,000
                                    )
                                    
                                    
                                    1,397,000
                                    
                                    2/2/2010
                                    
                                    1
                                    
                                    76%$
                                    107,103,000
                                    
                                    
                                    $
                                    (43,417,000
                                    )
                                    
                                    $
                                    63,686,000
 
 *
              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 11 non-performing loans and 7 performing loans, of approximately
$51.3 million.  Our manager evaluated the loans and, based on current
estimates regarding the value of the remaining underlying collateral or the
borrowers’ ability to pay, believes that such collateral is sufficient to
protect us against further losses of principal.  However, such
estimates could change or the value of underlying real estate could
decline.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be recorded in future
periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any dividends payable to our stockholders.
 
 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.
 - 21
-
  
 Description
                      
                      Balance
      at
                        December
      31, 2008
                      
                      
                      Specific
      Reserve Allocation
                      
                      
                      Sales
      &
                        Transfers
      to REO
                      
                      
                      Balance
      at
                        March
      31, 2009RightStar,
      Inc. (Part I & Part II)
                      
                      $
                      9,757,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      9,757,000Monterrey
      Associates, L.P.
                      
                      
                      2,155,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      2,155,000Peoria
      180, LLC
                      
                      
                      12,337,000
                      
                      
                      
                      --
                      
                      
                      
                      (12,337,000
                      )
                      
                      
                      --Terravita,
      LLC (a)
                      
                      
                      377,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      377,000Redwood
      Place, LLC (b)
                      
                      
                      5,284,000
                      
                      
                      
                      --
                      
                      
                      
                      (5,284,000
                      )
                      
                      
                      --2503
      Panorama, LLC
                      
                      
                      3,051,000
                      
                      
                      
                      292,000
                      
                      
                      
                      --
                      
                      
                      
                      3,343,0003900,
      LLC
                      
                      
                      3,276,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      3,276,000VBP,
      LLC (a)
                      
                      
                      3,430,000
                      
                      
                      
                      508,000
                      
                      
                      
                      --
                      
                      
                      
                      3,938,000WCP
      Warm Springs Holdings 1, LLC
                      
                      
                      2,457,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      2,457,000Bright
      Haven Builders, LLC (b)
                      
                      
                      628,000
                      
                      
                      
                      --
                      
                      
                      
                      (628,000
                      )
                      
                      
                      --Lohrey
      Investments, LLC
                      
                      
                      5,223,000
                      
                      
                      
                      1,274,000
                      
                      
                      
                      --
                      
                      
                      
                      6,497,000South
      Bay Villas, LLC
                      
                      
                      1,188,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,188,000World
      Capital La Piazza, LLC (b)
                      
                      
                      6,836,000
                      
                      
                      
                      --
                      
                      
                      
                      (6,836,000
                      )
                      
                      
                      --Meadowlark
      Assisted Living Community, LLC
                      
                      
                      2,217,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      2,217,000WHM
      Copper Mountain Investments, LLC
                      
                      
                      4,093,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      4,093,000Preston
      Hollow Assisted Living, L.P.
                      
                      
                      2,501,000
                      
                      
                      
                      --
                      
                      
                      
                      (2,501,000
                      )
                      
                      
                      --World
      Capital Durango Alpha (2) (b)
                      
                      
                      1,364,000
                      
                      
                      
                      --
                      
                      
                      
                      (1,364,000
                      )
                      
                      
                      --Wolfpack
      Properties, LLC (a)
                      
                      
                      1,082,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,082,000ExecuSuite
      Properties, LLC (a)
                      
                      
                      528,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      528,000SE
      Property Investments, LLC (a)
                      
                      
                      407,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      407,000Devonshire,
      LLC (a)
                      
                      
                      1,493,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,493,000Building
      A, LLC & Building C, LLC (a)
                      
                      
                      90,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      90,000Cascadia
      Canyon, LLC
                      
                      
                      8,434,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      8,434,000Total
                      
                      $
                      78,208,000
                      
                      
                      $
                      2,074,000
                      
                      
                      $
                      (28,950,000
                      )
                      
                      $
                      51,332,000
 
 (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.
 
 RightStar Loan Allowance –
RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of
2004.  The lenders commenced a judicial foreclosure on the loans, part
I and part II, which is secured by a lien on the business and virtually all of
the property of RightStar, which includes 4 cemeteries and 8 mortuaries in
Hawaii.  The aggregate principal balance of the loan is approximately
$32.3 million.  The loans, part I and part II, are owned as
follows:
  See
review report of Independent Registered Public Accounting Firm.
 - 22
-
  
 Senior
      Principal Amount
                      (Part
      II)
                    
                    
                    Junior
      Principal Amount
                      (Part
      I)
                    
                    
                    TotalVRM
      I
                    
                    $
                    4,892,000
                    
                    
                    $
                    4,415,000
                    
                    
                    $
                    9,307,000VRM
      II
                    
                    
                    9,108,000
                    
                    
                    
                    8,183,000
                    
                    
                    
                    17,291,000Vestin
      Mortgage
                    
                    
                    --
                    
                    
                    
                    5,657,000
                    
                    
                    
                    5,657,000Total
                    
                    $
                    14,000,000
                    
                    
                    $
                    18,255,000
                    
                    
                    $
                    32,255,000
 
 The loans
are subject to an inter-creditor agreement which states the order of priority
for any payments received are disbursed as follows:
 
 ·
              First
      to reimburse collection and foreclosure expenses advanced by the
      lenders;
 
 ·
              Second
      to pay past due interest on the Senior Principal Amount (Part II)
      (including default rate interest);
 
 ·
              Third
      to pay past due interest on the Junior Principal Amount (Part I)
      (including default rate interest);
 
 ·
              Fourth
      to pay Senior Principal; and
 
 ·
              Fifth
      to pay Junior Principal.
 
 We and
VRM I acquired the senior portion of the loan on July 14, 2005 for approximately
$15.5 million of which our portion was approximately $10.1 million (including
accrued interest of approximately $1.0 million).  We and VRM I
acquired this balance to expedite the foreclosure process and remove the prior
senior lender from its priority position, which had the potential to impair the
value we may receive at the time the property is sold.  In exchange
for assistance in expediting the foreclosure process, the lenders jointly agreed
to release the guarantors from their guaranty of the loan.  In March
2007, Vestin Mortgage purchased the junior principal amount owned by the
unrelated third party for $500,000.  Vestin Mortgage has agreed that
any monies it receives as a result of payment of the notes or proceeds from a
foreclosure sale are limited to its $500,000 investment in the notes plus
expenses.
 
 In early
2006, the State of Hawaii notified the lenders of a potential statutory trust
fund deficiency, estimated to be between $20 million and $30 million and claimed
that this balance has priority over all lenders.  The State of Hawaii
is pursuing approximately $30 million in recoveries from the former trustees,
prior owners of the property and other parties.  The proceeds from
these recoveries, if any, will be used to fund the potential deficiency in the
statutory trust.  The lenders dispute the amount and priority of this
deficit.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  To date the auction has not been
successful.  Vestin and the State are in the process of negotiating a
new agreement that would permit the foreclosure to
proceed.  Agreements in principle have been reached; however, an
agreement has not yet been signed.
  See
review report of Independent Registered Public Accounting Firm.
 - 23
-
  
 During
December 2007, we, VRM I, and the statutory trust fund received a settlement
totaling $2.8 million, of which approximately $2.0 million was applied against
outstanding trust obligations.  Approximately $0.8 million, of which
our portion was approximately $0.5 million, was applied towards the allowance
for doubtful accounts on this loan and was recorded as a reimbursement of legal
fees totaling approximately $0.4 million.
 
 In June
2008, the State of Hawaii allowed us and the other lenders to put in place a new
management team that replaced the previous receiver.
 
 We have
evaluated the estimated value of the underlying collateral and the expected cost
and length of litigation.  Based on this estimate we have maintained
our total specific reserve allowance for loss.  The reserve allowance
includes approximately $1.0 million for estimated litigation fees and expenses
that we have incurred in enforcing our rights against the underlying collateral,
which were fully consumed as of December 31, 2007.  We will continue
to evaluate our position in the RightStar loan as the situation
progresses.  As of March 31, 2009, our specific reserve allowance on
the RightStar loans totaled approximately $9.8 million.
 
 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 approximately $2.2 million.  This
specific reserve allowance was based on our manager’s evaluation and an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2008.  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 $0.4 million.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which included a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $1.7
million.  The terms of the rewritten loan remain the same as those of
the original loans and the loan was performing as required as of 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 $3.3 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during February 2009.  During
March 2009, we reclassified an impairment reserve of approximately $0.3 million
to the specific reserve allowance.  Our manager will continue to
evaluate our position in the loan.
 
 3900, LLC – 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 loan on a 7.66 acre
neighborhood retail center, located in Tempe, AZ, of approximately $3.3
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.
 
 VBP Partners, LLC – As of
March 31, 2009, our manager has provided a specific reserve allowance, related
to a performing loan for the development of 4.14 acres of land located in Las
Vegas, NV, of approximately $4.3 million, of which our portion is approximately
$3.9 million.  In addition, during the three months ended March 31,
2009, this loan was modified, effectively changing the status of the loan from
non-performing to performing.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan,
obtained by our manager during January 2009.  During March 2009, we
reclassified an impairment reserve of approximately $0.5 million 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.
 - 24
-
  
 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 $2.5 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 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 $6.5
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.
 
 South Bay Villas, LLC – As of
March 31, 2009, our manager has provided a specific reserve allowance, related
to a non-performing loan on a 48 unit condominium building part of the Desert
Sands Condominiums Phase 2 located in Laughlin, NV, of approximately $1.2
million, of which our portion is approximately $1.2 million.  This
specific reserve allowance was based on completion costs of the property
evaluated by our manager during October 2008 and updated appraisal, obtained by
our manager during October 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Meadowlark Assisted Living
Community, LLC – As of March 31, 2009, our manager has provided a
specific reserve allowance for the outstanding balance of the loan, which is a
second lien position on a 74 bed Assisted Living/Memory Care residential
facility, located on approximately 4.35 acres of land located in Yreka, CA, of
approximately $3.8 million, of which our portion is approximately $2.2
million.  This specific reserve allowance was based on our manager’s
evaluation, which included the foreclosure of the property by the first lien
holder.  Our manager will continue to evaluate our position in the
loan.
 
 WHM Copper Mountain Investments,
LLC – As of March 31, 2009, our manager has provided a specific reserve
allowance, related to a non-performing loan on approximately 2,330 acres lying
within sections 15, 16, 21, 28 & 33 of the Copper Mountain Ranch Master
Planned Community located in Casa Grande, AZ, of approximately $4.9 million, of
which our portion is approximately $4.1 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during January 2009.  Our
manager will continue to evaluate our position in the loan.
 
 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 $8.4 million.  This
specific reserve allowance was based on the current sales price of the
underlying collateral for this loan.  Our manager will continue to
evaluate our position in the loan.
 
 Wolfpack Properties, LLC, –
As of 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 approximately $1.1
million.  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.
 - 25
-
  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 approximately $0.5
million.  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 approximately $0.4
million.  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 approximately $1.5
million.  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.
 
 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 $90,000.  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 16 loans, totaling
approximately $121.4 million, of which our portion was approximately $85.9
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/or
principal.  Subsequent to their extension, 7 of the 16 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 $70.9 million, of which our portion is approximately $53.1
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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 26
-
  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:
 
 As
      of March 31, 2009Balance
                    
                    
                    Allowance
      for loan losses *
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    23,353,000
                    
                    
                    $
                    -
                    
                    
                    $
                    23,353,000Non-performing
      loans – related allowance
                    
                    
                    83,750,000
                    
                    
                    
                    (43,417,000
                    )
                    
                    
                    40,333,000Subtotal
      nonperforming loans
                    
                    
                    107,103,000
                    
                    
                    
                    (43,417,000
                    )
                    
                    
                    63,686,000Performing
      loans – no related allowance
                    
                    
                    56,184,000
                    
                    
                    
                    -
                    
                    
                    
                    56,184,000Performing
      loans – related allowance
                    
                    
                    26,132,000
                    
                    
                    
                    (7,915,000
                    )
                    
                    
                    18,217,000Subtotal
      performing loans
                    
                    
                    82,316,000
                    
                    
                    
                    (7,915,000
                    )
                    
                    
                    74,401,000Total
                    
                    $
                    189,419,000
                    
                    
                    $
                    (51,332,000
                    )
                    
                    $
                    138,087,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesabove.
 
 As
      of December 31, 2008Balance
                    
                    
                    Allowance
      for loan losses
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    9,230,000
                    
                    
                    $
                    --
                    
                    
                    $
                    9,230,000Non-performing
      loans – related allowance
                    
                    
                    135,631,000
                    
                    
                    
                    (71,180,000
                    )
                    
                    
                    64,451,000Subtotal
      nonperforming loans
                    
                    
                    144,861,000
                    
                    
                    
                    (71,180,000
                    )
                    
                    
                    73,681,000Performing
      loans – no related allowance
                    
                    
                    57,666,000
                    
                    
                    
                    --
                    
                    
                    
                    57,666,000Performing
      loans – related allowance
                    
                    
                    22,515,000
                    
                    
                    
                    (7,028,000
                    )
                    
                    
                    15,487,000Subtotal
      performing loans
                    
                    
                    80,181,000
                    
                    
                    
                    (7,028,000
                    )
                    
                    
                    73,153,000Total
                    
                    $
                    225,042,000
                    
                    
                    $
                    (78,208,000
                    )
                    
                    $
                    146,834,000
 
  See
review report of Independent Registered Public Accounting Firm.
 - 27
-
  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 533,675 shares of VRM I’s common stock, representing
approximately 8.09% 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 I’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 $2.25 per share.
 
 As of
March 31, 2009, our manager evaluated the near-term prospects of VRM I in
relation to the severity and duration of the unrealized loss since September 30,
2008.  Based on that evaluation and our ability and intent to hold
this investment for a reasonable period of time sufficient for a forecasted
recovery of fair value, we do not consider our investment in VRM I to be
other-than-temporarily impaired at March 31, 2009.  We will continue
to evaluate our investment in marketable securities on a quarterly
basis.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At March
31, 2009, we held 15 properties with a total carrying value of approximately
$32.1 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 $51,000.  Expenses incurred during the three
months ended March 31, 2009, related to our real estate held for sale totaled
approximately $2.7 million.  These expenses included approximately
$2.5 million in write downs on real estate held for sale.  The summary
below includes our percentage of ownership in each of the
properties.  Our investments in real estate held for sale are
accounted for at the lower of cost or fair value less costs to sell with fair
value based on appraisals and knowledge of local market
conditions.  It is not our intent to invest in or own real estate as a
long-term investment.  We seek to sell properties acquired through
foreclosure as quickly as circumstances permit 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:
  See
review report of Independent Registered Public Accounting Firm.
 - 28
-
  
 Description
                      Date
      Acquired
                      
                      Percentage
      of Ownership
                      
                      
                      Balance
      at
                        December
      31, 2008
                      
                      
                      Acquisitions
                      
                      
                      Write
      Downs
                      
                      
                      Net
      Cash Proceeds on Sales
                      
                      
                      Balance
      at
                        March
      31, 2009Marshall's
      Vista, LTD (1)
                      8/3/2004
                      
                      
                      100%
                      
                      
                      $
                      2,760,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      2,760,000Rio
      Vista Nevada, LLC(2)
                      12/21/2006
                      
                      
                      86%
                      
                      
                      
                      1,945,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,945,000Pirates
      Lake, LTD (3)
                      2/5/2008
                      
                      
                      48%
                      
                      
                      
                      887,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      887,000Brawley
      CA 122, LLC(4)
                      5/1/2008
                      
                      
                      33%
                      
                      
                      
                      308,000
                      
                      
                      
                      --
                      
                      
                      
                      (123,000
                      )
                      
                      
                      --
                      
                      
                      
                      185,000V
      & M Homes at the Palms, Inc. (5)
                      7/15/2008
                      
                      
                      39%
                      
                      
                      
                      455,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      455,000The
      Orleans at Mesquite Estates, LLC (6)
                      8/8/2008
                      
                      
                      100%
                      
                      
                      
                      828,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      828,000MRPE,
      LLC (7)
                      8/11/2008
                      
                      
                      72%
                      
                      
                      
                      4,617,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      4,617,000The
      Laurels at Mesquite Estates, LLC(8)
                      8/11/2008
                      
                      
                      100%
                      
                      
                      
                      920,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      920,000Jeffrey's
      Court, LLC(9)
                      9/3/2008
                      
                      
                      61%
                      
                      
                      
                      2,229,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      2,229,000Cliff
      Shadows Properties, LLC(10)
                      9/8/2008
                      
                      
                      95%
                      
                      
                      
                      8,104,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (6,739,000
                      )
                      
                      
                      1,365,000The
      Sycamore Glenn at Mesquite Estates, LLC(11)
                      9/8/2008
                      
                      
                      100%
                      
                      
                      
                      1,380,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,380,000Redwood
      Place, LLC (12)
                      1/16/2009
                      
                      
                      76%
                      
                      
                      
                      --
                      
                      
                      
                      6,057,000
                      
                      
                      
                      (1,525,000
                      )
                      
                      
                      --
                      
                      
                      
                      4,532,000Bright
      Haven Builders, LLC (13)
                      3/6/2009
                      
                      
                      82%
                      
                      
                      
                      --
                      
                      
                      
                      1,173,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,173,000World
      Capital La Piazza, LLC (14)
                      3/30/2009
                      
                      
                      100%
                      
                      
                      
                      --
                      
                      
                      
                      6,164,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      6,164,000World
      Capital Durango Alpha (15)
                      3/30/2009
                      
                      
                      68%
                      
                      
                      
                      --
                      
                      
                      
                      3,482,000
                      
                      
                      
                      (830,000
                      )
                      
                      
                      --
                      
                      
                      
                      2,652,000Total
                      
                      
                      
                      
                      
                      
                      $
                      24,433,000
                      
                      
                      $
                      16,876,000
                      
                      
                      $
                      (2,478,000
                      )
                      
                      $
                      (6,739,000
                      )
                      
                      $
                      32,092,000
 
 (1)
              Marshall's Vista, LTD –
      During the three months ended March 31, 2009, a former potential buyer
      informed us that they were not in a position to close and that they could
      no longer continue to make extension payments and the sale was
      cancelled.  The property is currently listed for sale at
      approximately $3.0 million, which approximates the total book value, plus
      selling costs, for this property.  No write-down was necessary
      during the three months ended March 31,
2009.
 
 (2)
              Rio Vista Nevada, LLC –
      During December 2006, we, VRM I and Fund III acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the 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.
 
 (3)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings approximately 46.75 acres of land in Galveston,
      TX.  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 Fund
III.
 
 (4)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings a 25 acre proposed 122 single-family subdivision to be known
      as River Drive Subdivision in Brawley, CA.  Our manager has
      evaluated the carrying value of the property and based on 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.
 - 29
-
  
 (5)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings an 80 acre parcel of land in Florence,
      AZ.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in February 2009, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at $1.5
      million.
 
 (6)
              The Orleans at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 21.7 gross acres of Mesquite Estates Planned Unit Development
      with 65 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate,
      updated appraisal obtained in January 2009, and current sales price, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at
      approximately $0.9 million, which approximates the total book value, plus
      selling costs, for this property.
 
 (7)
              MRPE, LLC – During
      August 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings 132.03 acres of land within the Wolf Creek Estates Master
      Planned Community, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its analysis,
      updated appraisal obtained in January 2009, and current sales price, 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 Fund
      III.
 
 (8)
              The Laurels at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 26.5 gross acres of Mesquite Estates Planned Unit Development
      with 60 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate,
      updated appraisal obtained in August 2008, and current sales price, no
      write-down was necessary during the three months ended March 31,
      2009.  The property is currently listed for sale at
      approximately $1.0 million, which approximates the total book value, plus
      selling costs, for this property.
 
 (9)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings 4.92 acres of land to be developed into 119
      condominium units in Las Vegas, NV.  Our manager has evaluated
      the carrying value of the property and based on its analysis, updated
      appraisal obtained in January 2009, and current sales price, no write-down
      was necessary during the three months ended March 31,
  2009.
 
 (10)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and Fund III acquired
      through foreclosure proceedings a 106 Unit Townhouse Project known as
      Cliff Shadows Townhomes located in Las Vegas, NV.  Our manager
      has evaluated the carrying value of the property and based on an updated
      appraisal obtained in September 2008 and the current purchase agreement,
      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 $9.1 million.  On March
      6, 2009, we, VRM I, and Fund III completed the sale of 98 units, with the
      remaining units pending final
escrow.
 
 (11)
              The Sycamore Glenn at Mesquite
      Estates, LLC – During September 2008, we acquired through
      foreclosure proceedings 32.3 gross acres of Mesquite Estates Planned Unit
      Development with 180 "paper" lots, located in Mesquite, NV.  Our
      manager has evaluated the carrying value of the property and based on its
      estimate, no write-down was necessary during the three months ended March
      31, 2009.  The property is currently listed for sale at
      approximately $1.5 million, which approximates the total book value, plus
      selling costs, for this property.
 
 (12)
              Redwood Place, LLC – On
      January 16, 2009, we, VRM I, and Fund III, 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 $51,000.  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 $1.5 million during the
      three months ended March 31,
2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 30
-
  
 (13)
              Bright Haven Builders,
      LLC – On March 6, 2009, we and, VRM I, acquired through foreclosure
      proceedings 10 single family residents (on lots 74 and 169-177), in
      various stages of completion, located within Cherry Meadows Subdivision
      located in Yelm, WA.  During April 2009, our manager received a
      sales agreement to purchase one of the single family homes for
      $235,000.  The remaining homes are currently listed for
      sale.  Our manager has evaluated the carrying value of the
      property and based on its estimate, no write-down was necessary during the
      three months ended March 31, 2009.
 
 (14)
              World Capital La Piazza,
      LLC – On March 30, 2009, we acquired through foreclosure
      proceedings 8.44 net acres of land located in Henderson,
      NV.  The property is currently under contract to sell for
      approximately $6.1 million, with carry back financing to be provided in
      the amount of $3.1 million.  Our manager has evaluated the
      carrying value of the property and based on its estimate, no write-down
      was necessary during the three months ended March 31,
  2009.
 
 (15)
              World Capital Durango
      Alpha – On March 30, 2009, we, VRM I, and Fund III 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 $0.8 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
Management Agreement, such acquisitions and sales are made without any mark up
or mark down.  No gain or loss is recorded on these transactions, as
it is not our intent to make a profit on the purchase or sale of such
investments.  The purpose is generally to diversify our portfolio by
syndicating loans, thereby providing us with additional capital to make
additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us an annual management fee of up to 0.25%
of our aggregate capital contributions received by us and Fund II from the sale
of shares or membership units, paid monthly.  The amount of management
fees paid to our manager for the three months ended March 31, 2009 and 2008,
were approximately $274,000, for each period.
 
 As of
March 31, 2009, and 2008, our manager owned 92,699 of our common
shares.  For the three months ended March 31, 2009, we did not declare
or pay any dividends.  For the three months ended March 31, 2008, we
declared $29,000 in dividends payable to our manager based on the number of
shares our manager held on the dividend record dates.
 
 On March
6, 2009, we, VRM I, and Fund III 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 management
agreement, we, VRM I and Fund III paid our manager an administrative fee of
$282,000, shared pro-rata among us, VRM I and Fund III.
 
 As of
March 31, 2009, we had receivables from our manager of $47,000.  As of
December 31, 2008, we owed our manager $623,000, primarily related to loan
extension fees.
 
 Transactions with Other
Related Parties
 
 As of
March 31, 2009 and March 31, 2008, we owned 533,675 common shares of VRM I,
representing approximately 8.09% and 7.76%, respectively, of their total
outstanding common stock.  For the three months ended March 31, 2009
and 2008 we recognized $0 and $44,000, respectively, in dividend income from VRM
I based on the number of shares we held on the dividend record
dates.
  See
review report of Independent Registered Public Accounting Firm.
 - 31
-
  
 As of
March 31, 2009 and March 31, 2008, VRM I owned 225,134 of our common shares,
representing approximately 1.63% and 1.51%, respectively, of our total
outstanding common stock.  For the three months ended March 31, 2009
and 2008, we declared $0 and $72,000, respectively, in dividends payable to VRM
I based on the number of shares VRM I held on the dividend record
dates.
 
 During
the three months ended March 31, 2008, we sold approximately $0.5 million in
real estate loans to VRM I.  No gain or loss resulted from these
transactions.  There were no similar transactions during the three
months ended March 31, 2009.
 
 As of
March 31, 2009, we had receivables from VRM I of $197,000.  As of
December 31, 2008, we had receivables from VRM I of $92,000
 
 As of
March 31, 2009 and March 31, 2008, Fund III owned 114,117 of our common shares,
representing approximately 0.83% and 0.77%, respectively, of our total
outstanding common stock.  For the three months ended March 31, 2009
and 2008, we declared $0 and $36,000, respectively, in dividends payable to Fund
III based on the number of shares Fund III held on the dividend record
dates.
 
 As of
March 31, 2009, we had receivables from Fund III of $11,000.  As of
December 31, 2008, we had receivables from Fund III of $9,000.
 
 During
the three months ended March 31, 2009 and 2008, we incurred $133,000 and
$27,000, respectively, for legal fees to the law firm of Levine, Garfinkel &
Katz in which Tthe Secretary of Vestin Group has an equity ownership interest in
the law firm.
 
 On March
23, 2009, our board of directors authorized us to enter into a consulting
agreement with the former COO of the Manager to assist us in the repurchase of
the Junior Subordinated Notes.  The consulting fees paid will be up to
three and half percent of the discounted amount of the repurchase.
 
 NOTE
H — NOTES RECEIVABLE
 
 During
October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada
of which our portion of the net cash proceeds was approximately $5.8
million.  We originally sold this property under a 100% seller
financing arrangement.  The borrowers then sold the property to an
unrelated third party that resulted in a payoff of the note and also allowed us
to record the sale and remove the asset from real estate held for sale – seller
financed.  In addition, during September 2004, we received a
promissory note from the guarantors of the loan in the amount of $440,000 in
exchange for a release of their personal guarantees.  Since payments
on the note did not begin for 18 months from the date of the note, we discounted
the face value of the note to $328,000, which is based on a discount rate of 8%
as of that date.  As of March 31, 2009, we have received $104,000 in
principal payments.  Payments will be recognized as income when
received.  The balance of $336,000 was fully reserved as of March 31,
2009.
 
 During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
approximately $5.5 million of which our share of the proceeds were approximately
$3.8 million, which resulted in a loss of approximately $0.8
million.  In addition, during June 2005, we and VRM I entered into a
settlement agreement with the guarantors of the loan in the amount of $2.0
million in exchange for a release of their personal guarantees, of which our
share was approximately $1.4 million.  The balance is secured by a
second deed of trust, with a first installment of $100,000 due in July 2005 and
monthly interest only payments of 5% on $1.1 million from July 2005 through July
2008, at which time the entire balance is due.  As of March 31, 2009,
we have received $616,000 in principal payments.  Payments will be
recognized as income when received.  The balance of $745,000 was fully
reserved as of March 31, 2009.
  See
review report of Independent Registered Public Accounting Firm.
 - 32
-
  During
2006, we and VRM I entered into a settlement agreement in the amount of $1.5
million with the guarantors of a loan collateralized by a 126 unit (207 bed)
assisted living facility in Phoenix, AZ, which we had foreclosed
on.  Our portion was approximately $1.3 million.  The
promissory note is payable in seven annual installments of $100,000 with an
accruing interest rate of 7%, with the remaining note balance due in April
2013.  As of March 31, 2009, we had received $2,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of approximately $1.3 million was fully
reserved as of March 31, 2009.
 
 NOTE
I — JUNIOR SUBORDINATED NOTES
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through the special purpose business trust, VCT I to
Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly.  The securities mature on
July 30, 2020 and may be called at par by us at any time.  We incurred
approximately $2.3 million in financing costs relating to the
notes.  These costs are being amortized to interest expense over the
term of the notes.  We are obligated to pay the trust preferred
securities with respect to distributions and amounts payable upon liquidation,
redemption or repayment.
 
 VCT I
issued $100,000 of common securities, representing 100% of the voting common
stock of VCT I to us.  VCT I used the proceeds from the sale of the
trust preferred securities and the common securities to purchase our Junior
Subordinated Notes.  The terms of the Junior Subordinated Notes match
the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
Junior Subordinated Notes require quarterly interest distributions beginning
July 30, 2007.  For the three months ended March 31, 2009 and 2008,
interest expense on the Junior Subordinated Notes totaled approximately $1.2
million and $1.3 million, respectively.  As of March 31, 2009, the
principal balance outstanding was approximately $56.4 million, net of notes
repurchased by us.
 
 Our
interest in VCT I is accounted for using the equity method and the assets and
liabilities of VCT I are not consolidated into our financial statements, in
accordance with FIN 46R.  Interest on the Junior Subordinated Notes is
included in interest expense on our consolidated income statement while the
Junior Subordinated Notes are presented as a separate item on our consolidated
balance sheet.
 
 On
November 7, 2008, we entered into an agreement (the “First Supplemental
Indenture”) with Taberna Capital Management, LLC (“Taberna”), in its capacity as
collateral manager for certain collateral debt obligation vehicles that are the
holders of the Junior Subordinated Notes, providing for an amendment of the
tangible net worth covenant.
 
 The First
Supplemental Indenture provides as follows (defined terms refer to the
definitions in the indenture):
 
 •
              The
      tangible net worth covenant was changed from not less than $225 million to
      not less than the lesser of $150 million or 2.5 times the then outstanding
      principal balance of the Junior Subordinated
  Notes.
 
 •
              The
      EBITDA covenant was changed from 2.5 times Interest Expense to 1.5 times
      Interest Expense, provided that, for the quarter ending June 30, 2009, the
      requirement will be 1.2 times Interest Expense for the four quarter period
      ending on such date.
 
 •
              The
      restriction on the Company redeeming notes at par prior to July 30, 2012
      were removed and no redemption premium will be applied to any
      redemptions.
 
 •
              We
      were required to post a $5,000,000 letter of credit that can be drawn to
      pay principal and interest on the Junior Subordinated Notes if an Event of
      Default has occurred.  The letters of credit may not be
      subordinated to any of our Senior Debt.  During November 2008,
      we posted the entire $5,000,000 letter of
  credit.
  See
review report of Independent Registered Public Accounting Firm.
 - 33
-
  
 •
              The
      notice and cure provisions in the indenture were changed from 30 days or
      45 days to 15 days.
 
 •
              Taberna
      was granted expanded rights to examine our books and
    records.
 
 •
              We
      agreed to reimburse Taberna’s fees related to the First Supplemental
      Indenture in an amount not to exceed
$50,000.
 
 On
December 31, 2008, we were not in compliance with the revised tangible net worth
covenant and the debt to tangible net worth covenant.  On March 25,
2009, we entered into a letter agreement with Taberna providing for a waiver of
all financial covenants effective December 31, 2008 through June 30,
2009.  In addition, pursuant to the letter agreement we exchanged $20
million of the Junior Subordinated Notes for certain replacement securities,
which we acquired for approximately $10 million, in April 2009.  The
transaction will reduce our obligation on the Junior Subordinated Notes to
approximately $36.3 million, which we expect will facilitate future compliance
with financial covenants.  This transaction will result in a net gain
of approximately $9 million, net of transaction costs.  In addition,
we are to pay additional interest equal to $250,000 per year, payable quarterly
on the same payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  The replacement securities were acquired with funds
consisting of $5 million from our operating and financing funds and $5 million
from the letters of credit.  In addition, we are required to pay
additional interest equal to $250,000 per year on the Junior Subordinated Notes,
payable quarterly on the same payment dates as the current terms of the Junior
Subordinated Notes.  We agreed to make a nonrefundable payment of
$200,000 to Taberna to cover its costs related to the waiver and exchange
arrangement.
 
 NOTE
J— SECURED BORROWINGS
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue in any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In
the event of borrower non-performance, the Inter-creditor Agreements generally
provide that the Lead Lenders must repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on the participated
loan amount; (ii) substituting an alternative loan acceptable to the Investor;
or (iii) repurchasing the participation from the Investor for the outstanding
balance plus accrued interest.
 
 Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowings arrangements.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part II – Other
Information, Item 6 Exhibits of this Report Form 10-Q).  The
participation interest is at 11% on the outstanding balance.  We
incurred approximately $0.9 million in finance costs related to the secured
borrowings, these costs are being amortized to interest expense over the term of
the agreements.  As of March 31, 2009, and December 31, 2008, we had
$10.6 million in funds, including approximately $0.7 million in interest
reserves, used under Inter-creditor agreements.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 34
-
  NOTE
K — NOTE PAYABLE
 
 In May
2008, we financed a 12-month insurance policy for Directors and Officers
liability, with an annual interest rate of 4.9%.  The agreement
required a down payment of $38,000 and nine monthly payments of $23,000
beginning on May 27, 2008.  As of March 31, 2009, the outstanding
balance of the note was paid in full.  In April 2009, we financed a
12-month insurance policy for Directors and Officers liability, with an annual
interest rate of 4.9%.  The agreement required a down payment of
$45,000 and nine monthly payments of $28,000 beginning on May 27,
2009.
 
 On March
25, 2009, we entered into a promissory note for $3.0 million payable on or
before May 8, 2009, with an exit fee of $0.6 million due on or before May 26,
2009.  We subsequently used these funds to purchase a portion of the
Junior Subordinated Notes.
 
 NOTE
L — 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, secured
borrowings and Junior Subordinated Notes payable.
 
 To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment.  Accordingly, our degree of judgment exercised in
determining fair value is greatest for instruments categorized in Level
3.  In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy.  In such cases, FAS
157 requires that an asset or liability be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair
value.
 
 Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure.  Therefore, even when market assumptions are
not readily available, our own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement
date.  We use prices and inputs that are current as of the measurement
date, including during periods of market dislocation, such as the recent
illiquidity in the auction rate securities market.  In periods of
market dislocation, the observability of prices and inputs may be reduced for
many instruments.  This condition may cause our financial instruments
to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
 
 FAS 157
requires that the valuation techniques used by us be consistent with at least
one of the three possible approaches: the market approach, income approach
and/or cost approach.  Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active
securities exchanges.  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:
  See
review report of Independent Registered Public Accounting Firm.
 - 35
-
  
 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
                        
                        $
                        427,000
                        
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        427,000Investment
      in real estate loans
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        135,727,000
                        
                        
                        $
                        135,727,000Assets
      under secured borrowings
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        10,600,000
                        
                        
                        $
                        10,600,000LiabilitiesSecured
      borrowings
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        9,907,000
                        
                        
                        $
                        9,907,000Junior
      subordinated notes payable
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        28,600,000
                        
                        
                        $
                        28,600,000
 
 The
following table presents the changes in our financial assets and liabilities
that are measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from December 31, 2008 to March 31,
2009:
 
 AssetsInvestment
      in
                      real
      estate loans
                    
                    
                    Assets
      under secured borrowingsBalance
      on December 31, 2008
                    
                    $
                    145,959,000
                    
                    
                    $
                    10,600,000Change
      in temporary valuation adjustment included in net lossIncrease
      in allowance for loan losses
                    
                    
                    (2,074,000
                    )
                    
                    
                    --Change
      in impairment on restructured loans
                    
                    
                    800,000
                    
                    
                    
                    --Purchase
      and additions of assetsTransfer
      of real estate loans to real estate held for sale
                    
                    
                    (30,987,000
                    )
                    
                    
                    --Transfer
      of allowance on real estate loans to real estate held for
    sale
                    
                    
                    14,111,000
                    
                    
                    
                    --New
      mortgage loans and mortgage loans bought
                    
                    
                    22,734,000
                    
                    
                    
                    --Sales,
      pay downs and reduction of assetsCollections
      of principal and sales of investment in real estate loans
                    
                    
                    (28,169,000
                    )
                    
                    
                    --Reduction
      of allowance for loan loss related to sale of investment in real estate
      loan
                    
                    
                    14,838,000
                    
                    
                    
                    --Temporary
      change in estimated fair value based on future cash flows
                    
                    
                    (1,485,000
                    )
                    
                    
                    --Transfer
      to Level 1
                    
                    
                    --
                    
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --
                    
                    
                    
                    --Balance
      on March 31, 2009, net of temporary valuation adjustment
                    
                    $
                    135,727,000
                    
                    
                    $
                    10,600,000
 
  See
review report of Independent Registered Public Accounting Firm.
 - 36
-
  
 LiabilitiesSecured
      borrowings
                    
                    
                    Junior
      subordinated notes payableBalance
      on December 31, 2008
                    
                    $
                    9,907,000
                    
                    
                    $
                    28,600,000Temporary
      change in estimated fair value
                    
                    
                    --
                    
                    
                    
                    --Transfer
      to Level 1
                    
                    
                    --
                    
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --
                    
                    
                    
                    --Balance
      on March 31, 2009, net of temporary valuation adjustment
                    
                    $
                    9,907,000
                    
                    
                    $
                    28,600,000
 
 NOTE
M — 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 ABP 28-1, "Interim Disclosure about Fair
Value of Financial Instruments" ("FSP FAS 107-1 and ABP 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 ABP 28-1 will not have
a material impact on our consolidated financial statements upon
adoption.
 
 NOTE
N — LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and Fund III.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 37
-
  In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of units in Fund III and in our
predecessor, Vestin Fund II, LLC.  The Respondents consented to the
entry of a cease and desist order, the payment by Mr. Shustek of a fine of
$100,000 and Mr. Shustek’s suspension from association with any broker or dealer
for a period of six months, which expired in March 2007.  In addition,
the Respondents agreed to implement certain undertakings with respect to future
sales of securities.  We are not a party to the Order.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
United States Court of Appeals for the Ninth Circuit, which dismissal was upheld
when the United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, prior to the formation of Fund II.  On March
6, 2006, Desert Land amended the state court complaint to name VRM
I.  Desert Land alleges that one or more of the defendants have
transferred assets to other entities without receiving reasonable value
therefore; alleges plaintiffs are informed and believe that defendants have made
such transfers with the actual intent to hinder, delay or defraud Desert Land;
that such transfers made the transferor insolvent and that sometime between
February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I
for that purpose.
 
 The state
court complaint further alleges that Desert Land is entitled to void such
transfers and that pursuant to NRS 112.20, Desert Land is entitled to an
injunction to enjoin defendants from further disposition of
assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin
Group and Vestin Mortgage for any losses and expenses in connection with the
action, and Mr. Shustek has guaranteed the indemnification.  In
December 2008, this lawsuit was settled.  The settlement has no effect
on us.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The court certified a class of all former Fund I unit holders
who voted against the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The trial is currently scheduled to begin on June 19,
2009.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages, and
rescission.  The trial is currently scheduled to begin on 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.
 
 In
addition to the matters described above, our manager is involved in a number of
other legal proceedings concerning matters arising in connection with the
conduct of its business activities.  Our manager believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously.  Other than the matters described above, our manager
believes that it is not a party to any pending legal or arbitration proceedings
that would have a material adverse effect on our manager’s financial condition
or results of operations or cash flows, although it is possible that the outcome
of any such proceedings could have a material impact on our manager’s net income
in any particular period.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 38
-
  NOTE
O — LEGAL MATTERS INVOLVING THE COMPANY
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  To date the auction has not been
successful.  Vestin and the State are in the process of negotiating a
new agreement that would permit the foreclosure to
proceed.  Agreements in principal have been reached; however, an
agreement has not yet been signed.
 
 We and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund II into Vestin Realty Mortgage II,
Inc.  The court certified a class of all former Fund II unit holders
who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc.,
and a subclass of all class members who were over the age of 60 and Nevada
residents at the time of the merger.  The trial is currently scheduled
to begin on June 19, 2009.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of our management agreement and Fund II’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by us with respect to the
above actions.
 
 We,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 sets of plaintiffs representing approximately 138
individuals (“Plaintiffs”),in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
rescission.  The trial is currently scheduled to begin on 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 our management agreement
and Fund II’s operating agreement contain indemnity provisions whereby Vestin
Mortgage and Michael V. Shustek may be eligible for indemnification by us with
respect to the above actions.  We, Vestin Mortgage, Inc. and Michael
Shustek have entered into confidential settlement agreements with individual
plaintiffs who collectively held approximately 10% of the total shares at issue
in the action.  In addition, four individual plaintiffs have
voluntarily withdrawn their claims against us, Vestin Mortgage, Inc. and Michael
Shustek with prejudice.
 
 In
addition to the matters described above, we are involved in a number of other
legal proceedings concerning matters arising in the ordinary course of our
business activities.  We believe we have meritorious defenses to each
of these actions and intend to defend them vigorously.  Other than the
matters described above, we believe that we are not a party to any pending legal
or arbitration proceedings that would have a material adverse effect on our
financial condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a material impact
on our net income in any particular period.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 39
-
  NOTE
P — DIVIDEND REQUIREMENT
 
 To
maintain our status as a REIT, we are required to declare dividends, other than
capital gain dividends, to our stockholders each year in an amount at least
equal to (1) the sum of (a) 90% of our taxable income, computed without regards
to the dividends paid deduction and our net capital gain, and (b) 90% of the net
income, after tax, from foreclosure property, minus (2) the sum of certain
specified items of non-cash income over 5% of our REIT taxable
income.  All dividends will be made at the discretion of our board of
directors and will depend on our earnings, both tax and GAAP, financial
condition, maintenance of REIT status and such other factors as the board of
directors deems relevant.
 
 Our Board
of Directors decided to suspend the payment of dividends during June
2008.  We will continue to comply with the REIT requirements and will
distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 NOTE
Q — SUBSEQUENT EVENTS
 
 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 Fund
III.  Our 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.
 
 We are
raising funds through the issuance of promissory notes secured by certain of our
real estate owned properties.
  On May 7,
2009, we, VRM I and Fund III foreclosed on the WCP Warm Spring Holding 1, LLC
loan and classified the property as real estate held for
sale.
  See
review report of Independent Registered Public Accounting Firm.
 - 40
-
  
 REPORT
OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
   To the
Board of Directors and Stockholders of Vestin Realty Mortgage II,
Inc.
 
 We have
reviewed the accompanying consolidated balance sheet of Vestin Realty Mortgage
II, Inc. and its subsidiary as of March 31, 2009, and the related consolidated
statements of operations for the three-month periods ended March 31, 2009 and
2008, the consolidated statements of equity and other comprehensive loss for the
three-month period ended March 31, 2009, and the consolidated statements of cash
flows for the three-month periods ended March 31, 2009 and 2008. All information
included in these consolidated financial statements is the representation of the
management of Vestin Realty Mortgage II, Inc.
 
 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,
the objective of which is the expression of an opinion regarding the
consolidated 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 consolidated financial statements referred to above for them
to be in conformity with accounting principles generally accepted in the United
States of America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Vestin Realty Mortgage II, Inc. as of December 31, 2008 and the related
consolidated statements of operations, equity and other comprehensive income
(loss) and cash flows for the year ended December 31, 2008.  We have
also audited the effectiveness of the Company’s internal controls over financial
reporting as of December 31, 2008, and in our report dated March 26, 2009, we
expressed an unqualified opinion on those consolidated financial statements and
an unqualified opinion on the effectiveness of internal control over financial
reporting. The consolidated financial statements referred to above are not
presented herein. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2008, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
 
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 
 Orange,
California
 May 7,
2009
  
  - 41
-
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three 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.
 
  - 42
-
  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 15 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 $63.7 million, net of allowance for loan losses of
approximately $43.4 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 $95.8 million or
49% of our total assets as of March 31, 2009, as compared to approximately $98.1
million or 49% of our total assets as of December 31, 2008.  At March
31, 2009, non-performing assets consisted of approximately $32.1 million of real
estate held for sale and approximately $63.7 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 $51,000, 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 dividends to our stockholders.  For additional
information regarding our non-performing loans see “Non-Performing Loans” in
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 As of
March 31, 2009, our loan-to-value ratio was 74.3%, 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 11
non-performing loans and 7 performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager.  For further information regarding allowance
for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated 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,
Hawaii, Nevada, Oklahoma, Oregon and Texas.
 
  - 43
-
  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
                      
                      $
                      2,148,000
                      
                      
                      $
                      7,156,000Total
      operating expenses
                      
                      
                      5,813,000
                      
                      
                      
                      2,103,000Non-operating
      income (loss)
                      
                      
                      (57,000
                      )
                      
                      
                      185,000Loss
      from real estate held for sale
                      
                      
                      (2,685,000
                      )
                      
                      
                      (1,965,000
                      )Income
      (loss) before provision for income taxes
                      
                      
                      (6,407,000
                      )
                      
                      
                      3,273,000Provision
      for income taxes
                      
                      
                      --
                      
                      
                      
                      --Net
      income (loss)
                      
                      $
                      (6,407,000
                      )
                      
                      $
                      3,273,000Basic
      and diluted earnings per common share
                      
                      $
                      (0.46
                      )
                      
                      $
                      0.22Dividends
      declared per common share
                      
                      $
                      --
                      
                      
                      $
                      0.32Weighted
      average common shares
                      
                      
                      13,788,859
                      
                      
                      
                      14,872,330Weighted
      average term of outstanding loans, including extensions
                      
                      23
      months
                      
                      
                      19
      months
 
 Total
Revenues:  For the three months ended March 31, 2009, total
revenues were approximately $2.1 million compared to approximately $7.2 million
for the same period in 2008, a decrease of approximately $5.1 million or 70%
compared to the same period in 2008 due in significant part to the following
factor:
 
 ·
              Interest
      income from investments in real estate loans was approximately $2.1
      million during the three months ended March 31, 2009 compared to
      approximately $7.1 million 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 investment in real estate
      loans was approximately $189.4 million.  As of March 31, 2008,
      our investment in real estate loans was approximately $302.3
      million.  The decline in interest income is largely attributable
      to the increase in non-performing assets, which has reduced the amount of
      cash available for investment in new loans and the increase of real estate
      owned properties acquired through the foreclosures of our investments in
      real estate loans.  As of March 31, 2009, approximately $91.5
      million of our loans were non-performing compared to approximately $58.2
      million as of March 31, 2008.  For additional information on our
      loan portfolio, see Note D – Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements of this
      Quarterly Report Form 10-Q.
 
 Total Operating
Expenses:  For the three months ended March 31, 2009, total
operating expenses were approximately $5.8 million compared to approximately
$2.1 million during the three months ended March 31, 2008, an increase of
approximately $3.7 million or 176%.  Expenses were primarily affected
by the following factors:
 
 ·
              During
      the three months ended March 31, 2009, we recognized a provision for loan
      losses totaling approximately $1.3 million, compared to none for the same
      period in 2007.  See “Specific Loan Allowance” in Note D – Investment Real Estate
      Loans of the Notes to the Financial Statements included in Part I,
      Item I Consolidated
      FinancialStatements of this Quarterly Report on Form
      10-Q.
 
 ·
              We
      recognized approximately $1.3 million of interest expense during the three
      months ended March 31, 2009 related to the Junior Subordinated Notes
      issued, during June 2007, in connection with the trust preferred
      financing, compared to approximately $1.4 million during the same period
      in 2008.  During the three months ended March 31, 2009, we
      recognized approximately $0.4 million of interest expenses related to
      secured borrowings held during the period compared to none for the same
      period in 2008.
  - 44
-
  
 ·
              Professional
      fees increased approximately $1.9 million during three months ended March
      31, 2009 compared to the same period in 2008, primarily due to the legal
      fees relating to the legal actions that have been filed against us in
      connection with the REIT conversion.  See Note O – Legal Matters Involving The
      Company of the Notes to the Financial Statements included in Part
      I, Item I Consolidated
      FinancialStatements of this Quarterly Report on Form
      10-Q.
 
 ·
              During
      the three months ended March 31, 2009, we recognized approximately $0.4
      million in provision for doubtful accounts related to receivables from
      borrowers for reimbursement of property taxes, accrued interest and other
      related expenses in connection with our investment in real estate
      loans.  There were no similar transaction during the three
      months ended March 31, 2008.
 
 Total Non-Operating Income
(Loss):  During the three months ended March 31, 2009 total
non-operating loss was $57,000 compared to non-operating income of $185,000
during the three months ended March 31, 2008, a decline of $242,000 or
131%.  This decline is primarily due to the following
factors:
 
 ·
              During
      the three months ended March 31, 2009, we recognized approximately $19,000
      of interest income from banking institutions compared to approximately
      $141,000 in the same period in 2008.  The decrease is due to the
      decrease in our average cash
balance.
 
 ·
              During
      the three months ended March 31, 2009, we recognized $76,000 in expenses
      related to settlement of certain legal
actions.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended March 31, 2009, total losses
from real estate held for sale were approximately $2.7 million compared to
approximately $2.0 million for the three months ended March 31, 2008, a decrease
of approximately $0.2 million or 8% due in significant part to the following
factor:
 
 ·
              We
      wrote down approximately $2.5 million on three properties held for sale
      during the three months ended March 31, 2009 compared to approximately
      $2.5 million on one property held for sale during the three months ended
      March 31, 2008.  These write downs resulted from declining real
      estate values which adversely impacted the value of the properties we
      acquired through foreclosure.  For additional information see
      Note F – Real Estate
      Held For Sale of the Notes to the Financial Statements included in
      Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.  As of
      March 31, 2009, we held 15 properties held for sale totaling approximately
      $32.1 million compared to 4 properties held for sale as of March 31, 2008
      totaling approximately $32.4
million.
 
 Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to declare dividends, other than capital gain dividends,
to our stockholders each year in an amount at least equal to (1) the sum of (a)
90% of our taxable income, computed without regard to the dividends paid
deduction and our net capital gain, and (b) 90% of the net income, after tax,
from foreclosure property, minus (2) the sum of certain specified items of
noncash income over 5% of our REIT taxable income, determined without regard to
the dividends paid and our net capital gain.  Because we expect to
declare dividends based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our dividends may at times be
more or less than our reported earnings as computed in accordance with
GAAP.  During the three months ended March 31, 2009, we did not
declared any cash dividends.
 
  - 45
-
  Total
taxable income and REIT taxable income are non-GAAP financial measurements, and
do not purport to be an alternative to reported net income or cash flow from
operations determined in accordance with GAAP as a measure of operating
performance.  Our total taxable income represents the aggregate amount
of taxable income generated by us and our wholly owned taxable REIT subsidiary,
TRS II, Inc.  REIT taxable income is calculated under U.S. federal tax
laws in a manner that, in certain respects, differs from the calculation of net
income pursuant to GAAP.  REIT taxable income excludes the
undistributed taxable income of TRS II, Inc., which is not included in REIT
taxable income until distributed to us.  Subject to certain TRS value
limitations, there is no requirement that the TRS II, Inc. distribute their
earnings to us.  Since we are structured as a REIT and the Internal
Revenue Code requires that we distribute substantially all of our net taxable
income in the form of dividends to our stockholders, we believe that presenting
investors with the information management uses to calculate our taxable income
is useful to investors in understanding the amount of the minimum dividends that
we must declare to our stockholders so as to comply with the rules set forth in
the Internal Revenue Code.  Because not all companies have identical
calculations, this presentation of total taxable income and REIT taxable income
may not be comparable to those reported by other companies.
 
 The table
below reconciles the differences between reported net income and total estimated
taxable income and estimated REIT taxable income for the three months ended
March 31, 2009:
  For
      the Three Months EndedMarch
      31, 2009Net
      loss, as reported
                      
                      $
                      (6,407,000
                      )Add
      (deduct):Provision
      for loan losses
                      
                      
                      1,274,000Write
      down on real estate held for sale
                      
                      
                      2,478,000Net
      tax loss on foreclosure of real estate loans
                      
                      
                      (15,709,000
                      )Tax
      loss on sale of real estate loan
                      
                      
                      (14,837,000
                      )Provision
      for doubtful accounts related to receivable
                      
                      
                      53,000Total
      taxable loss
                      
                      
                      (33,148,000
                      )Less
      : Taxable income attributable to TRS II, Inc.
                      
                      
                      31,000Estimated
      REIT taxable loss (prior to deductions for dividends paid)
                      
                      $
                      (33,117,000
                      )
 
 CAPITAL
AND LIQUIDITY
 
 Liquidity
is a measure of a company’s ability to meet potential cash requirements,
including ongoing commitments to fund lending activities and general operating
purposes.  Subject to a 3% reserve, we generally seek to use all of
our available funds to invest in real estate loans.  Distributable
cash flow generated from such loans is paid out to our stockholders, in the form
of a dividend.  We do not anticipate the need for hiring any
employees, acquiring fixed assets such as office equipment or furniture, or
incurring material office expenses during the next twelve months.  We
may pay our manager an annual management fee of up to 0.25% of our aggregate
capital received by Fund II and us from the sale of shares or membership
units.
 
 During
the three months ended March 31, 2009, net cash flows used by operating
activities approximated $1.6 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 $4.7 million, during the
three months ended March 31, 2009 compared to the same period in
2008.  In addition, we incurred approximately $2.5 million in
write-downs on real estate held for sale and approximately $1.3 million in
provision for loan losses during the three months ended March 31,
2009.  These write-downs and allowances 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, sales of real
estate loans and proceeds for sales of real estate held for sale of
approximately $13.1 million and cash used for new investments and purchases of
real estate loans totaling approximately $15.8 million.  Cash flows
from financing activities consisted of a note payable of $3.0
million.  Financing activities also consisted of a purchase of
treasury stock totaling $42,000 and principal payments on a note payable of
$24,000.
 
  - 46
-
  At March
31, 2009, we had approximately $6.7 million in cash, $0.4 million in marketable
securities – related party and approximately $199.4 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales, sales of real estate held
for sale and/or borrowings.  We believe we have sufficient working
capital to meet our operating needs in the near term, provided that payment on
the Junior Subordinated Notes discussed below is not accelerated.  In
addition to the foregoing assets, as of March 31, 2009, we had approximately
$5.0 million in restricted cash, in the form of letters of credit upon which
Taberna is entitled to draw if we default upon our obligation to pay principal
and interest on the Junior Subordinated Notes.  The letters of credit
may not be subordinated to any of our Senior Debt.  During April 2009,
the $5.0 million in letter of credit was deposited in an escrow
account.  Pursuant to an agreement with Taberna, such funds will be
used to acquire replacement securities which will be exchanged for a portion of
the outstanding trust preferred securities.  For additional
information regarding the First Supplemental Indenture see Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Since we
comply with the REIT requirements and distribute at least ninety percent (90%)
of our annual taxable income, our sources of liquidity include; repayments of
outstanding loans, dividend reinvestments by our stockholders, arrangements with
third parties to participate in our loans and proceeds from issuance of note
payable and secured borrowings.  We rely primarily upon repayment of
outstanding loans and proceeds from sales of real estate held for sale to
provide capital for investment in new loans.  The significant level of
defaults on outstanding loans has reduced the funds we have available for
investment in new loans.  Resulting foreclosure proceedings may not
generate full repayment of our loans and may result in significant delays in the
return of invested funds.  This has diminished our capital resources
and impaired our ability to invest in new loans.  During June 2008,
our Board of Directors decided to suspend the payment of
dividends.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.  We
will continue to comply with the REIT requirements and will distribute at least
ninety percent (90%) of our annual taxable income.
 
 Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale totaling approximately $63.7 million and $32.1
million, respectively, as of March 31, 2009, compared to approximately $73.7
million and $24.4 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 shares except through our dividend reinvestment
program.  As of May 1, 2009, approximately 10% of our stockholders
owning less than 1% our outstanding shares have elected to reinvest their
dividends.  The level of dividend reinvestment in the future will
depend upon our performance, as well as the number of our stockholders who
prefer to reinvest rather than receive current dividends.
 
  - 47
-
  On
December 31, 2008, we were not in compliance with the revised tangible net worth
covenant and the debt to tangible net worth covenant.  On March 25,
2009, we entered into a letter agreement with Taberna providing for a waiver of
all financial covenants effective December 31, 2008 through June 30,
2009.  In addition, pursuant to the letter agreement we exchanged $20
million of the Junior Subordinated Notes for certain replacement securities,
which we acquired for approximately $10 million, in April 2009.  The
transaction will reduce our obligation on the Junior Subordinated Notes to
approximately $36.3 million, which we expect will facilitate future compliance
with financial covenants.  This transaction will result in a net gain
of approximately $9 million, net of transaction costs.  In addition,
we are to pay additional interest equal to $250,000 per year, payable quarterly
on the same payment dates as the current terms of the Junior Subordinated
Notes.  We agreed to make a nonrefundable payment of $200,000 to
Taberna to cover its costs related to the waiver and exchange
arrangement.  The replacement securities were acquired with funds
consisting of $5 million from our operating and financing funds and $5 million
from the letters of credit.  In addition, we are required to pay
additional interest equal to $250,000 per year on the Junior Subordinated Notes,
payable quarterly on the same payment dates as the current terms of the Junior
Subordinated Notes.  We agreed to make a nonrefundable payment of
$200,000 to Taberna to cover its costs related to the waiver and exchange
arrangement.  If we fail to perform our obligations under the letter
agreement or if we are unable to comply with the financial covenants after July
1, 2009, then, absent another waiver from the note holders, the lenders could
declare an event of default and could seek to accelerate all amounts due under
the Junior Subordinated Notes.  We might not have cash resources
sufficient to pay the amounts due in the event of acceleration and we do not
have in place any sources of liquidity which would enable us to meet our
obligations in the event of an acceleration of the Junior Subordinated
Notes.  For additional information regarding the First Supplemental
Indenture see Note I – Junior
Subordinated Notes of the Notes to the Consolidated Financial Statements
included Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 On March
25, 2009, we borrowed $3.0 million from an unaffiliated party pursuant to an
unsecured promissory note which is payable on or before May 8, 2009, with an
exit fee of $0.6 million due on or before May 26, 2009.  We intend to
use these funds to purchase a portion of the Junior Subordinated Notes referred
to above.  Per the terms of the loan, all subsequent proceeds from
loan repayments and sales of property will be used to pay down the
note.  We are currently anticipating receipt of proceeds from the sale
of properties, which will meet our on-going obligations.  No assurance
can be made that these sales will be completed.
 
 We are
considering various options to enhance the company’s capital
resources.  Among other things, we are currently exploring the
possibility of raising funds through a private placement of unsecured
notes.  At this time, we do not know if any such offering would be
successful, or if we will be able to enhance our capital resources through other
means.  Additionally, we are raising funds through the issuance of
promissory notes secured by certain of our real estate owned
properties.
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws
repurchases may be made at such times and in such amounts, as our management
deems appropriate.  The share repurchase program may be discontinued
or terminated at any time and we have not established a date for completion of
the share repurchase program.  The repurchases will be funded from our
available cash.  As of March 31, 2009, we had purchased 1,198,573
shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $5.7 million.  In addition, as part of a settlement
agreement, we repurchased 13,750 shares of stock and classified them as treasury
stock and incurred $76,000 in settlement expenses.  These shares are
carried on our books at cost totaling $42,000 and are not part of the repurchase
program.  As of March 31, 2009, we had a total of 1,212,323 shares of
treasury stock carried on our books at cost totaling approximately $5.7
million.
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
  - 48
-
  We may
seek to expand our capital resources through borrowings from institutional
lenders or through securitization of our loan portfolio or similar
arrangements.  No assurance can be given that, if we should seek to
borrow additional funds or to securitize our assets we would be able to do so on
commercially attractive terms.  Our ability to expand our capital
resources in this manner is subject to many factors, some of which are beyond
our control, including the state of the economy, the state of the capital
markets and the perceived quality of our loan portfolio.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 6% to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 34 real estate loans, as of
March 31, 2009, with a balance of approximately $189.4 million as compared to
investments in 39 real estate loans, as of December 31, 2008, with a balance of
approximately $225.0 million.
 
 As of
March 31, 2009, we had 15 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 $63.7 million, net of
allowance for loan losses of approximately $43.4 million, which does not include
the allowances of approximately $7.9 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 11 non-performing loans and 7 performing
loans, based on updated appraisals and evaluation of the borrower obtained by
our manager.  Our manager evaluated these loans and concluded that the
remaining underlying collateral was sufficient to protect us against further
losses of principal or interest.  Our manager will continue to
evaluate these loans in order to determine if any other allowance for loan
losses should be recorded.
 
 During
the three months ended March 31, 2009, we foreclosed upon four properties,
totaling approximately $16.9 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:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
  - 49
-
  
 ·
              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 15 properties with a total carrying value of approximately
$32.1 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, other than the
interest in VCT I as discussed in Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part I, Item I
Consolidated FinancialStatements of this Quarterly Report on Form 10-Q nor do we have any
interests in non-exchange traded commodity contracts.
 
 CONTRACTUAL
OBLIGATIONS
 
 The
following summarizes our contractual obligations at March 31, 2009:
 
 Contractual
      Obligation
                      
                      Total
                      
                      
                      Less
      Than 1 Year
                      
                      
                      1-3
      Years
                      
                      
                      3-5
      Years
                      
                      
                      More
      Than
                        5
      YearsJunior
      subordinated notes payable (1)
                      
                      $
                      56,350,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      56,350,000Secured
      borrowings (2)
                      
                      
                      9,907,000
                      
                      
                      
                      9,907,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Notes
      payable (3)
                      
                      
                      3,000,000
                      
                      
                      
                      3,000,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Total
                      
                      $
                      69,257,000
                      
                      
                      $
                      12,907,000
                      
                      
                      $
                      --
                      
                      
                      $
                      --
                      
                      
                      $
                      56,350,000
 
 (1)
              See
      Note I – Junior
      Subordinated Notes of the Notes to the Consolidated Financial
      Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form
  10-Q.
 
 (2)
              See
      Note J – Secured
      Borrowings of the Notes to the Consolidated Financial Statements
      included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form
  10-Q
 
 (3)
              See
      Note K – Notes
      Payable of the Notes to the Consolidated Financial Statements
      included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form
  10-Q.
 
  - 50
-
  RELATED
PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financial statements in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 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
                      
                      $
                      2,548,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
                      
                      $
                      12,738,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
                      
                      $
                      (2,548,000
                      )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
                      
                      $
                      (12,738,000
                      )
 
 The
purpose of this analysis is to provide an indication of the impact that the
weighted average interest rate fluctuations would have on our financial
results.  It is not intended to imply our expectation of future
revenues or to estimate earnings.  We believe that the assumptions
used above are appropriate to illustrate the possible material impact on the
consolidated financial statements.
 
 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
                    
                    $
                    1,894,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
                    
                    $
                    9,471,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
                    
                    $
                    (1,894,000
                    )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
                    
                    $
                    (9,471,000
                    )
 
  - 51
-
  
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 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.
 
  - 52
-
  ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVEDISCLOSURES ABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.
 
 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 $139.4 million, net of allowance of approximately
$51.3 million, with a weighted average effective interest rate of
12.02%.  The weighted average interest rate of 12.02% 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 12.59%.  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 23
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 20 of our loans, totaling approximately
$92.6 million, had an exit fee.  Out of the 20 loans with an exit fee,
6 loans, totaling approximately $23.1 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
                  
                  $
                  129,821,000
                  
                  
                  $
                  44,492,000
                  
                  
                  $
                  15,106,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  189,419,000Weighted
      Average Interest Rates
                  
                  
                  12.42%
                  
                  
                  
                  12.23%
                  
                  
                  
                  8.00%
                  
                  
                  
                  --%
                  
                  
                  
                  --%
                  
                  
                  
                  --%
                  
                  
                  
                  12.02%
 
 (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 $7.1 million invested in cash, cash
equivalents, certificates of deposit, and marketable securities – related party
(VRM I).  Approximately 3% of our assets will be held in such accounts
as a cash reserve; additional deposits in such accounts will be made as funds
are received from investors and repayment of loans pending the deployment of
such funds in new real estate loans.  We believe that these financial
assets do not give rise to significant interest rate risk due to their
short-term nature.
 
 ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
  - 53
-
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
regarding required financial disclosure.  In connection with the
preparation of this Report on Form 10-Q, our management carried out an
evaluation, under the supervision and with the participation of our management,
including the 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
evaluation, our 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 CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure.
 
 Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been or will be detected.  Even effective internal control over
financial reporting can only provide reasonable assurance with respect to
financial statement preparation.  Furthermore, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.  Our management, including our CEO and CFO, does not
expect that our controls and procedures will prevent all errors.
 
 The
certifications of the our CEO and CFO required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this
report.
 
 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 Fund
III.  Our 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.
 
 PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note N – Legal
Matters Involving the Manager and Note O – Legal Matters Involving the
Company in Part I, Item I Consolidated Financial
Statements of this Quarterly Report on Form 10-Q for information
regarding our legal proceedings, which are incorporated herein by
reference.
 
  - 54
-
  ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and our dividends to
shareholders.  Current economic conditions increase the risk of
defaults on our loans.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.
 
 As of
March 31, 2009, our non-performing assets were approximately $95.8 million,
representing approximately 77% of our stockholders’
equity.  Non-performing assets included approximately $63.7 million in
non-performing loans, net of allowance for non-performing loan losses of
approximately $43.4 million, and approximately $32.1 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 $51.3 million and
$78.2 million in allowances for loan losses, respectively, resulting in net
weighted average loan-to-value ratios of 74.14% and 84.01%,
respectively.  Not including allowance for loan losses, our weighted
average loan-to-value ratio, as of March 31, 2009 and December 31, 2008, was
114.39% and 175.12%, respectively, primarily as a result of declining real
estate values that have eroded the market value of our collateral.  As
a result, we may not be able to recover the full amount of our loans if the
borrower defaults.  Moreover, any failure of a borrower to pay
interest on loans will reduce our revenues, the dividends we pay to stockholders
and, most likely, the value of our stock.  Similarly, any failure of a
borrower to repay loans when due may reduce the capital we have available to
make new loans, thereby adversely affecting our operating results.
 
 The
current recession and constraints in the credit markets are adversely affecting
our operating results and financial condition.
 
 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.
 
  - 55
-
  There may
be a greater risk of default by our borrowers, which may impair our ability to
declare timely dividends and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.  This may lead to an
increase in non-performing assets in our loan portfolio and create additional
risks of return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.  We
are currently experiencing a trend of declining real estate values, which
increases the risk that our collateral will prove insufficient to protect our
loans.
 
 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.
 
 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.
 
 An
increased percentage of our loan portfolio consists of second deeds of trust
which generally entail a higher degree of risk than first deeds of
trust.
 
  - 56
-
  We invest
in second deeds of trust and, in rare instances, wraparound, or all-inclusive,
real estate loans.  Our board is required to approve our investing
more than 10% of our assets in second deeds of trust.  During
September 2008, the board authorized us to allow loans secured by second deeds
of trust to constitute up to 15% of our loans, due to loan restructuring and
current business opportunities.  In a second deed of trust, our rights
as a lender, including our rights to receive payment on foreclosure, will be
subject to the rights of the first deed of trust.  In a wraparound
real estate loan, our rights will be similarly subject to the rights of a first
deed of trust, but the aggregate indebtedness evidenced by our loan
documentation will be the first deed of trust plus the new funds we
invest.  We would receive all payments from the borrower and forward
to the senior lender its portion of the payments we receive.  Because
both of these types of loans are subject to the first deed of trust’s right to
payment on foreclosure, we incur a greater risk when we invest in each of these
types of loans that we will not be able to collect the full amount of our
loan.  If we are unable to collect the amounts secured by second deeds
of trust, our operating results will suffer and we will have less funds
available to distribute to shareholders.  As of March 31, 2009,
approximately 20.46% of our loans were secured by a second deed of
trust.  When funded, such loans constituted less than 15% of our
loans.  The percentage of our loans in second deeds of trust have
increased due to the decrease in loans secured by first deeds of trust through
sales and foreclosures.
 
 Our
loans are not guaranteed by any governmental agency.
 
 Our loans
are not insured or guaranteed by a federally owned or guaranteed mortgage
agency.  Consequently, our recourse, if there is a default, may be to
foreclose upon the real property securing a loan and/or pursuing the borrower’s
guarantee of the principal.  The value of the foreclosed property may
have decreased and may not be equal to the amount outstanding under the
corresponding loan, resulting in a decrease of the amount available to
distribute.
 
 Our
real estate loans may not be marketable, and we expect no secondary market to
develop.
 
 We do not
expect our real estate loans to be marketable, and we do not expect a secondary
market to develop for them.  As a result, we will generally bear all
the risk of our investment until the loans mature.  This will limit
our ability to hedge our risk in changing real estate markets and may result in
reduced returns to our investors.
 
 We
may not be able to maintain compliance with all of the financial covenants
contained in the indenture governing our Junior Subordinated
Notes.  Failure to comply could result in acceleration of all amounts
due under such notes, resulting in severe disruption of our
operations.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  The amount currently due on such notes
is approximately $56.4 million.  The Junior Subordinated Notes sold in
June 2007 in connection with the trust preferred financing bear interest at a
fixed rate of 8.75% through July 2012; thereafter the interest rate is LIBOR
plus 3.5%, resetting quarterly.  The First Supplemental Indenture
governing the Junior Subordinated Notes sets forth a number of financial
covenants.  On December 31, 2008, we were not in compliance with the
revised tangible net worth covenant and the debt to tangible net worth
covenant.  On March 25, 2009, we entered into a letter agreement with
Taberna providing for a waiver of all financial covenants effective December 31,
2008 through June 30, 2009.  In addition, pursuant to the letter
agreement we exchanged $20 million of the Junior Subordinated Notes for certain
replacement securities, which we acquired for approximately $10 million, in
April 2009.  The transaction will reduce our obligation on the Junior
Subordinated Notes to approximately $36.3 million, which we expect will
facilitate future compliance with financial covenants.  This
transaction will result in a net gain of approximately $9 million, net of
transaction costs.  In addition, we are to pay additional interest
equal to $250,000 per year, payable quarterly on the same payment dates as the
current terms of the Junior Subordinated Notes.  We agreed to make a
nonrefundable payment of $200,000 to Taberna to cover its costs related to the
waiver and exchange arrangement.  The replacement securities were
acquired with funds consisting of $5 million from our operating and financing
funds and $5 million from the letters of credit.  In addition, we are
required to pay additional interest equal to $250,000 per year on the Junior
Subordinated Notes, payable quarterly on the same payment dates as the current
terms of the Junior Subordinated Notes.  We agreed to make a
nonrefundable payment of $200,000 to Taberna to cover its costs related to the
waiver and exchange arrangement.
 
  - 57
-
  If we
fail to perform our obligations under the letter agreement or if we are unable
to comply with the financial covenants after July 1, 2009, then, absent another
waiver from the note holders, the lenders could declare an event of default and
could seek to accelerate all amounts due under the Junior Subordinated
Notes.  We might not have cash resources sufficient to pay the amounts
due in the event of acceleration.  As a result, our business
operations would suffer severe disruption if the lenders sought to accelerate
payment of the Junior Subordinated Notes.  In addition, an unresolved
event of default under the indenture would prevent us from paying any dividends
or other dividends to our shareholders.
 
 The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
 We may
borrow up to 70% of the fair market value of our outstanding real estate loans
at any time.  We currently have outstanding approximately $56.4
million of trust preferred securities bearing interest at
8.75%.  These borrowings will require us to carefully manage our cost
of funds.  In order to benefit from the trust preferred securities, we
need to loan the proceeds at rates in excess of the rates payable on the Junior
Subordinated Notes.  No assurance can be given that we will be
successful in making loans at rates in excess of our cost of funds, particularly
if non-performing loans reduce our effective rate of return on our outstanding
loans or if there is a continuing decline in interest rates.
 
 In
addition, the financial covenants in the indenture governing the Junior
Subordinated Notes may constrain our flexibility in operating our
business.  Should we breach a material covenant or if we are unable to
meet our payment obligations on the Junior Subordinated Notes, the purchasers of
the trust preferred securities may declare us in default, resulting in
acceleration of the principal sums due on the notes and restrictions on the
payment of dividends to our stockholders.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part II, Item 6 – Exhibits of this Quarterly
Report Form 10-Q).  The participation interest is at 11% on the
outstanding balance.  We incurred approximately $0.9 million in
finance costs related to the secured borrowings, these costs are being amortized
to interest expense over the term of the agreements.  As of March 31,
2009, and December 31, 2008, we had $10.6 million in funds, including
approximately $0.7 million in interest reserves, used under Inter-creditor
Agreements.
 
 The terms
of any additional indebtedness we incur may vary.  However, some
lenders may require as a condition of making a loan to us that the lender will
receive a priority on loan repayments received by us.  As a result, if
we do not collect 100% on our investments, the first dollars may go to our
lenders and we may incur a loss that will result in a decrease of the amount
available for distribution.  In addition, we may enter into
securitization arrangements in order to raise additional funds.  Such
arrangements could increase our leverage and adversely affect our cash flow and
our ability to declare dividends.
 
 There
is a substantial risk that we would be unable to raise additional funding if
needed to meet our obligations or expand our loan portfolio.
 
 We may
need cash to meet our minimum REIT distribution requirements and limit U.S.
federal income taxation.  Because we are required to distribute
annually to our stockholders at least 90% of our REIT taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) to qualify as a REIT and because we intend to distribute substantially
all of our REIT taxable income and net capital gain, our ability to expand our
loan portfolio will depend in large part on external sources of
capital.  In addition, if our minimum distribution requirements to
maintain our REIT status and minimize U.S. federal income taxation become large
relative to our cash flow as a result of our taxable income exceeding our cash
flow from operations, then we may be required to borrow funds or raise capital
by selling assets to meet those distribution requirements.
 
  - 58
-
  Our
ability to borrow funds for this purpose, or to expand our loan portfolio, is
doubtful in light of current market conditions.  In addition, our
ability to raise funds through an equity financing would be hindered by the
current price of our stock.  If we raise capital through an equity
offering, this may result in substantial dilution to our current
stockholders.  Any debt financing may be expensive and might include
restrictive covenants that would constrain our ability to declare dividends to
our shareholders.  We may not be able to raise capital on reasonable
terms, if at all, in the current market environment.
 
 We
may have difficulty protecting our rights as a secured lender.
 
 We
believe that our loan documents will enable us to enforce our commercial
arrangements with borrowers.  However, the rights of borrowers and
other secured lenders may limit our practical realization of those
benefits.  For example:
 
 ·
              Judicial
      foreclosure is subject to the delays of protracted
      litigation.  Although we expect non-judicial foreclosure to be
      quicker, our collateral may deteriorate and decrease in value during any
      delay in foreclosing on it;
 
 ·
              The
      borrower’s right of redemption during foreclosure proceedings can deter
      the sale of our collateral and can for practical purposes require us to
      manage the property;
 
 ·
              Unforeseen
      environmental hazards may subject us to unexpected liability and
      procedural delays in exercising our
rights;
 
 ·
              The
      rights of senior or junior secured parties in the same property can create
      procedural hurdles for us when we foreclose on
  collateral;
 
 ·
              Required
      licensing and regulatory approvals may complicate our ability to foreclose
      or to sell a foreclosed property where our collateral includes an
      operating business.  See Note O – Legal Matters Involving The
      Company in the notes to the consolidated financial statement under
      Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form
  10-Q.
 
 ·
              We
      may not be able to pursue deficiency judgments after we foreclose on
      collateral; and
 
 ·
              State
      and federal bankruptcy laws can prevent us from pursuing any actions,
      regardless of the progress in any of these suits or
      proceedings.
 
 By
becoming the owner of property, we may incur additional obligations, which may
reduce the amount of funds available for distribution.
 
 We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  If we foreclose on
the security property, we expect to obtain the services of a real estate broker
and pay the broker’s commission in connection with the sale of the
property.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.  See Note F – Real Estate Held for Sale in
the notes to the consolidated financial statement under Part I, Item I Consolidated 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.
 
  - 59
-
  Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 Our
results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets.  If the economy is
healthy, we expect that more people will be borrowing money to acquire, develop
or renovate real property.  However, if the economy grows too fast,
interest rates may increase too much and the cost of borrowing may become too
expensive.  Alternatively, if the economy enters a recession, real
estate development may slow.  A slowdown in real estate lending may
mean we will have fewer loans to acquire, thus reducing our revenues and
dividends to stockholders.  As a result of the current economic
recession, our revenues and dividends have been reduced.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 ·
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and dividends will decline if we are unable to reinvest at higher
      rates or if an increasing number of borrowers default on their loans;
      and
 
 ·
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if a borrower should prepay
      obligations that have a higher interest rate from an earlier period, we
      will likely not be able to reinvest the funds in real estate loans earning
      that higher rate of interest.  In the absence of a prepayment
      fee, we will receive neither the anticipated revenue stream at the higher
      rate nor any compensation for its loss.  As of March 31, 2009,
      none of our loans had a prepayment penalty, although 20 of our loans,
      totaling approximately $92.6 million, had an exit fee.  Out of
      the 20 loans with an exit fee, 6 loans, totaling approximately $23.1
      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.
 
 
 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,
Hawaii, Nevada, Oklahoma, Oregon and Texas, with approximately 44% of our loans
in Nevada.  Depending on the market and on our company’s performance,
we may expand our investments throughout the United States.  However,
our manager has limited experience outside of the Western and Southwestern
United States.  Real estate markets vary greatly from location to
location and the rights of secured real estate lenders vary considerably from
state to state.
 
 Legal
actions seeking damages and appraisal rights could harm our operating results
and financial condition.
 
 We are a
party in several legal actions seeking damages and appraisal rights in
connection with the REIT conversion.  See Note N – Legal Matters Involving The
Manager and Note O – Legal Matters Involving The
Company in the notes to the consolidated financial statement under Part
I, Item I Consolidated
FinancialStatements of this Quarterly Report on Form
10-Q.  While we believe these actions are without merit, the defense
of such actions has materially increased our legal costs and may require the
substantial attention of our management.  The increased legal costs
have adversely impacted our operating results.  As of March 31, 2009,
we have incurred legal expenses of approximately $2.8 million related to such
actions.  Moreover, any adverse outcome in such actions could result
in our having to pay substantial damages, which would reduce our cash resources
and harm our financial condition.
 
 We
may have a lack of control over participations.
 
  - 60
-
  We will
consider investing in or purchasing loans jointly with other lenders and
purchasers, some of whom might be affiliates of Vestin Mortgage.  We
will initially have, and will maintain a controlling interest as lead lender in
participations with non-affiliates.  Although it is not our intention
to lose control, there is a risk that we will be unable to remain as the lead
lender in the loans in which we participate in the future.  In the
event of participation with a publicly registered affiliate, the investment
objectives of the participants shall be substantially
identical.  There shall be no duplicate fees.  The
compensation to the sponsors must be substantially identical, and the investment
of each participant must be on substantially the same terms and
conditions.
 
 Each
participant shall have a right of first refusal to buy the other's interest if
the co-participant decides to sell its interest.  We will not
participate in joint ventures or partnerships with affiliates that are not
publicly registered except as permitted in the NASAA Guidelines or otherwise
approved by the independent members of our board of directors.  If our
co-participant affiliate determines to sell its interest in the loan, there is
no guarantee that we will have the resources to purchase such interest and we
will have no control over a sale to a third party purchaser.
 
 MANAGEMENT
AND CONFLICTS OF INTEREST RISKS
 
 We
rely on our manager to manage our day-to-day operations and select our loans for
investment.
 
 Our
ability to achieve our investment objectives and to pay dividends to our
shareholders depends upon our manager’s and its affiliate’s performance in
obtaining, processing, making and brokering loans for us to invest in and
determining the financing arrangements for borrowers.  Stockholders
have no opportunity to evaluate the financial information or creditworthiness of
borrowers, the terms of mortgages, the real property that is our collateral or
other economic or financial data concerning our loans.  We pay our
manager an annual management fee of up to 0.25% of our aggregate capital
received by us and Fund II from the sale of shares or membership
units.  This fee is payable regardless of the performance of our loan
portfolio.  Our manager’s duties to our stockholders are generally
governed by the terms of the management contract, rather than by common law
principles of fiduciary duty.  Moreover, our manager is not required
to devote its employees’ full time to our business and may devote time to
business interests competitive to our business.
 
 Our
manager’s lack of experience with certain real estate markets could impact its
ability to make prudent investments on our behalf.
 
 As of
March 31, 2009, our loans were in the following states:  Arizona,
California, Hawaii, 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.  Stockholders will not have an opportunity to evaluate the
qualifications of such advisors and no assurance can be given that they will
render prudent advice to our manager.
 
  - 61
-
  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 is 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.
 
 Vestin
Mortgage serves as our manager pursuant to a long-term management agreement that
may be difficult to terminate and does not reflect arm’s length
negotiations.
 
 We have
entered into a long-term management agreement with Vestin Mortgage to act as our
manager.  The term of the management agreement is for the duration of
our existence.  The management agreement may only be terminated upon
the affirmative vote of a majority in interest of stockholders entitled to vote
on the matter or by our board of directors for cause upon 90 days’ written
notice of termination.  Consequently, it may be difficult to terminate
our management agreement and replace our manager in the event that our
performance does not meet expectations or for other reasons unless the
conditions for termination of the management agreement are
satisfied.  The management agreement was negotiated by related parties
and may not reflect terms as favorable as those subject to arm’s length
bargaining.
 
 Our
manager will face conflicts of interest concerning the allocation of its
personnel’s time.
 
 Our
manager is also the manager of VRM I, Fund III and inVestin, companies with
investment objectives similar to ours.  Our manager and Mr. Shustek,
who indirectly owns 100% of our manager, anticipate that they may also sponsor
other real estate programs having investment objectives similar to
ours.  As a result, our manager and Mr. Shustek may have conflicts of
interest in allocating their time and resources between our business and other
activities.  During times of intense activity in other programs and
ventures, our manager and its key people will likely devote less time and
resources to our business than they ordinarily would.  Our management
agreement with our manager does not specify a minimum amount of time and
attention that our manager and its key people are required to devote to our
company.  Thus, our manager may not spend sufficient time managing our
operations, which could result in our not meeting our investment
objectives.
 
 Our
manager and its affiliates will face conflicts of interest arising from our fee
structure.
 
 Vestin
Originations, an affiliate of our manager, will receive substantial fees from
borrowers for transactions involving real estate loans.  Many of these
fees are paid on an up-front basis.  In some cases, Vestin
Originations or our manager may be entitled to additional fees for loan
extensions or modifications and loan assumptions, reconveyances and exit
fees.  These and other fees are quantified and described in greater
detail in our management agreement under “Management Agreement —
Compensation.”  Vestin Originations’ compensation is based on the
volume and size of the real estate loans selected for us, regardless of their
performance, which could create an incentive to make or extend riskier
loans.  Our interests may diverge from those of our manager, Vestin
Originations and Mr. Shustek to the extent that Vestin Originations benefits
from up-front fees that are not shared with us.
  - 62
-
  
 Vestin
Originations will be receiving fees from borrowers that would otherwise increase
our returns.  Because Vestin Originations receives all of these fees,
our interests will diverge from those of our manager, Vestin Originations and
Mr. Shustek when our manager decides whether we should charge the borrower
higher interest rates or our manager’ affiliates should receive higher fees from
borrowers.
 
 We paid
our manager a management fee of approximately $0.3 million for the three months
ended March 31, 2009.  In addition, 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, Fund III and
inVestin.  Our assets represented approximately 78% 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, Fund III and inVestin, which have similar investment objectives as
our company.  There are no restrictions or guidelines on how our
manager will determine which loans are appropriate for us and which are
appropriate for VRM I, Fund III, inVestin or another company that our manager
manages.  Moreover, our manager has no obligation to provide us with
any particular opportunities or even a pro rata share of opportunities afforded
to other companies it manages.
 
 UNITED
STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT QUALIFICATION
 
 Our
failure to qualify as a REIT would subject us to U.S. federal income tax, which
would reduce amounts available for distribution to our
stockholders.
 
 We have
elected to be taxed as a REIT under the Code.  Our qualification as a
REIT requires us to satisfy numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations, and
involves the determination of various factual matters and circumstances not
entirely within our control.  We intend that our organization and
method of operation will enable us to qualify as a REIT, but we may not so
qualify or we may not be able to remain so qualified in the
future.  Future legislation, new regulations, administrative
interpretations or court decisions could adversely affect our ability to qualify
as a REIT or adversely affect our stockholders.
 
 If we
fail to qualify as a REIT in any taxable year, we would be subject to U.S.
federal income tax (including any applicable alternative minimum tax) on our
taxable income at corporate rates, and we would not be allowed to deduct
dividends made to our stockholders in computing our taxable
income.  We may also be disqualified from treatment as a REIT for the
four taxable years following the year in which we failed to
qualify.  The additional tax liability would reduce our net earnings
available for investment or distribution to stockholders.  In
addition, we would no longer be required to declare dividends to our
stockholders.  Even if we continue to qualify as a REIT, we will
continue to be subject to certain U.S. federal, state and local taxes on our
income and property.
 
 Dividends
from a REIT are currently taxed at a higher rate than corporate
dividends.
 
 Under the
Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax
rate on both dividends from certain domestic and foreign corporations and net
long-term capital gain for individuals was reduced to 15% until
2008.  The Tax Increase Prevention and Reconciliation Act of 2005,
which signed into law on May 17, 2006, extended the 15% long-term net capital
gain rate to 2010.  However, this reduced rate of tax on dividends
generally will not apply to our dividends (except those dividends identified by
the company as “capital gain dividends” which are taxable as long-term capital
gain) and therefore such dividends generally will be taxed as ordinary
income.  Ordinary income generally is subject to U.S. federal income
tax rate at a rate of up to 35% for individuals.  The higher tax rate
on our dividends may cause the market to devalue our common stock relative to
stock of those corporations whose dividends qualify for the lower rate of
taxation.  Please note that, as a general matter, dividends from a
REIT will be taxed at the same rate as stockholders’ share of Vestin Realty
Mortgage II’s taxable income attributable to its realized net interest
income.
  - 63
-
  
 A
portion of our business is potentially subject to prohibited transactions
tax.
 
 As a
REIT, we are subject to a 100% tax on our net income from “prohibited
transactions.”  In general, prohibited transactions are sales or other
dispositions of property to customers in the ordinary course of
business.  Sales by us of property in the course of our business will
generally constitute prohibited transactions.
 
 We intend
to avoid the 100% prohibited transactions tax on property foreclosed upon by
Fund II prior to the REIT conversion by holding and selling such properties
through one or more wholly-owned taxable REIT subsidiaries.  However,
under the Code, no more than 25% of the value of the assets of a REIT may be
represented by securities of one or more taxable REIT subsidiaries and a taxable
REIT subsidiary generally cannot operate a lodging or health care
facility.
 
 As of
March 31, 2009, we held 15 properties with a total carrying value of
approximately $32.1 million recorded as investments in real estate held for sale
and no properties in which we or an affiliate provided the financing, recorded
as real estate held for sale – seller financed.  United States
generally accepted accounting principals (“GAAP”) requires us to include real
estate held for sale – seller financed until the borrower has met and maintained
certain requirements.  The real estate held for sale collectively
constituted approximately 17% of our assets as of March 31, 2009.
 
 Taxable
REIT subsidiaries are subject to corporate-level tax, which may devalue our
common stock relative to other companies.
 
 Taxable
REIT subsidiaries are corporations subject to corporate-level
tax.  Our use of taxable REIT subsidiaries may cause the market to
value its common stock lower than the stock of other publicly traded REITs which
may not use taxable REIT subsidiaries and lower than the equity of mortgage
pools taxable as non-publicly traded partnerships such as Fund II’s intended
qualification prior to the REIT conversion, which generally are not subject to
any U.S. federal income taxation on their income and gain.
 
 Our
use of taxable REIT subsidiaries may have adverse U.S. federal income tax
consequences.
 
 We must
comply with various tests to continue to qualify as a REIT for U.S. federal
income tax purposes, and our income from and investments in taxable REIT
subsidiaries generally do not constitute permissible income and investments for
purposes of the REIT qualification tests.  While we will attempt to
ensure that our dealings with our taxable REIT subsidiaries will not adversely
affect our REIT qualification, we cannot be assured that we will successfully
achieve that result.  Furthermore, we may be subject to a 100% penalty
tax, or our taxable REIT subsidiaries may be denied deductions, to the extent
our dealings with our taxable REIT subsidiaries are not deemed to be arm’s
length in nature.
 
 We
may endanger our REIT status if the dividends we receive from our taxable REIT
subsidiaries exceed applicable REIT gross income tests.
 
 The
annual gross income tests that must be satisfied to ensure REIT qualification
may limit the amount of dividends that we can receive from our taxable REIT
subsidiaries and still maintain our REIT status.  Generally, not more
than 25% of our gross income can be derived from non-real estate related
sources, such as dividends from a taxable REIT subsidiary.  If, for
any taxable year, the dividends we received from our taxable REIT subsidiaries,
when added to our other items of non-real estate related income, represent more
than 25% of our total gross income for the year, we could be denied REIT status,
unless we were able to demonstrate, among other things, that our failure of the
gross income test was due to reasonable cause and not willful
neglect.
 
  - 64
-
  We
may lose our REIT status if we issue shares under our stockholders’ rights
plan.
 
 Under
Section 562(c) of the Code, a REIT generally cannot make a distribution unless
the distribution is pro rata, with no preference to any share of stock as
compared to other shares of the same class of stock.  A REIT that is
not in compliance with this requirement may lose its REIT
status.  Under our stockholders’ rights plan, upon certain events,
some holders of our common stock and not others will have the right to acquire
shares of Series A preferred stock.  When effective, this right could
be treated as a deemed distribution to those holders of our common stock
entitled to the right with no distribution to other such
holders.  Thus, this right, when effective, could be treated as a
distribution that is not consistent with the requirements of Section 562(c) of
the Code, which could result in the loss of our REIT qualification.
 
 RISK
OF OWNERSHIP OF OUR COMMON STOCK
 
 The
market price and trading volume of our common stock may be
volatile.
 
 The
market price of our common stock since trading commenced on May 1, 2006, to
March 31, 2009, has ranged from $1.54 to $15.96 (adjusted for the 1-for-2.6
reverse stock split in December 2007).  We believe the price of our
stock in the months after we were listed was affected by, among other things,
selling pressure from stockholders seeking immediate liquidity and the level of
non-performing assets, which we own.  We continue to own a significant
level of non-performing assets and our sector of the market has suffered from
the problems encountered by sub-prime lenders.  Our stock price may
continue to be highly volatile and subject to wide fluctuations.  In
addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur.  Our Company will be dissolved
on December 31, 2020 unless the holders of a majority of our common stock
determine otherwise.  As we move closer to the dissolution date, we
expect to stop making new loans and our stock price could approach our book
value per share.  However, no assurance can be given that the stock
price will approach book value and then prevailing market conditions may affect
the price of our stock even as we near 2020.
 
 The
market price of our common stock may fluctuate or decline significantly in the
future.  Some of the factors, many of which are beyond our control,
that could negatively affect our stock price or result in fluctuations in the
price or trading volume of our common stock include:
 
 ·
              Increases
      in loans defaulting or becoming non-performing or being written
      off;
 
 ·
              Actual
      or anticipated variations in our quarterly operating results or
      dividends;
 
 ·
              Publication
      of research reports about us or the real estate
  industry;
 
 ·
              Changes
      in market valuations of similar
companies;
 
 ·
              Changes
      in tax laws affecting REITs;
 
 ·
              Litigation;
 
 ·
              Adverse
      market reaction to any increased indebtedness we incur in the future;
      and
 
 ·
              General
      market and economic conditions.
 
 Market
interest rates could have an adverse effect on our stock price.
 
 One of
the factors that will influence the price of our common stock will be the
dividend yield on our common stock (as a percentage of the price of our common
stock) relative to market interest rates.  Thus, an increase in market
interest rates may lead prospective purchasers of our common stock to expect a
higher dividend yield, a lack of which could adversely affect the market price
of our common stock.
 
  - 65
-
  We
are the subject of stockholder litigation, which may depress the price of our
stock.
 
 A number
of lawsuits have been filed against us by stockholders who claim, among other
things, that they were improperly denied dissenter’s rights in connection with
the conversion of Fund II into a REIT.  We believe the suits are
without merit and we intend to vigorously defend against such
claims.  Nonetheless, the outcome of the lawsuits cannot be predicted
at this time, nor can a meaningful evaluation be made of the potential impact
upon us if the plaintiffs were to prevail in their claims.  The
resulting uncertainty may depress the price of our stock.  Moreover,
concerns about the costs of defense and the potential diversion of our manager’s
time to deal with these lawsuits may have an adverse effect upon the price of
our stock.
 
 Our
charter documents and Maryland law contain provisions that may delay, defer or
prevent a change of control transaction.
 
 Our
charter and bylaws and Maryland corporate law contain a number of provisions (as
further described in exhibit 3.2 Bylaws of the Registrant
under the Exhibit Index included in Part II, Item 6 of this Quarterly Report
Form 10-Q) that could delay, defer or prevent a transaction or a change in
control of us that might involve a premium price for holders of our common stock
or otherwise be in their best interests, including:
 
 ·
              Ownership
      Limit.  Our articles of incorporation, subject to certain
      exceptions, authorizes our board of directors to take such actions as are
      necessary and desirable to preserve our qualification as a REIT and to
      limit any person to actual or constructive ownership of no more than a
      9.8% of the number or value, whichever is more restrictive, of the
      outstanding shares of our stock, unless our board of directors waives this
      ownership limit.  However, our board of directors may not grant
      a waiver of the ownership limit that would permit a person to acquire more
      than 15% of our stock without exception.  The ownership limit
      may have the effect of precluding a change in control of us by a third
      party, even if such change in control would be in the interest of our
      stockholders (and even if such change in control would not reasonably
      jeopardize our REIT status).
 
 ·
              Staggered
      Board.  Our board of directors is divided into three
      classes, with each class serving staggered three-year
      terms.  This classification of our board of directors may have
      the effect of delaying or preventing changes in our control or
      management.
 
 ·
              Removal of
      Directors.  Directors may be removed only for cause and
      only by the affirmative vote of stockholders holding at least a majority
      of the shares then outstanding and entitled to be cast for the election of
      directors.
 
 ·
              Stockholders’ Rights
      Plan.  We have a stockholders’ rights plan that enables
      our board of directors to deter coercive or unfair takeover tactics and to
      prevent a person or a group from gaining control of us without offering a
      fair price to all stockholders.  Unless our board of directors
      approves the person’s or group’s purchase, after that person gains control
      of us, all other stockholders will have the right to purchase securities
      from us at a price that is less than their then fair market
      value.  Purchases by other stockholders would substantially
      reduce the value and influence of the shares of our common stock owned by
      the acquiring person or group.  Our board of directors, however,
      can prevent the stockholders’ rights plan from operating in this
      manner.  This gives our board of directors’ significant
      discretion to approve or disapprove a person’s or group’s efforts to
      acquire a large interest in us.
 
 ·
              Duties of Directors with
      Respect to Unsolicited Takeovers.  Under Maryland law, a
      director is required to perform his or her duties (a) in good faith, (b)
      in a manner he or she believes to be in the best interests of the
      corporation and (c) with the care that an ordinarily prudent person in a
      like position would use under similar circumstances.  Maryland
      law provides protection for Maryland corporations against unsolicited
      takeovers by, among other things, retaining the same standard of care in
      the performance of the duties of directors in unsolicited takeover
      situations.  The duties of directors of Maryland corporations do
      not require them to (a) accept, recommend or respond to any proposal by a
      person seeking to acquire control of the corporation, (b) authorize the
      corporation to redeem any rights under, or modify or render inapplicable,
      any stockholders rights plan, (c) make a determination under Maryland
      Business Combination Act or Maryland Control Share Acquisition Act or (d)
      act or fail to act solely because of the effect of the act or failure to
      act may have on an acquisition or potential acquisition of control of the
      corporation or the amount or type of consideration that may be offered or
      paid to the stockholders in an
acquisition.
  - 66
-
  
 Moreover,
under Maryland law the act of the directors of a Maryland corporation relating
to or affecting an acquisition or potential acquisition of control is not
subject to any higher duty or greater scrutiny than is applied to any other act
of a director.  Maryland law also contains a statutory presumption
that an act of a director of a Maryland corporation satisfies the applicable
standards of conduct for directors under Maryland law.
 
 ·
              Maryland General Corporation
      Law.  Certain provisions of the MGCL may have the effect
      of inhibiting a third party from making a proposal to acquire us or of
      impeding a change of control under circumstances that otherwise could
      provide the holders of shares of our common stock with the opportunity to
      realize a premium over the then-prevailing market price of such shares,
      including:
 
 ·
              “business
      combination” provisions that, subject to limitations, prohibit certain
      business combinations between us and an “interested stockholder” (defined
      generally as any person who beneficially owns 10% or more of the voting
      power of our shares or an affiliate or associate of ours who, at any time
      within the two-year period prior to the date in question, was the
      beneficial owner of 10% or more of our then outstanding voting shares) or
      an affiliate thereof for five years after the most recent date on which
      the stockholder becomes an interested stockholder, and thereafter imposes
      special appraisal rights and special stockholder voting requirements on
      these combinations; and
 
 ·
              “control
      share” provisions that provide that “control shares” of our company
      (defined as shares which, when aggregated with other shares controlled by
      the stockholder, entitle the stockholder to exercise one of three
      increasing ranges of voting power in electing directors) acquired in a
      “control share acquisition” (defined as the direct or indirect acquisition
      of ownership or control of “control shares”) have no voting rights except
      to the extent approved by our stockholders by the affirmative vote of at
      least two-thirds of all the votes entitled to be cast on the matter,
      excluding all interested shares.
 
 ·
              We
      have opted out of the control share provisions of the MGCL pursuant to a
      provision in our bylaws.  However, our board of directors may by
      amendment to our bylaws opt in to the control share provisions of the MGCL
      in the future.
 
 ·
              Advance Notice of Director
      Nominations and Stockholder Proposals.  Our bylaws impose
      certain advance notice requirements that must be met for nominations of
      persons for election to the board of directors and the proposal of
      business to be considered by
stockholders.
 
 Our
rights and the rights of our stockholders to take action against our directors
and officers are limited.
 
 Maryland
law provides that a director has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably
believes to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances.  Our charter limits the liability of our directors and
officers to us and our stockholders for money damages, except for liability
resulting from:
 
 ·
              Actual
      receipt of an improper benefit or profit in money, property or services;
      or
 
 ·
              A
      final judgment based upon a finding of active and deliberate dishonesty by
      the director or officer that was material to the cause of action
      adjudicated.
 
 In
addition, our articles of incorporation authorize us to obligate our company,
and our bylaws require us, to indemnify our directors and officers for actions
taken by them in those capacities to the maximum extent permitted by Maryland
law.  As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise exist under
common law.  Accordingly, in the event that actions taken in good
faith by any of our directors or officers impede the performance of our company,
stockholders’ ability to recover damages from such director or officer will be
limited.
 
  - 67
-
  ITEM
      2.
              UNREGISTERED
      SALESOF EQUITY AND USE OF
  PROCEEDS
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.
 
 We are
not obligated to purchase any shares.  Subject to applicable
securities laws repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.  As of March 31, 2009, we had
purchased 1,198,573 shares as treasury stock through the repurchase program
noted above.  These shares are carried on our books at cost totaling
approximately $5.7 million.  In addition, as part of a settlement
agreement, we repurchased 13,750 shares of stock and classified them as treasury
stock and incurred $76,000 in settlement expenses.  These shares are
carried on our books at cost totaling $42,000 and are not part of the repurchase
program.  As of March 31, 2009, we had a total of 1,212,323 shares of
treasury stock carried on our books at cost totaling approximately $5.7
million.
 
 The
following is a summary of our stock purchases during the three months ended
March 31, 2009, as required by Regulation S-K, Item 703.
 
 Period
                    
                    (a)
      Total Number of Shares Purchased
                    
                    
                    (b)
      Average Price Paid per Share
                    
                    
                    (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                    
                    
                    (d)
      Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be
      Purchase Under the Plans or ProgramsJanuary
      1 - January 31, 2009
                    
                    
                    13,750
                    
                    
                    $
                    3.05
                    
                    
                    
                    --
                    
                    
                    $
                    4,308,000February
      1 - February 28, 2009
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    4,308,000March
      1 - March 31, 2009
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    4,308,000Total
                    
                    
                    13,750
                    
                    
                    $
                    3.05
                    
                    
                    
                    --
                    
                    
                    $
                    4,308,000
 
 ITEM
      3.
              DEFAULTS
      UPON SENIORSECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
    HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 None.
 
  - 68
-
  ITEM
      6.
              EXHIBITS
 
 EXHIBIT
INDEX
 
 Exhibit
      No.
              
              Description
      of Exhibits2.1
      (2)
              
              Agreement
      and Plan of Merger between Vestin Fund II, LLC and the
      Registrant3.1
      (1)
              
              Articles
      of Incorporation of the Registrant3.2
      (1)
              
              Bylaws
      of the Registrant3.3
      (1)
              
              Form
      of Articles Supplementary of the Registrant3.4
      (5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.5
      (5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.6
      (6)
              
              Amended
      Articles of Incorporation of the Registrant4.1
      (1)
              
              Reference
      is made to Exhibits 3.1, 3.2 and 3.34.2
      (2)
              
              Specimen
      Common Stock Certificate4.3
      (1)
              
              Form
      of Rights Certificate4.4
      (4)
              
              Junior
      Subordinated Indenture4.5
      (8)
              
              Letter
      Agreement dated November 7, 2008 pertaining to Junior Subordinated
      Indenture4.6
      (9)
              
              First
      Supplemental Indenture dated of February 3, 2009 pertaining to Junior
      Subordinated Indenture4.7
      (9)
              
              Letter
      Agreement dated March 25, 2009 pertaining to Junior Subordinated
      Indenture10.1
      (1)
              
              Form
      of Management Agreement between Vestin Mortgage, Inc. and the
      Registrant10.2
      (1)
              
              Form
      of Rights Agreement between the Registrant and the rights
      agent10.9
      (4)
              
              Form
      of Purchase Agreement10.10
      (4)
              
              Amended
      and Restated Trust Agreement10.11
      (7)
              
              Intercreditor
      Agreement, dated June 16, 2008, by and between Vestin Originations, Inc.,
      Vestin Mortgage, Inc., Vestin Realty Mortgage II, Inc., and Owens Mortgage
      Investment Fund10.12
              
              Agreement between Strategix Solutions, LLC and
      Vestin Realty Mortgage II, Inc. for accounting
    services.21.1
      (2)
              
              List
      of subsidiaries of the Registrant31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      135099.2R
      (3)
              
              Vestin
      Realty Mortgage II, Inc. Code of Business Conduct and
    Ethics
 
 (1)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 6 to our Form S-4
      Registration Statement filed on January 4, 2006 (File No.
      333-125121).(2)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 7 to our Form S-4
      Registration Statement filed on January 13, 2006 (File No.
      333-125121).(3)
              
              Incorporated
      herein by reference to the Transition Report on Form 10-K for the nine
      month transition period ended March 31, 2006 filed on September 7, 2006
      (File No. 000-51892)(4)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on June 27,
      2007 (File No. 000-51892)(5)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on January 4,
      2008 (File No. 000-51892)(6)
              
              Incorporated
      herein by reference to the Annual Report on Form 10-K filed on March 14,
      2008 (File No. 000-51892)(7)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed on August
      11, 2008 (File No. 000-51892)(8)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed on November
      10, 2008 (File No. 000-51892)(9)
              
              Incorporated
      herein by reference to the Annual Report on Form 10-K filed on March 26,
      2009 (File No. 000-51892)
 
  - 69
-
  
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Realty Mortgage II, Inc.By:
              /s/
      Michael V. ShustekMichael
      V. ShustekPresident
      and Chief Executive OfficerDate:
              May
      7, 2009
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
              
              Capacity
              
              Date/s/
      Michael V. Shustek
              
              President
      and Chief Executive Officer and Director
              
              May
      7, 2009Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer and Director
              
              May
      7, 2009Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              May
      7, 2009John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              May
      7, 2009Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              May
      7, 2009Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              May
      7, 2009Roland
      M. Sansone
 
 
  - 70
-