UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (MARK
ONE)
 
 [X]  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
quarterly period ended March 31,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 Transition
Period From _______ To ________
 
 COMMISSION
FILE NUMBER 333-125121
 
 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 [X]Non-accelerated
      filer [   ]
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company
[   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes  [   ]    No   [X]
 
 As of May
1, 2008, there were 14,881,340 shares of the Company’s Common Stock
outstanding.
 
  Table of Contents
  TABLE
OF CONTENTS
 
 PagePart I
              FINANCIAL INFORMATIONItem 1.
              Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2008 (unaudited)
      and December 31, 2007
              1Consolidated Statements of Income (unaudited) for the Three
      Months Ended March 31, 2008 and 2007
              2Consolidated Statements of Equity and Other Comprehensive
      Income (unaudited) for the Three Months Ended March 31,
      2008
              3Consolidated Statements of Cash Flows (unaudited) for the
      Three Months Ended March 31, 2008 and 2007
              4Notes to Consolidated Financial Statements
      (unaudited)
              6Report of Independent Registered Public Accounting
      Firm
              29Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              30Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              39Item 4.
              Controls and Procedures
              41Item 4T
              Controls and Procedures
              41Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              41Item 1A.
              Risk Factors
              41Item 2.
              Unregistered Sales of Equity – Securities and Use of
      Proceeds
              53Item 3.
              Defaults Upon Senior Securities
              54Item 4.
              Submission of Matters to a Vote of Security
      Holders
              54Item 5.
              Other Information
              54Item 6.
              Exhibits
              55SIGNATURES
              56Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              CONSOLIDATED
      FINANCIAL STATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSMarch
      31, 2008
              
              
              December
      31, 2007(Unaudited)AssetsCash
              
              $
              6,072,000
              
              
              $
              20,241,000Certificates
      of deposit
              
              
              103,000
              
              
              
              102,000Investment
      in marketable securities - related party
              
              
              2,156,000
              
              
              
              2,460,000Interest
      and other receivables, net of allowance of $160,000 at March 31, 2008 and
      December 31, 2007
              
              
              1,796,000
              
              
              
              4,162,000Notes
      receivable, net of allowance of $2,435,000 at March 31, 2008 and
      $2,619,000 at December 31, 2007
              
              
              --
              
              
              
              --Real
      estate held for sale
              
              
              32,402,000
              
              
              
              28,563,000Investment
      in real estate loans, net of allowance for loan losses of $12,873,000 at
      March 31, 2008 and December 31, 2007
              
              
              289,473,000
              
              
              
              278,190,000Due
      from related parties
              
              
              46,000
              
              
              
              --Investment
      in equity affiliate
              
              
              100,000
              
              
              
              100,000Deferred
      financing costs
              
              
              2,168,000
              
              
              
              2,213,000Other
      assets
              
              
              56,000
              
              
              
              137,000Total
      assets
              
              $
              334,372,000
              
              
              $
              336,168,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              2,599,000
              
              
              $
              2,641,000Due
      to related parties
              
              
              --
              
              
              
              122,000Junior
      subordinated notes payable
              
              
              60,100,000
              
              
              
              60,100,000Dividend
      payable
              
              
              1,577,000
              
              
              
              1,546,000Total
      liabilities
              
              
              64,276,000
              
              
              
              64,409,000Commitments
      and ContingenciesStockholders'
      equityPreferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
              
              
              --
              
              
              
              --Treasury
      stock, at cost (109,634 shares)
              
              
              (1,440,000
              )
              
              
              (1,440,000
              )Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 14,877,292 shares
      issued and outstanding at March 31, 2008 and 14,866,219 shares issued and
      outstanding at December 31, 2007
              
              
              1,000
              
              
              
              1,000Additional
      paid in capital
              
              
              278,465,000
              
              
              
              278,367,000Accumulated
      deficit
              
              
              (5,655,000
              )
              
              
              (4,198,000
              )Accumulated
      other comprehensive loss
              
              
              (1,275,000
              )
              
              
              (971,000
              )Total
      stockholders' equity
              
              
              270,096,000
              
              
              
              271,759,000Total
      liabilities and stockholders' equity
              
              $
              334,372,000
              
              
              $
              336,168,000
 
  The
accompanying notes are an integral part of these consolidated
statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 1
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF INCOME(UNAUDITED)For
      The Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007RevenuesInterest
      income from investment in real estate loans
              
              $
              7,087,000
              
              
              $
              6,413,000Other
      income
              
              
              69,000
              
              
              
              240,000Total
      revenues
              
              
              7,156,000
              
              
              
              6,653,000Operating
      expensesManagement
      fees - related party
              
              
              274,000
              
              
              
              274,000Interest
      expense
              
              
              1,359,000
              
              
              
              334,000Professional
      fees
              
              
              193,000
              
              
              
              300,000Professional
      fees - related party
              
              
              27,000
              
              
              
              38,000Other
              
              
              250,000
              
              
              
              212,000Total
      operating expenses
              
              
              2,103,000
              
              
              
              1,158,000Income
      from operations
              
              
              5,053,000
              
              
              
              5,495,000Non-operating
      incomeDividend
      income - related party
              
              
              44,000
              
              
              
              27,000Interest
      income from banking institutions
              
              
              141,000
              
              
              
              155,000Total
      other non-operating income
              
              
              185,000
              
              
              
              182,000Income
      from real estate held for saleRevenue
      related to real estate held for sale
              
              
              --
              
              
              
              2,000Gain
      on sale of real estate held for sale - seller financed
              
              
              --
              
              
              
              808,000Expenses
      related to real estate held for sale
              
              
              (173,000
              )
              
              
              (104,000
              )Write
      down on real estate held for sale
              
              
              (1,792,000
              )
              
              
              --Total
      income (loss) from real estate held for sale
              
              
              (1,965,000
              )
              
              
              706,000Income
      before provision for income taxes
              
              
              3,273,000
              
              
              
              6,383,000Provision
      for income taxes
              
              
              --
              
              
              
              --NET
      INCOME
              
              $
              3,273,000
              
              
              $
              6,383,000Basic
      and diluted earnings per weighted average common share
              
              $
              0.22
              
              
              $
              0.43Dividends
      declared per common share
              
              $
              0.32
              
              
              $
              0.39Weighted
      average common shares
              
              
              14,872,330
              
              
              
              14,943,760
 
  The
accompanying notes are an integral part of these consolidated
statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 2
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE INCOMEFOR
      THE THREE MONTHS ENDED MARCH 31, 2008(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, 2007
              
              
              109,634
              
              
              $
              (1,440,000
              )
              
              
              14,866,219
              
              
              $
              1,000
              
              
              $
              278,367,000
              
              
              $
              (4,198,000
              )
              
              $
              (971,000
              )
              
              $
              271,759,000Comprehensive
      Income:Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,273,000
              
              
              
              
              
              
              
              3,273,000Unrealized
      Loss on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (304,000
              )
              
              
              (304,000
              )Comprehensive
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,969,000Dividends
      Declared to Stockholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,730,000
              )
              
              
              
              
              
              
              (4,730,000
              )Reinvestment
      of Dividends
              
              
              
              
              
              
              
              
              
              
              11,073
              
              
              
              --
              
              
              
              98,000
              
              
              
              
              
              
              
              
              
              
              
              98,000Stockholders'
      Equity at
                March
      31, 2008 (Unaudited)
              
              
              109,634
              
              
              $
              (1,440,000
              )
              
              
              14,877,292
              
              
              $
              1,000
              
              
              $
              278,465,000
              
              
              $
              (5,655,000
              )
              
              $
              (1,275,000
              )
              
              $
              270,096,000
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 3
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Cash
      flows from operating activities:Net
      income
              
              $
              3,273,000
              
              
              $
              6,383,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Impairment
      of real estate held for sale
              
              
              1,792,000
              
              
              
              --Gain
      on sale of real estate held for sale
              
              
              --
              
              
              
              (808,000
              )Recovery
      of allowance for doubtful notes receivable included in other
      income
              
              
              --
              
              
              
              (218,000
              )Amortized
      interest income
              
              
              --
              
              
              
              (529,000
              )Amortized
      financing costs, included in interest expense
              
              
              45,000
              
              
              
              --Change
      in operating assets and liabilities:Interest
      and other receivables
              
              
              2,366,000
              
              
              
              (58,000
              )Due
      to/from related parties
              
              
              (168,000
              )
              
              
              (2,000
              )Other
      assets
              
              
              81,000
              
              
              
              165,000Accounts
      payable and accrued liabilities
              
              
              (42,000
              )
              
              
              103,000Net
      cash provided by operating activities
              
              
              7,347,000
              
              
              
              5,036,000Cash
      flows from investing activities:Investments
      in real estate loans
              
              
              (32,361,000
              )
              
              
              (22,973,000
              )Purchase
      of investments in real estate loans from:Fund
      III
              
              
              --
              
              
              
              (1,300,000
              )Third
      parties
              
              
              --
              
              
              
              (450,000
              )Proceeds
      from loan payoffs
              
              
              14,797,000
              
              
              
              13,703,000Sale
      of investments in real estate loans to:VRM
      I
              
              
              500,000
              
              
              
              --Proceeds
      related to investment in real estate held for sale
              
              
              150,000
              
              
              
              --Principal
      payments on real estate held for sale-seller financed
              
              
              --
              
              
              
              3,651,000Legal
      expenses paid and applied against loan allowance
              
              
              --
              
              
              
              (94,000
              )Proceeds
      from note receivable
              
              
              --
              
              
              
              218,000Purchase
      of investments in certificates of deposit
              
              
              (1,000
              )
              
              
              (1,008,000
              )Proceeds
      from investments in certificates of deposit
              
              
              --
              
              
              
              250,000Deposit
      liability
              
              
              --
              
              
              
              310,000Net
      cash used by investing activities
              
              
              (16,915,000
              )
              
              
              (7,693,000
              )Cash
      flows from financing activities:Principal
      payments on notes payable
              
              
              --
              
              
              
              (27,000
              )Dividends
      paid to stockholders, net of reinvestments
              
              
              (4,464,000
              )
              
              
              (7,687,000
              )Dividends
      paid to stockholders - related party
              
              
              (137,000
              )
              
              
              (116,000
              )Net
      cash used in financing activities
              
              
              (4,601,000
              )
              
              
              (7,830,000
              )NET
      CHANGE IN CASH
              
              
              (14,169,000
              )
              
              
              (10,487,000
              )Cash,
      beginning of period
              
              
              20,241,000
              
              
              
              16,841,000Cash,
      end of period
              
              $
              6,072,000
              
              
              $
              6,354,000
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 4
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Supplemental
      disclosures of cash flows information:Income
      taxes paid
              
              $
              --
              
              
              $
              --Interest
      paid
              
              $
              1,359,000
              
              
              $
              334,000Non-cash
      investing and financing activities:Dividend
      payable
              
              $
              1,577,000
              
              
              $
              1,943,000Reinvestment
      of dividends
              
              $
              98,000
              
              
              $
              161,000Loan
      payoffs of loans funded through secured borrowings
              
              $
              --
              
              
              $
              3,135,000Loan
      rewritten with same or similar collateral
              
              $
              1,690,000
              
              
              $
              2,544,000Unearned
      revenue from loans rewritten with same or similar property as
      collateral
              
              $
              --
              
              
              $
              454,000Decrease
      in deposit liability related to pay off of real estate held for sale -
      seller financed
              
              $
              --
              
              
              $
              4,507,000Adjustment
      to note receivable and related allowance
              
              $
              --
              
              
              $
              69,000Prepaid
      amount applied to accounts payable
              
              $
              41,000
              
              
              $
              --Unrealized
      gain (loss) on marketable securities - related party
              
              $
              (304,000
              )
              
              $
              269,000
 
 
 
  The
accompanying notes are an integral part of these consolidated
statements.
 See
review report of Independent Registered Public Accounting Firm.
 - 5
-
 Table of Contents
  
 VESTIN
REALTY MORTGAGEII, INC
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH
31, 2008
 
 (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 also 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
-
 Table of Contents
  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”).
 
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Management
Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the 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.
 
 Revenue
Recognition
 
 Interest
is recognized as revenue when earned according to the terms of the loans, using
the effective interest method.  We do not accrue interest income on
loans once they are determined to be impaired.  A loan is impaired
when based on current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due.  Cash
receipts will be allocated to interest income, except when such payments are
specifically designated by the terms of the loan as principal reduction or when
management does not believe our investment in the loan is fully
recoverable.
 
 Investments in Real Estate
Loans
 
 We may
from time to time acquire or sell investments in real estate loans from or to
our manager or other related parties pursuant to the terms of our 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 based on appraisals obtained at the time of loan origination and may not
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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 7
-
 Table of Contents
  The
appraisals may be for the current estimate of the “as-if developed” value of the
property, which approximates the post-construction value of the collateralized
property assuming that such property is developed.  As-if developed
values on raw land loans or acquisition and development loans often dramatically
exceed the immediate sales value and may include anticipated zoning changes and
timely successful development by the purchaser.  As most of the
appraisals will be prepared on an as-if developed basis, if a loan goes into
default prior to any development of a project, the market value of the property
may be substantially less than the appraised value.  As a result,
there may be less security than anticipated at the time the loan was originally
funded.  If there is less security and a default occurs, we may not
recover the full amount of the loan.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment.  Our manager’s estimate of losses is
based on a number of factors including the types and dollar amounts of loans in
the portfolio, adverse situations that may affect the borrower’s ability to
repay, prevailing economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Generally, subsequent recoveries of amounts previously
charged off are added back to the allowance and included as income.
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the real estate lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 Additional
facts and circumstances may be discovered as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  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 upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 8
-
 Table of Contents
  Real Estate Held For
Sale
 
 Real
estate held for sale includes real estate acquired through foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or
Disposal of Long Lived Assets(“FAS 144”),we seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  The carrying values of real estate held for sale are assessed
on a regular basis from updated appraisals, comparable sales values or purchase
offers.
 
 Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
initial and continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sales agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sales
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sales agreements are recorded under the deposit method or cost recovery method
as defined in FAS 66.  Under the deposit method, no profit is
recognized and any cash received from the buyer is reported as a deposit
liability on the balance sheet.  Under the cost recovery method, no
profit is recognized until payments by the buyer exceed the carrying basis of
the property sold.  Principal payments received will reduce the
related receivable, and interest collections will be recorded as unrecognized
gross profit on the balance sheet.  The carrying values of these
properties are included in real estate held for sale on the accompanying
consolidated balance sheets.
 
 In cases
where the investment by the buyer is significant (generally 20% or more) and the
buyer has an adequate continuing investment, the purchase money debt is not
subject to future subordination, and a full transfer of risks and rewards has
occurred, we will use the full accrual method.  Under the full accrual
method, a sale is recorded and the balance remaining to be paid is recorded as a
normal note.  Interest is recorded as income when
received.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
 Table of Contents
  Classification of Operating
Results from Real Estate Held for Sale
 
 FAS 144 –
Accounting for the Impairment
or Disposal of Long-Lived Assets ("FAS 144'') generally requires
operating results from long lived assets held for sale to be classified as
discontinued operations as a separately stated component of net
income.  Our operations related to real estate held for sale are
separately identified in the accompanying 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
market price as of March 31, 2008.  All securities are classified as
available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities.
 
 Fair Value
Disclosures
 
 FAS 107 –
Disclosures about Fair Value
of Financial Instruments (“FAS 107”), requires the determination of fair
value of our financial assets.  The following methods and assumptions
were used to estimate the fair value of financial instruments included in the
following categories:
 
 (a)
              Cash:  The
      carrying value of cash approximates fair
value.
 
 (b)
              Certificate
      of Deposits:  The carrying amounts of these instruments
      approximate fair value due to their short-term
  nature.
 
 (c)
              Investment
      in Marketable Securities – Related Party:  The carrying amounts
      of these investment securities are classified as available-for-sale and
      are recorded at their fair values.  Fair values are determined
      by the quoted market price of the
investment.
 
 (d)
              Interest
      and Other Receivables:  The carrying amount of these instruments
      approximate fair value due to their short-term
  nature.
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
 Table of Contents
  
 (e)
              Investment
      in Real Estate Loans:  The fair value estimates for investments
      in real estate loans are based upon the present value of expected cash
      flows discounted at rates currently available for similar
      loans.  Fair value estimates are made at a specific point in
      time; based on relevant market information; are subjective in nature; and
      involve uncertainties and matters of significant judgment.  Fair
      values for loans, which are delinquent and/or in foreclosure are
      determined by underlying collateral securing the
  loans.
 
 (f)
              Assets
      under Secured Borrowing:  The carrying amount of these
      instruments approximate fair value.  The fair value is estimated
      based upon projected cash flows discounted at the estimated current
      interest rates at which similar loans would be
  made.
 
 (g)
              Accounts
      Payable and Accrued Liabilities:  The carrying amount of these
      instruments approximate fair value due to their short-term
      nature.
 
 (h)
              Junior
      Subordinated Notes Payable:  Due to the current economic credit
      environment there are no comparable instruments to estimate the current
      fair value of the junior subordinated notes payable, accordingly the
      estimated current fair value approximate the carrying value of the notes
      payable.
 
 At March
31, 2008 and December 31, 2007, the estimated fair values of the real estate
loans were approximately $288.8 million and $278.0 million.  These
estimates were based upon the present value of expected cash flows discounted at
rates currently available for similar loans.  Fair value estimates are
made at a specific point in time; based on relevant market information; are
subjective in nature; and involve uncertainties and matters of significant
judgment.  Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that would be collected upon maturity or
disposition of the loans.
 
 On
January 1, 2008, we adopted FAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB statement No.
115 (FAS 159) but we did not make any fair value elections with respect
to any of our eligible assets or liabilities as permitted under the provisions
of FAS 159 as of March 31, 2008.  In conjunction with the adoption of
FAS 159, we also adopted FAS 157, Fair Value Measures, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements  In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access.  Fair values determined by Level 2 inputs utilize inputs other
than quoted prices included in Level 1 that are observable for the asset or
liability, such as interest rates and yield curves that are observable at
commonly quoted intervals.  Level 3 inputs are unobservable inputs for
the asset or liability, and include situations where there is little, if any,
market activity for the asset or liability.  In instances in which the
inputs used to measure fair value may fall into different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the fair
value measurement in its entirety has been determined is based on the lowest
level input that is significant to the fair value measurement in its
entirety.
 
 At March
31, 2008, the only asset measured at fair value on a recurring basis is the
investment in marketable securities – related party totaling $2.2 million, which
was estimated using Level 1 inputs, or quoted prices in active markets, as
described above.
 
 Basic and Diluted Earnings
Per Common Share
 
 Basic
earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share (“FAS
128”), 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, 2008 and 2007.  The following is a
computation of the EPS data for the three months ended March 31, 2008 and
2007:
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
 Table of Contents
  
 For
      the Three Months EndedMarch
      31, 2008
              
              
              March
      31, 2007Net
      income available to common stockholders
              
              $
              3,273,000
              
              
              $
              6,383,000Weighted
      average number of common shares outstanding during the
    period
              
              
              14,872,330
              
              
              
              14,943,760Basic
      and diluted earnings per weighted average common share
              
              $
              0.22
              
              
              $
              0.43
 
 Common Stock
Dividends
 
 During
the three months ended March 31, 2008, cash dividends declared totaled
approximately $0.32 per common share, representing ordinary income.
 
 On April
24, 2008, the board of directors declared a monthly cash dividend of $0.09 per
share for the month of April 2008, which will be paid on May 30, 2008, to the
stockholders of record as of May 12, 2008.
 
 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, including
SEC Rule 10b-18, 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, 2008, we had
purchased 109,634 shares of treasury stock through the repurchase program noted
above.  These shares are carried on our books at a cost totaling
approximately $1.4 million.
 
 Segments
 
 We
operate as one business segment.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary.  All significant intercompany balances and transactions
have been eliminated in consolidation.  Our interest in VCT I (see
Note I – Junior Subordinated Notes) is accounted for using the equity method and
the assets and liabilities are not consolidated into our financial statements
due to our determination that VCT I is a variable interest entity in which we
are not the primary beneficiary under FIN 46R.
 
 Income
Taxes
 
 We are
organized and conduct our operations to qualify as a real estate investment
trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the “Code”) and to comply with the provisions of the Internal
Revenue Code with respect thereto.  A REIT is generally not subject to
federal income tax on that portion of its REIT taxable income (“Taxable Income”)
which is distributed to its stockholders, provided that at least 90% of Taxable
Income is distributed and provided that certain other requirements are
met.  Our taxable income may substantially exceed or be less than our
net income as determined based on GAAP, because, differences in GAAP and taxable
net income consist primarily of allowances for loan losses or doubtful account,
write downs on real estate held for sale, amortization of deferred financing
cost, capital gains and losses, and deferred income.  Certain assets
of ours are held in a taxable REIT subsidiary (“TRS”).  The income of
a TRS is subject to federal and state income taxes.  The net income
tax provision for the three months ended March 31, 2008, was approximately
zero.
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
 Table of Contents
  
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ consolidated financial
statements to conform to the current period presentation.
 
 NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash and loans
secured by deeds of trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits.  As of March 31, 2008 and December 31, 2007,
we had approximately $5.7 million and $19.7 million, respectively, in excess of
the federally insured limits.
 
 As of
March 31, 2008, 42%, 15%, 15% and 14% of our loans were in Nevada, Oregon,
Arizona and California, respectively, compared to 45%, 16%, 15% and 7%, at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, a downturn in the local real estate
markets in these states could have a material adverse effect on us.
 
 At March
31, 2008, the aggregate amount of loans to our three largest borrowers
represented approximately 23% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in California and Oregon with first lien positions, interest rates between 10.5%
and 14%, with an aggregate outstanding balance of approximately $68.9 million
and maturing through March 2009.  At December 31, 2007, the aggregate
amount of loans to our three largest borrowers represented approximately 22% of
our total investment in real estate loans.  These real estate loans
consisted of commercial loans, located in Hawaii and Oregon with first lien
positions, interest rates between 10.5% and 14.0%, with an aggregate outstanding
balance of approximately $63.9 million.  The loans in Hawaii described
above referred to the RightStar loans discussed in Note D – Investments in Real Estate
Loans.  We have a significant concentration of credit risk with
our largest borrowers, any additional defaults by such borrowers could have a
material adverse effect on us.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  An
increase in interest rates over the loan rate applicable at origination of the
loan may have an adverse effect on the borrower’s ability to
refinance.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
March 31, 2008, all of our loans provided for payments of interest only with a
“balloon” payment of principal payable in full at the end of the
term.
 
 In
addition, we may invest in real estate loans that require borrowers to maintain
interest reserves funded from the principal amount of the loan for a period of
time.  At March 31, 2008, we had approximately $83.3 million in
investments in real estate loans that had interest reserves where the total
outstanding principal due to our co-lenders and us was approximately $95.8
million.  These loans had interest reserves of approximately $7.4
million, of which our portion was approximately $6.3 million.  At
December 31, 2007, we had approximately $108.8 million in investments in real
estate loans that had interest reserves where the total outstanding principal
due to our co-lenders and us was approximately $128.6 million.  These
loans had interest reserves of approximately $10.4 million, of which our portion
was approximately $8.8 million.
 
 As of
March 31, 2008, we had five real estate loan products consisting of commercial,
construction, acquisition and development, land and residential.  The
effective interest rates on all product categories range from 8.65% to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
 Table of Contents
  Investments
in real estate loans as of March 31, 2008, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.07%
              
              
              
              49.42%Commercial
              
              
              18
              
              
              
              147,285,000
              
              
              
              12.20%
              
              
              
              48.71%
              
              
              
              77.87%Construction
              
              
              8
              
              
              
              46,963,000
              
              
              
              11.04%
              
              
              
              15.53%
              
              
              
              74.21%Land
              
              
              13
              
              
              
              89,760,000
              
              
              
              12.14%
              
              
              
              29.69%
              
              
              
              66.53%43
              
              
              $
              302,346,000
              
              
              
              12.04%
              
              
              
              100.00%
              
              
              
              72.21%
 
 Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Weighted
      Average Loan-To-Value (1)Acquisition
      and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.30%
              
              
              
              49.42%Commercial
              
              
              19
              
              
              
              131,257,000
              
              
              
              12.12%
              
              
              
              45.10%
              
              
              
              81.43%Construction
              
              
              9
              
              
              
              45,883,000
              
              
              
              11.04%
              
              
              
              15.76%
              
              
              
              73.84%Land
              
              
              14
              
              
              
              95,585,000
              
              
              
              12.12%
              
              
              
              32.84%
              
              
              
              64.43%46
              
              
              $
              291,063,000
              
              
              
              12.00%
              
              
              
              100.00%
              
              
              
              72.64%
 
 (1)
              Loan-to-value
      ratios are based on the most recent appraisals and may not reflect
      subsequent changes in value and are prior to allowances for loan
      losses.  Such appraisals, which may be commissioned by the
      borrower, are generally dated no greater than 12 months prior to the date
      of loan origination.  The appraisals may be for the current
      estimate of the “as-if developed” value of the property, which
      approximates the post-construction value of the collateralized property
      assuming that such property is developed.  “As-if developed”
      values on raw land loans or acquisition and development loans often
      dramatically exceed the immediate sales value and may include anticipated
      zoning changes, and successful development by the purchaser; upon which
      development is dependent on availability of financing.  As most
      of the appraisals will be prepared on an “as-if developed” basis, if a
      loan goes into default prior to completion of the development of the
      project, the market value of the property may be substantially less than
      the appraised value.  As a result, there may be less security
      than anticipated at the time the loan was originally made.  If
      there is less security and a default occurs, we may not recover the full
      amount of the loan.
 
 (2)
              The
      following table reconciles the balance of the loan portfolio to the amount
      shown on the accompanying Consolidated Balance
  Sheets.
 
 March
      31, 2008
                Balance
              
              
              December
      31, 2007
                BalanceBalance
      per loan portfolio
              
              $
              302,346,000
              
              
              $
              291,063,000Less:Allowance
      for loan losses **
              
              
              (12,873,000
              )
              
              
              (12,873,000
              )Balance
      per consolidated balance sheet
              
              $
              289,473,000
              
              
              $
              278,190,000
 
 The
following is a schedule of priority of real estate loans as of March 31, 2008
and December 31, 2007:
 
 Loan
      Type
              
              Number
      of Loans
              
              
              March
      31, 2008 Balance*
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              41
              
              
              $
              297,572,000
              
              
              
              98.42%
              
              
              
              44
              
              
              $
              288,665,000
              
              
              
              99.18%Second
      deeds of trust
              
              
              2
              
              
              
              4,774,000
              
              
              
              1.58%
              
              
              
              2
              
              
              
              2,398,000
              
              
              
              0.82%43
              
              
              $
              302,346,000
              
              
              
              100.00%
              
              
              
              46
              
              
              $
              291,063,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 **  Please
refer to (3) Specific Reserve
Allowance below.
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  
 The
following is a schedule of contractual maturities of investments in real estate
loans as of March 31, 2008:
 
 April
      2008 - June 2008 (a)
              
              $
              158,781,000July
      2008 - September 2008
              
              
              88,114,000October
      2008 - December 2008
              
              
              8,933,000January
      2009 – March 2009
              
              
              32,028,000Thereafter
              
              
              14,490,000Total
              
              $
              302,346,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to March 31,
2008.
 
 The
following is a schedule by geographic location of investments in real estate
loans as of March 31, 2008 and December 31, 2007:
 
 March
      31, 2008 Balance*
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
      PercentageArizona
              
              $
              45,279,000
              
              
              
              14.98%
              
              
              $
              43,865,000
              
              
              
              15.07%California
              
              
              42,290,000
              
              
              
              13.99%
              
              
              
              19,673,000
              
              
              
              6.76%Hawaii
              
              
              17,291,000
              
              
              
              5.72%
              
              
              
              17,291,000
              
              
              
              5.94%Nevada
              
              
              126,049,000
              
              
              
              41.69%
              
              
              
              132,000,000
              
              
              
              45.35%New
      York
              
              
              16,981,000
              
              
              
              5.62%
              
              
              
              16,981,000
              
              
              
              5.83%Oklahoma
              
              
              2,155,000
              
              
              
              0.71%
              
              
              
              5,051,000
              
              
              
              1.74%Oregon
              
              
              46,619,000
              
              
              
              15.42%
              
              
              
              46,620,000
              
              
              
              16.02%Texas
              
              
              3,824,000
              
              
              
              1.26%
              
              
              
              7,924,000
              
              
              
              2.72%Washington
              
              
              1,858,000
              
              
              
              0.61%
              
              
              
              1,658,000
              
              
              
              0.57%Total
              
              $
              302,346,000
              
              
              
              100.00%
              
              
              $
              291,063,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 
 At March
31, 2008, the following loans were non-performing (i.e., based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when the
payment of interest is 90 days past due); RightStar, Inc. (Part I & Part
II), Monterrey Associates LP, Jeffrey's Court, LLC, V & M Homes at the
Palms, Inc., Brawley CA 122, LLC, Cliff Shadows Properties, LLC, MRPE, LLC, The
Orleans at Mesquite Estates, LLC, and The Laurels at Mesquite
Estates.  These loans are currently carried on our books at a value of
approximately $47.0 million, net of allowance for loan losses of approximately
$11.2 million, which does not include the allowances of approximately $1.7
million relating to the decrease in the property value for performing loans as
of March 31, 2008.  These loans have been placed on non-accrual of
interest status and are the subject of pending foreclosure
proceedings.
 
 ·
              RightStar,
      Inc. (Part I & Part II), are loans secured by a lien on the business
      and virtually all of the property of RightStar, which includes 4
      cemeteries and 8 mortuaries in Hawaii with an outstanding balance of
      approximately $32.3 million of which our portion is approximately $17.3
      million ($8.2 million for Part I and $9.1 million for Part
      II).  The lenders have commenced a judicial foreclosure on the
      loans, Part I and Part II.
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  
 ·
              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, 2008, this loan has been considered
      non-performing for the last nineteen months.  Our manager
      brought foreclosure and other legal proceedings to protect our interest in
      the collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of legal
      actions commenced on our behalf with respect to other collateral securing
      the non-performing loan, of which our portion is approximately $1.0
      million net of allowance for loan loss.  We are vigorously
      contesting their position; however, we cannot determine at this time the
      outcome of these legal proceedings.  Our manager has evaluated
      this loan and based on an appraisal obtained during January 2008, a
      specific allowance of approximately $2.4 million, of which our portion was
      approximately $1.2 million, was recorded during the year ended December
      31, 2007.
 
 ·
              Jeffrey's
      Court, LLC, is a loan to provide financing for the development of 4.92
      acres of land into 119 condominium units in Las Vegas, NV, with an
      outstanding balance of approximately $5.1 million of which our portion is
      $3.1 million and is secured by a first lien on the property and guaranteed
      by the borrower.  As of March 31, 2008, this loan has been
      considered non-performing for the last eight months.  Our
      manager commenced foreclosure proceedings, and on December 6, 2007, the
      borrower filed for protection under Chapter 11 of the Bankruptcy Code in
      the United States Bankruptcy Court for the District of
      Nevada.  On March 14, 2008, a motion to approve an adequate
      protection agreement (the “Agreement”) was filed with the
      Court.  The motion was subsequently approved.  The
      Agreement provides for us to receive monthly payments until August 31,
      2008, when the entire loan balance shall be due and payable.  As
      of April 30, 2008, they have made $55,000 in payments as part of the
      agreement, of which our portion is $33,000.  In addition, the
      automatic stay from foreclosure has been vacated.  In the event
      of a default under the Agreement, our manager may immediately proceed with
      foreclosure.  In addition, we have filed a complaint in State
      Court, against the guarantors of the loan, in order to enforce the
      personal guarantees.  Our manager has evaluated this loan and
      concluded that the value of the underlying collateral is sufficient to
      protect us from loss of principal.  No specific allowance was
      deemed necessary.
 
 ·
              V
      & M Homes at the Palms, Inc., is a loan, with a variable interest
      rate, to provide acquisition financing for an 80 acre parcel of land in
      Florence, AZ, with an outstanding balance of approximately $3.9 million of
      which our portion is approximately $1.5 million and is secured by a first
      lien on the property and guaranteed by the principals of the
      borrower.  As of March 31, 2008, this loan has been considered
      non-performing for the last seven months.  Our manager commenced
      foreclosure proceedings, and on December 24, 2007, the borrower filed for
      protection under Chapter 11 of the Bankruptcy Code in the United States
      Bankruptcy Court for the District of Arizona.  Our legal counsel
      is seeking relief from the automatic stay.  We are in the
      process of bringing legal action against the guarantors of this
      loan.  Our manager has evaluated this loan and concluded that
      the value of the underlying collateral is sufficient to protect us from
      loss of principal.  No specific allowance was deemed
      necessary.
 
 ·
              Brawley
      CA 122, LLC, is a loan to provide acquisition and development financing
      for a 25 acre proposed 122 single-family subdivision to be known as River
      Drive Subdivision in Brawley, CA, with an outstanding balance of
      approximately $2.3 million of which our portion is $0.8 million and is
      secured by a first lien on the property and guaranteed by the
      borrower.  As of March 31, 2008, this loan has been considered
      non-performing for the last five months.  Our manager has
      commenced both foreclosure proceedings and litigation against the personal
      guarantors in order to enforce the personal guarantees.  Our
      manager evaluated this loan and based on an appraisal obtained during
      January 2008, a specific allowance of $0.8 million, of which our portion
      was $0.3 million, was recorded during the year ended December 31,
      2007.  During May 2008, we, VRM I and Fund III foreclosed upon
      Brawley CA 122, LLC and classified it as real estate held for
      sale.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 Table of Contents
  
 ·
              Cliff
      Shadows Properties, LLC is a loan to provide construction financing for a
      174 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las
      Vegas, NV, with an outstanding balance of approximately $17.0 million of
      which our portion is approximately $16.1 million and is secured by a first
      lien on the property and guaranteed by the borrower.  As of
      March 31, 2008, this loan has been considered non-performing for the last
      two months.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  In addition, our motion was
      granted for the appointment of a receiver to oversee the day to day
      operations of the borrower.  Our manager has evaluated this loan
      and concluded that the value of the underlying collateral is sufficient to
      protect us from loss of principal.  No specific allowance was
      deemed necessary.
 
 ·
              MRPE,
      LLC is a loan to provide financing for the development of 132.03 acres of
      land within the Wolf Creek Estates Master Planned Community, located in
      Mesquite, NV, with an outstanding balance of $17.0 million of which our
      portion is approximately $12.2 million and is secured by a first lien on
      the property and guaranteed by the principals of the
      borrower.  As of March 31, 2008, this loan has been considered
      non-performing for the last two months.  Our manager has
      commenced both foreclosure proceedings and litigation against the personal
      guarantors in order to enforce the personal guarantees.  Our
      manager has evaluated this loan and concluded that the value of the
      underlying collateral is sufficient to protect us from loss of
      principal.  No specific allowance was deemed
      necessary.
 
 ·
              The
      Orleans at Mesquite Estates, LLC is a loan to provide financing for the
      development of 21.7 gross acres of Mesquite Estates Planned Unit
      Development with 65 "paper" lots, located in Mesquite, NV, with an
      outstanding balance of $2.3 million and is secured by a first lien on the
      property and guaranteed by the principals of the borrower.  As
      of March 31, 2008, this loan has been considered non-performing for the
      last month.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  Our manager has evaluated this
      loan and concluded that the value of the underlying collateral is
      sufficient to protect us from loss of principal.  No specific
      allowance was deemed necessary.
 
 ·
              The
      Laurels at Mesquite Estates, LLC is a loan to provide financing for the
      development of 26.5 gross acres of Mesquite Estates Planned Unit
      Development with 60 "paper" lots, located in Mesquite, NV, with an
      outstanding balance of $2.8 million and is secured by a first lien on the
      property and guaranteed by the principals of the borrower.  As
      of March 31, 2008, this loan has been considered non-performing for the
      last month.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  Our manager has evaluated this
      loan and concluded that the value of the underlying collateral is
      sufficient to protect us from loss of principal.  No specific
      allowance was deemed necessary.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  The
following schedule summarizes the non-performing loans as of March 31,
2008:  Number of Months Non-Performing
 
 Description
      of Collateral
              
              Balance
      at
                March
      31, 2008
              
              Maturity
      Date
              
              Number
      of Months Non-Performing
              
              
              Percentage
      of Total Loan Balance4
      cemeteries and 8 mortuaries in Hawaii Part I***
              
              $
              8,183,000
              
              3/31/2004
              
              
              48
              
              
              45%
      of Part I4
      cemeteries and 8 mortuaries in Hawaii Part II***
              
              
              9,108,000
              
              3/31/2004
              
              
              48
              
              
              65%
      of Part II248-unit
      apartment complex in Oklahoma City, OK
              
              
              2,155,000
              
              9/1/2006
              
              
              19
              
              
              
              49%4.92
      acres of land in Las Vegas, NV
              
              
              3,073,000
              
              7/17/2007
              
              
              8
              
              
              
              61%80
      acre parcel of land in Florence, AZ
              
              
              1,510,000
              
              8/16/2007
              
              
              7
              
              
              
              39%25
      acres for proposed 122 single-family subdivision  in Brawley,
      CA
              
              
              755,000
              
              8/1/2007
              
              
              5
              
              
              
              33%174
      Unit Townhouse Project known as Cliff Shadows Townhomes located in, Las
      Vegas, NV
              
              
              16,117,000
              
              3/16/2008
              
              
              2
              
              
              
              95%132.03
      acres of Land within the Wolf Creek Estates Master Planned Community,
      located in Mesquite, NV
              
              
              12,186,000
              
              2/27/2008
              
              
              2
              
              
              
              72%21.7
      gross acres of Mesquite Estates Planned Unit Development with 65 "paper"
      lots, located in Mesquite, NV
              
              
              2,326,000
              
              9/28/2008
              
              
              1
              
              
              
              100%26.5
      gross acres of Mesquite Estates Planned Unit Development with 60 "paper"
      lots, located in Mesquite, NV
              
              
              2,790,000
              
              9/28/2008
              
              
              1
              
              
              
              100%$
              58,203,000
 
 **  Please
refer to (3) Specific Reserve
Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of March 31, 2008, we have
provided specific reserves, related to three non-performing loans and two
performing loans, of approximately $12.9 million.  Our manager
evaluated the loans and concluded that the remaining underlying collateral was
sufficient to protect us against further losses of principal.  Our
manager will continue to evaluate these loans in order to determine if any other
allowance for loan losses should be recorded in future periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any distributions payable to our stockholders.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  The
following is a roll-forward of the allowance for loan losses for the three
months ended March 31, 2008:
 
 Description
              
              Balance
      at
                December
      31, 2007
              
              
              Specific
      Reserve Allocation
              
              
              Reduction
      of Reserve
              
              
              Balance
      at
                March
      31, 2008RightStar,
      Inc. (Part I & Part II)
              
              $
              9,757,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              9,757,000Monterrey
      Associates, L.P.
              
              
              1,174,000
              
              
              
              --
              
              
              
              --
              
              
              
              1,174,000Brawley
      CA 122, LLC
              
              
              256,000
              
              
              
              --
              
              
              
              --
              
              
              
              256,000Peoria
      180, LLC
              
              
              1,309,000
              
              
              
              --
              
              
              
              --
              
              
              
              1,309,000Terravita,
      LLC
              
              
              377,000
              
              
              
              --
              
              
              
              --
              
              
              
              377,000Total
      (3)
              
              $
              12,873,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              12,873,000
 
 (3)
              Specific
      Reserve Allowances
 
 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:
 
 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.
 
 RightStar
is currently being operated by a court appointed receiver however the lenders
are working with the State of Hawaii to possibly appoint a management group to
continue to improve the operations of the property.
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  
 In early
2006, the State of Hawaii notified the lenders of a potential statutory trust
fund deficiency, estimated to be between $20 million and $30 million and claimed
that this balance has priority over all lenders.  The State of Hawaii
is pursuing approximately $30 million in recoveries from the former trustees,
prior owners of the property and other parties. The proceeds from these
recoveries, if any, will be used to fund the potential deficiency in the
statutory trust. The lenders dispute the amount and priority of this
deficit.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The outcome of this auction cannot be determined at this
time.
 
 During
December 2007, we, VRM I, and the statutory trust fund received a settlement
totaling $2.8 million, of which approximately $2.0 million was applied against
outstanding trust obligations. Approximately $0.8 million, of which our portion
totaling approximately $0.5 million, was applied towards the allowance for
doubtful accounts on this loan and was recorded as a reimbursement of legal fees
totaling approximately $0.4 million.
 
 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, 2008, our specific reserve allowance on
the RightStar loans totaled approximately $9.8 million.
 
 Peoria 180, LLC Loan
Allowance – As of March 31, 2008, our manager has provided a specific
reserve allowance, related to a land loan on property located in Glendale, AZ,
of approximately $1.6 million, of which our portion was approximately $1.3
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan and evaluation of the
borrower, obtained by our manager during October 2007.  As of March
31, 2008, the loan was performing as required.  Our manager will
continue to evaluate our position in the loan.
 
 Monterrey Associates, L.P. –
As of March 31, 2008, our manager has provided a specific reserve allowance,
related to a commercial loan on a 248-unit apartment complex in Oklahoma City,
OK, of approximately $2.4 million, of which our portion was approximately $1.2
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2008.  As of March 31, 2008, the loan was considered
non-performing.  Our manager will continue to evaluate our position in
the loan.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  Brawley CA 122, LLC – As of
March 31, 2008, our manager has provided a specific reserve allowance, related
to an acquisition and development loan on 25 acres for proposed 122
single-family subdivision in Brawley, CA, of approximately $0.8 million, of
which our portion was approximately $0.3 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during January 2008.  As of
March 31, 2008, the loan was considered non-performing.  Our manager
will continue to evaluate our position in the loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100 unit condominium/apartment project in
North Las Vegas, Nevada, totaling approximately $0.7 million, of which our
portion was approximately $0.4 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 the three months ended March 31, 2008, the loans on the
Terravita LLC property, with first and second positions were rewritten into one
loan, which include a principal pay down of $6.6 million, with a second position
totaling approximately $3.1 million of which our portion is approximately $1.7
million.  The terms of the rewritten loan remain the same as those of
the original loans and was performing as required as of March 31,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 In
addition, as of March 31, 2008, our manager granted extensions on 19 loans,
totaling approximately $229.0 million of which our portion was approximately
$167.8 million, pursuant to the terms of the original loan agreements, which
permit extensions by mutual consent.  Such extensions are generally
provided on loans where the original term was 12 months or less and where a
borrower requires additional time to complete a construction project or
negotiate take-out financing.  However, our manager generally grants
extensions when a borrower is in compliance with the material terms of the loan,
including, but not limited to the borrower’s obligation to make interest
payments on the loan.  Included in the 19 extended loans was the $19.8
million Mid-State Raceway loan, of which our portion was $17.0 million, which
was extended from March 31, 2007 to March 31, 2008.  On April 10,
2008, this loan was paid in full.  Our manager concluded that no
allowance for loan loss was necessary with respect to these loans, except for
the Peoria 180, LLC, Monterrey Associates, LP and Brawley CA 122, LLC loans
referred to above, as of March 31, 2008.
 
 Asset Quality and Loan
Reserves
 
 Losses
may occur from investing in real estate loans.  The amount of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the loan
      amount.
  See
review report of Independent Registered Public Accounting Firm.
 - 21
-
 Table of Contents
  
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  As of March 31, 2008 and December 31, 2007, approximately
$38.0 million and $10.4 million, respectively, in non-performing loans had no
specific allowance for loan losses.  As of March 31, 2008 and December
31, 2007, approximately $20.2 million in non-performing loans had a specific
allowance for loan losses of approximately $11.2 million, which does not include
the allowances of approximately $1.7 million relating to the decrease in
property value for performing loans at March 31, 2008 and December 31,
2007.  At March 31, 2008, the following loans were non-performing
(i.e., based on current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due); RightStar, Inc.
(Part I & Part II), Monterrey Associates LP, Jeffrey's Court, LLC, V & M
Homes at the Palms, Inc., Brawley CA 122, LLC, Cliff Shadows Properties, LLC,
MRPE, LLC, The Orleans at Mesquite Estates, LLC, and The Laurels at Mesquite
Estates.  These loans have been placed on non-accrual of interest
status and are the subject of pending foreclosure proceedings.  Our
manager evaluated the loans and concluded that the underlying collateral was
sufficient to protect us against further losses of principal or
interest.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be
recorded.
 
 NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
March 31, 2008, we owned 533,675 shares of VRM I’s common stock, representing
approximately 7.76% of their total outstanding common stock.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At March
31, 2008, we held four properties with a total carrying value of approximately
$32.4 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale.  The summary below includes
our percentage of ownership in each of the properties.  Our
investments in real estate held for sale are accounted for at the lower of cost
or fair value less costs to sell with fair value based on appraisals and
knowledge of local market conditions.  It is not our intent to invest
in or own real estate as a long-term investment.  We seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  The following is a roll-forward of investments in real estate
held for sale during the three months ended March 31, 2008:
 
 Description
              Date
      Acquired
              
              Percentage
      of Ownership
              
              
              Balance
      at
                December
      31, 2007
              
              
              Acquisitions
      (Reductions)
              
              
              Seller
      Financed Sales
              
              
              Balance
      at
                March
      31, 2008Partially
      completed golf course on 570 acres of land near Austin, TX (1)
              8/3/2004
              
              
              100%
              
              
              $
              4,438,000
              
              
              $
              (150,000
              )
              
              $
              --
              
              
              $
              4,288,000480
      residential building lots & 2 single family dwellings in Rio Vista
      Village Subdivision in Cathedral City, CA (2)
              12/21/2006
              
              
              86%
              
              
              
              24,125,000
              
              
              
              --
              
              
              
              --
              
              
              
              24,125,00046.75
      acres of land located in Galveston, TX(3)
              2/5/2008
              
              
              48%
              
              
              
              --
              
              
              
              2,308,000
              
              
              
              --
              
              
              
              2,308,0002
      single family residences and 4 lots in Mt. Charleston, NV (4)
              3/7/2008
              
              
              64%
              
              
              
              --
              
              
              
              1,681,000
              
              
              
              --
              
              
              
              1,681,000$
              28,563,000
              
              
              $
              3,839,000
              
              
              $
              --
              
              
              $
              32,402,000
 
  See
review report of Independent Registered Public Accounting Firm.
 - 22
-
 Table of Contents
  (1)
              During
      the year ended December 31, 2007, we entered into a sales contract for the
      sale of a partially completed golf course near Austin, Texas at a price
      that would not result in a material gain or loss.  The sales
      contract required that the buyer complete the purchase on or before June
      29, 2007; however, the buyer chose to extend the closing date multiple
      times by paying a non-refundable extension fee that was applied to the
      value recorded for such loan on our books.  The first extension
      was in June 2007, at which time we received a $100,000 non-refundable
      extension fee from the buyer to extend the closing date to October
      2007.  Since then the buyer has elected to extend the closing
      date to May 2008, by paying a non-refundable extension fee of $50,000
      every 30 days until closing.  As of March 31, 2008, we had
      received a total of $400,000 in extension fees.  Subsequently,
      the buyer has paid $50,000 to extend the closing date through the end of
      April 2008.  There can be no assurance that the sale will be
      completed.
 
 (2)
              During
      November 2006, we, VRM I and Fund III acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the year ended December 31, 2007, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s estimate during the year
      ended December 31, 2007, the property was written down approximately $1.5
      million, of which our portion was approximately $1.3
    million.
 
 (3)
              During
      the three months ended March 31, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings approximately 46.75 acres of land in
      Galveston, TX.  Our manager has evaluated the carrying value of
      the property and based on an updated appraisal obtained in April 2008, the
      property was written down approximately $3.7 million, of which our portion
      was approximately $1.8 million.
 
 (4)
              During
      the three months ended March 31, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings two 4,000 square foot single family
      residences, together with the four remaining lots in a subdivision,
      located on Mt. Charleston, NV.  Our manager has evaluated the
      carrying value of the property and based on its estimate, no write down
      was deemed necessary as of March 31,
2008.
 
 NOTE
G — RELATED PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our 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.
 
 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, 2008 and 2007,
were approximately $274,000, for each period.
 
 As of
March 31, 2008, our manager owned 92,699 of our common shares.  For
the three months ended March 31, 2008 and 2007, we declared $29,000 and $36,000,
respectively, in dividends payable to our manager based on the number of shares
our manager held on the dividend record dates.
 
 As of
March 31, 2008, we owed our manager $4,000.  As of December 31, 2007,
we had receivables from our manager of $1,000.
 
 Transactions with Other
Related Parties
 
 As of
March 31, 2008, we owned 533,675 common shares of VRM I, representing
approximately 7.76% of their total outstanding common stock.  For the
three months ended March 31, 2008 and 2007 we recognized $44,000 and $26,000,
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.
 - 23
-
 Table of Contents
  As of
March 31, 2008, VRM I owned 225,134 of our common shares, representing
approximately 1.51% of our total outstanding common stock.  For the
three months ended March 31, 2008 and 2007, we declared $72,000 and $56,000,
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.  No similar transactions occurred during the three
months ended March 31, 2007.
 
 As of
March 31, 2008, we had receivables from VRM I of $44,000.  As of
December 31, 2007, we owed VRM I $123,000.
 
 As of
March 31, 2008, Fund III owned 114,117 of our common shares, representing
approximately 0.77% of our total outstanding common stock.  For the
three months ended March 31, 2008 and 2007, we declared $36,000 and $24,000,
respectively, in dividends payable to Fund III based on the number of shares
Fund III held on the dividend record dates.
 
 During
the three months ended March 31, 2007, we purchased $1.3 million in real estate
loans from Fund III.  No gain or loss resulted from this
transaction.  No similar transactions occurred during the three months
ended March 31, 2008.
 
 As of
March 31, 2008, we had receivables from Fund III of $6,000.  As of
December 31, 2007, we did not have a balance due to or due from Fund
III.
 
 During
the three months ended March 31, 2008 and 2007, we incurred $27,000 and $38,000,
respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
which the Secretary of Vestin Group has an equity ownership interest in the law
firm.
 
 NOTE
H — 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, 2008, we have received $93,000 in
principal payments.  Payments will be recognized as income when
received.  The balance of $347,000 was fully reserved as of March 31,
2008.
 
 During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
$5,473,000 of which our share of the proceeds were approximately $3.8 million,
which resulted in a loss of $829,000.  In addition, during June 2005,
we and VRM I entered into a settlement agreement with the guarantors of the loan
in the amount of $2,000,000 in exchange for a release of their personal
guarantees, of which our share was $1,350,000.  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 $1,100,000 from July 2005 through
July 2008, at which time the entire balance is due.  As of March 31,
2008, we have received $616,000 in principal payments.  Payments will
be recognized as income when received.  The balance of $745,000 was
fully reserved as of March 31, 2008.
 
 During
November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa,
Arizona of which our portion of the consideration received totaled
$6,043,000.  We and VRM I received a promissory note from the original
guarantor in the amount of $478,000 of which our portion was
$409,000.  The promissory note is payable in interest only payments of
8% on the principal balance outstanding.  From June 25, 2005 through
May 25, 2006, monthly payments increased to $15,000 and were applied to
principal and accrued interest.  From June 25, 2006 through May 25,
2009, payments increase to $20,000 monthly.  As of December 31, 2007,
we received $234,000 in principal payments and the balance of $184,000 was fully
reserved.
  See
review report of Independent Registered Public Accounting Firm.
 - 24
-
 Table of Contents
  Due to
the uncertainty of collectability, the balance for the entire remaining balance
of the promissory note was fully reserved.  On August 7, 2007, we and
VRM I filed a complaint against the guarantor in the U.S. District Court of the
District of Nevada, seeking to recover the amounts due pursuant to the
promissory note.  The guarantor did not answer or otherwise respond to
the lawsuit.  We and VRM I was granted a default judgment for all the
amounts due.  However, due to the current financial position of the
guarantor, our Manager has determined that we would not be able to recover any
amounts due from the guarantor.  As of March 31, 2008, the note was
fully written off.
 
 During
December 2005, we and VRM I sold the 460 acre residential subdivision in Lake
Travis, TX for approximately $5.5 million, of which our portion was
approximately $3.5 million.  The purchase price included cash proceeds
of $5 million and a $500,000 note receivable, with an imputed interest rate of
8% in July 2006.  A net gain of $71,000 resulted from this
transaction, of which our portion was $47,000.  The purchaser
defaulted on the note and our manager pursued litigation.  During the
year ended December 31, 2007, we and VRM I entered into a settlement agreement,
which reduced the note to $175,000, of which our portion is
$115,000.  As of March 31, 2008, we had received $33,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of $82,000 was fully reserved as of March 31,
2008.
 
 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.  Payments will be recognized as income when
received.  The balance of approximately $1.3 million was fully
reserved as of March 31, 2008.
 
 NOTE
I — JUNIOR SUBORDINATED NOTES
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through the special purpose business trust, VCT I to
Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly.  The securities mature on
July 30, 2020 and may be called at par by us any time after July 30,
2012.  We incurred approximately $2.3 million in financing costs
relating to the notes.  These costs are being amortized to interest
expense over the term of the notes.  We are obligated to pay the trust
preferred securities with respect to distributions and amounts payable upon
liquidation, redemption or repayment.
 
 VCT I
issued $100,000 of common securities, representing 100% of the voting common
stock of VCT I to us.  VCT I used the proceeds from the sale of the
trust preferred securities and the common securities to purchase our junior
subordinated notes.  The terms of the junior subordinated notes
matches the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
junior subordinated notes require quarterly interest distributions beginning
July 31, 2007.  For the three months ended March 31, 2008, interest
expense on the junior subordinated notes totaled approximately $1.3
million
 
 Our
interest in VCT I is accounted for using the equity method and the assets and
liabilities of VCT I are not consolidated into our financial statements, in
accordance with FIN 46R.  Interest on the junior subordinated notes is
included in interest expense on our consolidated income statement while the
junior subordinated notes are presented as a separate item on our consolidated
balance sheet.  We were in compliance with all debt covenants related
to the junior subordinated notes as of March 31, 2008.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 25
-
 Table of Contents
  NOTE
J — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In March
2008, the Financial Accounting Standards Board (“FASB”) issued FAS 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No.
133.  FAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities, and is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early
application encouraged.  We will adopt FAS 161 in the first quarter of
2009.  Since FAS 161 requires only additional disclosures concerning
derivatives and hedging activities, adoption of FAS 161 will not affect our
financial statements.
 
 NOTE
K — LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and 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.
 
 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 and we do not
expect that the sanctions imposed upon the Respondents will have any material
affect upon our operations.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
Ninth Circuit United Court of Appeals, which dismissal was upheld when the
United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, 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.  The
Defendants believe that the allegations are without merit and that they have
adequate defenses.  The Defendants intend to undertake a vigorous
defense.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
action filed in San Diego Superior Court by certain plaintiffs who allege, among
other things, that they were wrongfully denied appraisal rights in connection
with the merger of Fund I into Vestin Realty Mortgage I, Inc.  The
action is being brought as a purported class action on behalf of all members of
Vestin Fund I who did not vote in favor of the merger.  The Defendants
believe that the allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM I’s management agreement and Fund I’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM I with respect to
the above actions.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 26
-
 Table of Contents
  VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages and a
rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM I’s management agreement and Fund I’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM I with respect to
the above actions.
 
 In
addition to the matters described above, our manager is involved in a number of
other legal proceedings concerning matters arising in connection with the
conduct of its business activities.  Our manager believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously.  Other than the matters described above, our manager
believes that it is not a party to any pending legal or arbitration proceedings
that would have a material adverse effect on our manager’s financial condition
or results of operations or cash flows, although it is possible that the outcome
of any such proceedings could have a material impact on our manager’s net income
in any particular period.
 
 NOTE
L — 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.  The outcome of this auction cannot be determined at this
time.
 
 We and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
action filed in San Diego Superior Court by certain plaintiffs who allege, among
other things, that they were wrongfully denied appraisal rights in connection
with the merger of Fund II into Vestin Realty Mortgage II, Inc.  The
action is being brought as a purported class action on behalf of all members of
Vestin Fund II who did not vote in favor of the merger.  The
Defendants believe that the allegations are without merit and that they have
adequate defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
a rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 27
-
 Table of Contents
  In
addition to the matters described above, we are involved in a number of other
legal proceedings concerning matters arising in the ordinary course of our
business activities.  We believe we have meritorious defenses to each
of these actions and intend to defend them vigorously.  Other than the
matters described above, we believe that we are not a party to any pending legal
or arbitration proceedings that would have a material adverse effect on our
financial condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a material impact
on our net income in any particular period.
 
 NOTE
M — DIVIDEND REQUIREMENT
 
 To
maintain our status as a REIT, we are required to make dividend distributions,
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 dividend distributions 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.
 
 NOTE
N — SUBSEQUENT EVENTS
 
 On April
24, 2008, the board of directors declared a monthly cash dividend of $0.09 per
share for the month of April 2008, which will be paid on May 30, 2008, to the
stockholders of record as of May 12, 2008.
 
 During
April 2008, the Sycamore Glenn at Mesquite Estates, LLC loan became
non-performing.  This loan was to provide financing for the
development of 32.3 gross acres of Mesquite Estates Planned Unit Development
with 180 "paper" lots, located in Mesquite, NV, with an outstanding balance of
$4.37 million and is secured by a first lien on the property and guaranteed by
the principals of the borrower.  Our manager has commenced both
foreclosure proceedings and litigation against the personal guarantors in order
to enforce the personal guarantees.  Our manager has evaluated this
loan and concluded that the value of the underlying collateral is sufficient to
protect us from loss of principal.  No specific allowance was deemed
necessary.
 
 As of
April 30, 2008, the borrower on the Jeffrey’s Court, LLC Loan, has made
payments, per the adequate protection and settlement agreement between us, VRM
I, Fund III and the borrower, of $55,000, of which our portion was
$33,000.  The borrower is required to make monthly payments on this
loan until August 31, 2008, at which time the entire loan balance is
due.
 
 During
May 2008, we, VRM I and Fund III foreclosed upon Brawley CA 122, LLC and
classified it as real estate held for sale.
 
 During
May 2008, we, VRM I and Fund III considered the Redwood Place, LLC loan
non-performing.  Redwood Place, LLC, is a loan that provided for the
acquisition and conversion to condominiums of a 186-unit apartment complex
located in Phoenix, Arizona.  The loan is secured by a first lien on
the property, and is guaranteed by principals of the borrower.  The
outstanding balance on the loan is approximately $15.0 million, of which our
portion is approximately $11.4 million.  The loan matured on April 5,
2008, and the borrower neglected to either payoff the loan or extend the
term.  Our manager has commenced foreclosure, and is proceeding with
legal action to enforce the personal guarantees.  Our manager has
evaluated this loan and has concluded the value of the underlying collateral is
sufficient to protect us from loss of principal.
 
 During
May 2008, we considered the 3900, LLC, loan non-performing.  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 Million. In addition, the loan is guaranteed by principals of
the borrower.  The outstanding balance of the loan is approximately
$4.7 million, of which our portion 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.  Our manager has evaluated this loan
and has concluded the value of the underlying collateral is sufficient to
protect us from loss of principal.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 28
-
 Table of Contents
  
 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, 2008, and the related consolidated
statements of income for the three-month periods ended March 31, 2008 and 2007,
the consolidated statements of equity and other comprehensive income for the
three-month period ended March 31, 2008, and the consolidated statements of cash
flows for the three-month periods ended March 31, 2008 and 2007. 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, 2007 and the related
consolidated statements of operations, equity and other comprehensive income and
cash flows for the year ended December 31, 2007.  We have also audited
the effectiveness of the Company’s internal controls over financial reporting as
of December 31, 2007, and in our report dated March 13, 2008, 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, 2007, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
 
 
 
 
 
 Orange,
California
 May 6,
2008
 
  - 29
-
 Table of Contents
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three months ended March 31, 2008 and
2007.  This discussion should be read in conjunction with our
consolidated financial statements and accompanying notes and other detailed
information regarding us appearing elsewhere in this report on Form 10-Q and our
report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis
of Financial Conditions and Results of Operations for the year ended
December 31, 2007.
 
 FORWARD
- LOOKING STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 2, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” should be read in conjunction with the consolidated
financial statements, related notes, and other detailed information included
elsewhere in this report on Form 10-Q.  We are including this
cautionary statement to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995.  Statements that are not historical fact are forward-looking
statements.  Certain of these forward-looking statements can be
identified by the use of words such as “believes,” “anticipates,” “expects,”
“intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,”
or other similar expressions.  Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors, which could
cause actual results, performance or achievements to differ materially from
future results, performance or achievements.  These forward-looking
statements are based on our current beliefs, intentions and
expectations.  These statements are not guarantees or indicative of
future performance.  Important assumptions and other important factors
that could cause actual results to differ materially from those forward-looking
statements include, but are not limited to, those factors, risks and
uncertainties described in Part II Item 1A Risk Factors of this
Quarterly Report on Form 10-Q and in our other securities filings with the
Securities and Exchange Commission (“SEC”).  Our future financial
condition and results of operations, as well as any forward-looking statements,
are subject to change and involve inherent risks and
uncertainties.  The forward-looking statements contained in this
report are made only as of the date hereof.  We undertake no
obligation to update or revise information contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.  Our capital, subject to a 3% reserve, will
constitute the bulk of the funds we have available for investment in real estate
loans.  We do not have any arrangements in place, except for the funds
we received pursuant to the VCT I closing, to materially increase the funds we
will have available to invest from any other sources.  See discussion
under – “Capital and Liquidity.”
 
  - 30
-
 Table of Contents
  Our
operating results during the past several years have been adversely affected by
increases in allowances for loan losses.  At March 31, 2008, the
following loans were non-performing (i.e., based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement or when the payment of
interest is 90 days past due); RightStar, Inc. (Part I & Part II), Monterrey
Associates LP, Jeffrey's Court, LLC, V & M Homes at the Palms, Inc., Brawley
CA 122, LLC, Cliff Shadows Properties, LLC, MRPE, LLC, The Orleans at Mesquite
Estates, LLC, and The Laurels at Mesquite Estates.  These loans are
currently carried on our books at a value of approximately $47.0 million, net of
allowance for loan losses of approximately $11.2 million, which does not include
the allowances of approximately $1.7 million relating to the decrease in the
property value for performing loans as of March 31, 2008.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  On February 5, 2008, we, VRM I and
Fund III foreclosed upon Pirates Lake, Ltd. and classified it as real estate
held for sale.  On March 7, 2008, we, VRM I and Fund III foreclosed
upon Forest Development LLC and classified it as real estate held for
sale.  For additional information, see Note F – Real Estate Held for Sale and
“Specific Loan Allowance” in Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statements of this report Form 10-Q.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $79.4 million or
24% of our total assets as of March 31, 2008, as compared to approximately $48.0
million or 14% of our total assets as of December 31, 2007.  At March
31, 2008, non-performing assets consisted of approximately $32.4 million of real
estate held for sale and approximately $47.0 million of non-performing loans,
net of allowance for loan losses.  During the year ended December 31,
2007, we entered into a sales contract for the sale of a partially completed
golf course near Austin, Texas at a price that would not result in a material
gain or loss.  The sales contract required that the buyer complete the
purchase on or before June 29, 2007; however, the buyer has chosen to extend the
closing date multiple times by paying a non-refundable extension fee that has
been applied to the value recorded for such loan on our books.  The
first extension was in June 2007, at which time we received a $100,000
non-refundable extension fee from the buyer to extend the closing date to
October 2007.  Since then the buyer has elected to extend the closing
date to May 2008, by paying a non-refundable extension fee of $50,000 every 30
days until closing.  As of March 31, 2008, we had received a total of
$400,000 in extension fees.  In addition, the buyer paid $50,000 in
April 2008 to extend the closing date an extra 30 days.  There can be
no assurance that the sale will be completed.
 
 We
believe that the significant increase in the level of our non-performing assets
reflects the difficulties encountered by the real estate and credit markets
during the past year.  The risk inherent in our business strategy that
entails more lenient underwriting standards and expedited loan approval
procedures could also result in an increase in our non-performing
assets.  As the economy weakens and credit becomes more difficult to
obtain, our borrowers who develop and sell commercial real estate projects are
unable to complete their projects or obtain takeout financing or are otherwise
adversely impacted.  This has resulted in an increase in loan
defaults, which reduce the amount of funds we have to pay distributions to our
stockholders.  Such conditions may also require us to restructure
loans.  The weighted average term of our outstanding loans, including
extensions, was 19 months as of March 31, 2008 and December 31,
2007.
 
 A
recession or uncertain economic conditions during the next year could have a
material impact on the collectibility of our loans.  The downturn in
the real estate markets where we conduct business might result in a further
increase in defaults on our loans and might require us to record additional
reserves.  The problems experienced by some lenders in the sub-prime
market may have a material adverse affect on the commercial mortgage markets in
which we operate.  We are aware that weakness in the credit markets
has had an adverse impact upon our markets.  In addition, we are aware
that weakness in residential lending has had and may continue to have an adverse
impact upon our markets.  Recognizing the risk, we seek to maintain an
adequate loan-to-value ratio, which, as of March 31, 2008, was 72.21%, prior to
allowances for loan losses, on a weighted average basis generally using
appraisals prepared on an “as-if developed basis” in connection with the loan
origination.
 
 We hope
to retain sufficient cushion in the underlying equity position to protect the
value of our loans in the event of a default.  However, a marked
increase in loan defaults accompanied by a rapid decline in real estate values
will have a material adverse effect upon our financial condition and operating
results.
 
  - 31
-
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  As of
March 31, 2008, we have provided a specific reserve allowance for three
non-performing loans and two performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year ended December 31, 2007.  For
further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated financials statements in Part I,
Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 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 H – Related Party Transactions in
the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 As of
March 31, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington.
 
 Comparison
of Operating Results for the three months ended March 31, 2008 to the three
months ended March 31, 2007.
 
 For
      the Three Months
                Ended
      March 31,2008
              
              
              2007Total
      revenues
              
              $
              7,156,000
              
              
              $
              6,653,000Total
      operating expenses
              
              
              2,103,000
              
              
              
              1,158,000Non-operating
      income
              
              
              185,000
              
              
              
              182,000Income
      (loss) from real estate held for sale
              
              
              (1,965,000
              )
              
              
              706,000Income
      before provision for income taxes
              
              
              3,273,000
              
              
              
              6,383,000Provision
      for income taxes
              
              
              --
              
              
              
              --Net
      income
              
              $
              3,273,000
              
              
              $
              6,383,000Basic
      and diluted earnings per common share
              
              $
              0.22
              
              
              $
              0.43Dividends
      declared per common share
              
              $
              0.32
              
              
              $
              0.39Weighted
      average common shares
              
              
              14,872,330
              
              
              
              14,943,760Weighted
      average term of outstanding loans, including extensions
              
              19
      months
              
              
              20
      months
 
 Total
Revenues:  For the three months ended March 31, 2008, total
revenues were approximately $7.2 million compared to approximately $6.7 million
during the three months ended March 31, 2007, an increase of approximately $0.5
million or 8%.  Revenues were primarily affected by the following
factors:
 
 ·
              Interest
      income from investments in real estate loans increased to approximately
      $7.1 million during the three months ended March 31, 2008, compared to
      approximately $6.4 million during the same period in 2007.  This
      increase was primarily due to the increase in investment in real estate
      loans of approximately $52.5 million and the increase in the weighted
      average interest rate from 11% as of March 31, 2007 to 12% as of March 31,
      2008.  Our revenue is dependent upon the balance of our
      investment in real estate loans and the interest earned on these
      loans.  As of March 31, 2008, our investment in real estate
      loans, was approximately $302.3 million compared to our investment in real
      estate loans, including loans related to seller financed real estate held
      for sale, of approximately $249.8 million as of March 31,
      2007.  In addition, our interest income is affected by the
      amount of non-performing loans.  As of March 31, 2008,
      approximately $58.2 million of our loans were non-performing compared to
      approximately $28.8 million as of March 31, 2007.  For
      additional information on our loan portfolio, see Note D - Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements of this
      Interim Report Form 10-Q.
 
  - 32
-
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  ·
              During
      the three months ended March 31, 2007, we earned approximately $0.2
      million in other income from a principal payment on a note receivable,
      which was fully reserved.  We received no comparable income
      during the same period in 2008.
 
 Total Operating
Expenses:  For the three months ended March 31, 2008, total
operating expenses were approximately $2.1 million compared to approximately
$1.2 million during the three months ended March 31, 2007, an increase of
approximately $0.9 million or 82%.  Expenses were primarily affected
by the following factors:
 
 ·
              We
      recognized approximately $1.4 million of interest expense during the three
      months ended March 31, 2008 related to the junior subordinated notes
      issued in connection with the trust preferred financing in June
      2007.  During the three months ended March 31, 2007, we
      recognized approximately $0.3 million of interest expense related to
      secured borrowings held during the
period.
 
 ·
              Professional
      fees decreased approximately $0.1 million during the three months ended
      March 31, 2008 compared to the same period in 2007, primarily due to the
      fact we incurred less legal fees relating to legal actions that have been
      filed against us in connection with the REIT conversion and
      RightStar.  See Note L - Legal Matters Involving The
      Company of the Notes to the Consolidated Financial Statements of
      this Interim Report Form 10-Q.
 
 Total Income(Loss) from Real Estate
Held for Sale:  For the three months ended March 31, 2008,
total loss from real estate held for sale was approximately $2.0 million
compared to income of approximately $0.7 million during the three months ended
March 31, 2007, a decrease of approximately $2.7 million or
378%.  Total income/loss from real estate held for sale was primarily
affected by the following factors:
 
 ·
              During
      the three months ended March 31, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings approximately 46.75 acres of land in
      Galveston, TX.  Our manager evaluated the carrying value of the
      property and based on an updated appraisal concluded that a write down of
      approximately $3.7 million, of which our portion was approximately $1.8
      million, was appropriate.
 
 ·
              We
      recorded a gain on sale of real estate held for sale related to seller
      financed loans of approximately $0.8 million during the three months ended
      March 31, 2007, as a result of a seller financed loan on the 74 unit (90
      bed) assisted living facility in San Bernardino, CA being paid in
      full.  There were no gains recorded on real estate held for sale
      during the three months ended March 31,
2008.
 
 Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to make distributions, 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
make distributions based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our distributions may at times
be more or less than our reported earnings as computed in accordance with
GAAP.
 
 Total
taxable income and REIT taxable income are non-GAAP financial measurements, and
do not purport to be an alternative to reported net income or cash flow from
operations determined in accordance with GAAP as a measure of operating
performance.  Our total taxable income represents the aggregate amount
of taxable income generated by us and our wholly owned taxable REIT subsidiary,
TRS II, Inc.  REIT taxable income is calculated under U.S. federal tax
laws in a manner that, in certain respects, differs from the calculation of net
income pursuant to GAAP.  REIT taxable income excludes the
undistributed taxable income of TRS II, Inc., which is not included in REIT
taxable income until distributed to us.  Subject to certain TRS value
limitations, there is no requirement that the TRS II, Inc. distribute their
earnings to us.  Since we are structured as a REIT and the Internal
Revenue Code requires that we distribute substantially all of our net taxable
income in the form of distributions 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
distributions that we must make to our stockholders so as to comply with the
rules set forth in the Internal Revenue Code.  Because not all
companies have identical calculations, this presentation of total taxable income
and REIT taxable income may not be comparable to those and reported by other
companies.
  - 33
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 In
addition to satisfying the 90% taxable income distribution rule referred to
above, the amount of distribution we make is ultimately based on distributing
100% of the REIT taxable income in order to limit any tax
liability.  The distribution of this additional 10% of REIT taxable
income is typically made in the following tax year as IRC section 858 allows us
to carryback distributions made, for example, in 2008 to 2007, for the purposes
of zeroing out our REIT taxable income.  As a result, included in the
distributions of approximately $4.7 million made during the three months ended
March 31, 2008 is approximately $0.4 million that was used to zero out our
estimated 2007 REIT taxable income.
 
 The table
below reconciles the differences between reported net income and total estimated
taxable income and estimated REIT taxable income for the three months ended
March 31, 2008:
 
 For
      the Three
                Months
      EndedMarch
      31, 2008Net
      income, as reported
              
              $
              3,273,000Add
      (deduct):Write
      down on real estate held for sale
              
              
              1,792,000Other
      book to tax differences
              
              
              (342,000
              )Total
      estimated taxable income
              
              
              4,723,000Add:
      Estimated taxable loss attributable to TRS II, Inc.
              
              
              51,000Estimated
      REIT taxable income (prior to deductions for dividends
    paid)
              
              $
              4,774,000
 
 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 because our
manager will manage our affairs.  We may pay our manager an annual
management fee of up to 0.25% of our aggregate capital received by us and Fund
II from the sale of shares or membership units.
 
 During
the three months ended March 31, 2008, net cash flows provided by operating
activities approximated $7.3 million, which included cash paid of approximately
$0.3 million in legal fees relating to legal actions that have been filed
against us in connection with the REIT conversion and RightStar.  Cash
flows related to investing activities consisted of cash provided by loan payoffs
and sales of real estate loans of approximately $15.3 million and cash used for
new investments and purchases of real estate loans totaled approximately $32.4
million.  Cash flows used for financing activities consisted of
dividends to stockholders, net of reinvestment, of approximately $4.6
million.
 
 At March
31, 2008, we had approximately $6.1 million in cash, $103,000 in certificates of
deposit, $2.2 million in marketable securities – related party and approximately
$334.4 million in total assets.  We intend to meet short-term working
capital needs through a combination of proceeds from loan payoffs, loan sales
and/or borrowings.  We believe we have sufficient working capital to
meet our operating needs in the near term.
 
 Since we
distribute most or all of our distributable cash generated by operations, 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 to
provide capital for investment in new loans.  Any significant level of
defaults on outstanding loans could reduce the funds we have available for
investment in new loans.  Resulting foreclosure proceedings may not
generate full repayment of our loans and may result in significant delays in the
return of invested funds.  This would diminish our capital resources
and would impair our ability to invest in new loans.  Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale not sold through seller financing, totaling
approximately $47.0 million and $32.4 million, respectively, as of March 31,
2008, compared to approximately $19.4 million and $28.6 million, respectively,
as of December 31, 2007.  It is possible that no earnings will be
recognized from these assets until they are disposed of, or that no earnings
will be recognized at all, and the time it will take to dispose of these assets
cannot be predicted.
  - 34
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  Our
manager believes that these non-performing assets have increased as a result of
conditions in the real estate and credit markets.  Because of the
estimated value of the underlying properties, we do not currently believe that
any losses beyond those already recognized will be incurred from these assets
upon final disposition.  However, it is possible that we will not be
able to realize the full estimated carrying values upon
disposition.
 
 We have
no current plans to sell any new shares except through our dividend reinvestment
program.  As of April 30, 2008, approximately 9% 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.
 
 On June
22, 2007 we completed the issuance of $60.1 million in unsecured trust preferred
securities through the special purpose business trust, VCT I to Merrill Lynch
International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly. VCT I used the proceeds from the sale
of the trust preferred securities and the common securities to purchase our
junior subordinated notes.  The terms of the junior subordinated notes
match the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
indenture governing the notes includes a number of covenants including the
following financial covenants:  (i) we must maintain a Tangible Net
Worth of not less than $225,000,000, (ii) our trailing twelve months EBITDA must
not be less than 2.5 times our Interest Expense and (iii) our ratio of Total
Debt to Tangible Net Worth must not exceed 0.5 to 1.00.  All defined
terms are set forth in the indenture.  As of March 31, 2008, we were
in compliance with all financial covenants included in the
indenture.
 
 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, including
SEC Rule 10b-18, 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, 2008, we had
purchased 109,634 shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $1.4 million.  There were no treasury stock purchases
made during the three months ended March 31, 2008.
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
 We may
seek to expand our capital resources through borrowings from institutional
lenders or through securitization of our loan portfolio or similar
arrangements.  No assurance can be given that, if we should seek to
borrow additional funds or to securitize our assets we would be able to do so on
commercially attractive terms.  Our ability to expand our capital
resources in this manner is subject to many factors, some of which are beyond
our control, including the state of the economy, the state of the capital
markets and the perceived quality of our loan portfolio.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 8.65% to
15.00%.  Revenue by product will fluctuate based upon relative
balances during the period.  We had investments in 43 real estate
loans, as of March 31, 2008, with a balance of approximately $302.3 million as
compared to investments in 46 real estate loans as of December 31, 2007, with a
balance of approximately $291.1 million.
 
  - 35
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  At March
31, 2008, the following loans were non-performing (i.e., based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when the
payment of interest is 90 days past due); RightStar, Inc. (Part I & Part
II), Monterrey Associates LP, Jeffrey's Court, LLC, V & M Homes at the
Palms, Inc., Brawley CA 122, LLC, Cliff Shadows Properties, LLC, MRPE, LLC, The
Orleans at Mesquite Estates, LLC, and The Laurels at Mesquite
Estates.  These loans are currently carried on our books at a value of
approximately $47.0 million, net of allowance for loan losses of approximately
$11.2 million, which does not include the allowances of approximately $1.7
million relating to the decrease in the property value for performing loans as
of March 31, 2008.  These loans have been placed on non-accrual of
interest status and are the subject of pending foreclosure
proceedings.  Our manager has evaluated these loans and concluded that
the value of the underlying collateral is sufficient to protect us from loss of
principal.  No specific allowance was deemed necessary.
 
 During
March 2007, our manager extended the Mid-State Raceway loan from March 31, 2007
to March 31, 2008.  As of March 31, 2008, this loan had a balance of
approximately $19.8 million, of which our portion was approximately $17.0
million.  This loan was paid in full on April 10, 2008.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of March 31, 2008, we have
provided a specific reserve related to three non-performing loans and two
performing loans, based on updated appraisals and evaluation of the borrower
obtained by our manager during the year ended December 31, 2007.  Our
manager evaluated these loans and concluded that the remaining underlying
collateral was sufficient to protect us against further losses of principal or
interest.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be
recorded.  For additional information on our investments in real
estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 Asset
Quality and Loan Reserves
 
 Losses
may occur from investing in real estate loans.  The amounts of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a periodic basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the real
      estate loan amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses.  For additional information regarding
the roll-forward of the allowance for loan losses for the three months ended
March 31, 2008, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
  - 36
-
 Table of Contents
  Investments
in Real Estate Held for Sale
 
 At March
31, 2008, we held four properties with a total carrying value of approximately
$32.4 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale.  Our investments in real
estate held for sale are accounted for at the lower of cost or fair value less
costs to sell with fair value based on appraisals and knowledge of local market
conditions.  It is not our intent to invest in or own real estate as a
long-term investment.  We seek to sell properties acquired through
foreclosure as quickly as circumstances permit.  For additional
information on our investments in real estate held for sale, refer to Note F
–Real Estate Held for
Sale of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities, other then 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
1 Consolidated Financial
Statementsof this Interim Report 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, 2008:
 
 Contractual
      Obligation
              
              Total
              
              
              Less
      Than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      Than
                5
      YearsJunior
      subordinated notes payable (1)
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000Total
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000
 
 (1)
              See
      Note I – Junior
      Subordinated Notes of the Notes to the Consolidated Financial
      Statements included in Part I, Item 1 Consolidated Financial
      Statementsof this Interim Report 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
impaired.  A loan is impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement or when the payment of
interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at March 31, 2008, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
              
              $
              2,688,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              13,439,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (2,688,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (13,439,000
              )
 
 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.
  - 37
-
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  Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment in our investment in real estate loans
portfolio.  Our manager’s estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrower’s ability to repay, prevailing
economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Subsequent recoveries of amounts previously charged off are
added back to the allowance or included as income.
 
 The
following table presents a sensitivity analysis to show the impact on our
financial condition at March 31, 2008, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
              
              $
              3,023,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              15,117,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (3,023,000
              )Allowance
      for loan losses assumption decreased by 4.3% of loan
    portfolio
              
              $
              (12,873,000
              )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approves loans more quickly than other real estate
lenders and, due to our expedited underwriting process, there is a risk that the
credit inquiry we perform will not reveal all material facts pertaining to a
borrower and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
  - 38
-
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  Real Estate Held For
Sale
 
 Real
estate held for sale includes real estate acquired through foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
FAS 144 - Accounting for the
Impairment or Disposal of Long Lived Assets,we seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  The
carrying values of real estate held for sale are assessed on a regular basis
from updated appraisals, comparable sales values or purchase
offers.
 
 Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
initial and continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sales agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sales
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sales agreements are recorded under the deposit method or cost recovery method
as defined in FAS 66.  Under the deposit method, no profit is
recognized and any cash received from the buyer is reported as a deposit
liability on the balance sheet.  Under the cost recovery method, no
profit is recognized until payments by the buyer exceed the carrying basis of
the property sold.  Principal payments received will reduce the
related receivable, and interest collections will be recorded as unrecognized
gross profit on the balance sheet.  The carrying values of these
properties are included in real estate held for sale on the accompanying
consolidated balance sheets.
 
 ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURESABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.
 
  - 39
-
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  Most of
our assets consisted of investments in real estate loans, which from time to
time include those that are financed under Inter-creditor
Agreements.  At March 31, 2008, our aggregate investment in real
estate loans was approximately $289.5 million, net of allowance of approximately
$12.9 million, with a weighted average effective interest rate of
12.04%.  Most of the real estate loans had an initial term of 12
months.  The weighted average term of outstanding loans, including
extensions, at March 31, 2008, was 19 months.  All but two of the
outstanding real estate loans at March 31, 2008, were fixed rate
loans.  One of the two variable interest rate loans was non-performing
as of March 31, 2008, see Note D – Investments in Real Estate
Loans in the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.  All of
the real estate loans are held for investment purposes; none are held for
sale.  We intend to hold such real estate loans to
maturity.  None of the real estate loans had prepayment penalties and
26 loans, totaling approximately $185.0 million, had an exit fee.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
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, 2008.  The presentation aggregates
the investment in real estate loans by their maturity dates for maturities
occurring in each of the years 2008 through 2012 and thereafter and separately
aggregates the information for all maturities arising after 2012.  The
carrying values of these assets approximate their fair value as of March 31,
2008.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at March 31, 2008Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              TotalInvestments
      In Real Estate Loans
              
              $
              255,828,000
              
              
              $
              46,518,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              302,346,000Weighted
      Average Interest Rates
              
              
              12.11%
              
              
              
              11.65%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              12.04%
 
 At March
31, 2008, we also had approximately $8.3 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.
 
  - 40
-
 Table of Contents
  ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our 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, 2008, of the effectiveness of the
design and operation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Exchange Act.  Based upon our
evaluation, our CEO and CFO concluded that, as of March 31, 2008, our disclosure
controls and procedures are designed at a reasonable assurance level and are
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our 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 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  Based on that
evaluation, there has been no such change during the first fiscal quarter of
2008.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
 
 Not
applicable
 
 PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note K Legal Matters
Involving the Manager and Note L Legal Matters Involving the
Company in Part I, Item 1 Consolidated Financial
Statements of this Form 10-Q for information regarding our legal
proceedings, which are incorporated herein by reference.
 
 ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
  - 41
-
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  RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and
distributions.  Current economic conditions increase the risk of
defaults on our loans.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.  We seek to mitigate the risk by
estimating the value of the underlying collateral and insisting on adequate
loan-to-value ratios.  However, we cannot be assured that these
efforts will fully protect us against losses on defaulted loans.  Our
appraisals are generally dated within 12 months of the date of loan origination
and may not reflect a decrease in the value of the real estate due to events
subsequent to the date of the appraisals.  Any subsequent decline in
real estate values on defaulted loans could result in less security than
anticipated at the time the loan was originally made, which may result in our
not recovering the full amount of the loan.  Our weighted average
loan-to-value ratio as of March 31, 2008, was 72.21%, as compared to 72.64% as
of December 31, 2007.  Any failure of a borrower to pay interest on
loans will reduce our revenues, the distributions we pay to stockholders and,
most likely, the value of common 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.
 
 As of
March 31, 2008, we had in our portfolio approximately $47.0 million in
non-performing loans, net of allowance for loan losses of approximately $11.2
million, which does not include allowances of approximately $1.7 million for
performing loans, and approximately $32.4 million of real estate held for sale
for a total of approximately $79.4 million in non-performing assets, which
represented approximately 29% of our stockholders’ equity.  We believe
this is largely attributable to difficulties in the real estate and credit
markets.  At this time, we are not able to predict how long such
difficult economic conditions will continue.
 
 A
prolonged economic slowdown, lengthy or severe recession or significant increase
in interest rates could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the year ended December 31,
2007, we, VRM I and Fund III conducted updated appraisals on a number of
properties securing our loans, representing approximately 60% of our loan
portfolio, and concluded that the estimated value of such properties should be
reduced by approximately $22.9 million.  Our share of this reduction
was approximately $18.1 million, which negatively impacted our weighted average
loan to value ratio.  As a commercial real estate lender willing to
invest in riskier loans, rates of delinquencies, foreclosures and losses on our
loans could be higher than those generally experienced in the commercial
mortgage lending industry during periods of economic slowdown or
recession.  We are of the opinion that problems in the sub-prime
residential mortgage market have adversely affected the general economy and the
availability of funds for commercial real estate developers.  We
believe this lack of available funds has led to an increase in defaults on our
loans.  Furthermore, problems experienced in U.S. credit markets since
the summer of 2007 have reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary to pay back our
loans.  Thus, an extended period of illiquidity in the credit markets
could result in a material increase in the number of our loans that are not paid
back on time.  For the three months ended March 31, 2008, loan
originations accounted for two of the three loans funded, as one loan was
rewritten during the period.  The terms of the rewritten loan remain
the same and the loan was performing as required as of March 31,
2008.  Any sustained period of increased delinquencies, defaults or
foreclosures will likely have an adverse affect upon our ability to originate,
purchase and securitize loans, which could significantly harm our business,
financial condition, liquidity and results of operations.
 
  - 42
-
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  Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders, which may lead to an increase in
non-performing assets in our loan portfolio and create additional risks of
return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.
 
 We depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.
 
 In
addition, most of the appraisals are prepared on an as-if developed basis, which
approximates the post-construction value of the collateralized property assuming
such property is developed.  As-if developed values on raw land loans
or acquisition and development loans often dramatically exceed the immediate
sales value and may include anticipated zoning changes and successful
development by the purchaser upon which development is dependent on availability
of financing.  As most of the appraisals will be prepared on an as-if
developed basis, if the loan goes into default prior to completion of the
project, the market value of the property may be substantially less than the
appraised value.  As a result, there may be less security than
anticipated at the time the loan was originally made.  If there is
less security and a default occurs, we may not recover the full amount of our
loan, thus reducing the amount of funds available to distribute.
 
 We
typically make “balloon payment” loans, which are riskier than loans with
payments of principal over an extended period of time.
 
 The loans
we invest in or purchase generally require the borrower to make a “balloon
payment” on the principal amount upon maturity of the loan.  A balloon
payment is a large principal balance that is payable after a period of time
during which the borrower has repaid none or only a small portion of the
principal balance.  As of March 31, 2008, all of our loans provided
for payments of interest only with a “balloon” payment of principal payable in
full at the end of the term.  Loans with balloon payments are riskier
than loans with payments of principal over an extended time period such as 15 or
30 years because the borrower’s repayment depends on its ability to sell the
property, obtain suitable refinancing or otherwise raise a substantial amount of
cash when the loan comes due.  The borrower’s ability to achieve a
successful sale or refinancing of the property may be adversely impacted by
deteriorating economic conditions or illiquidity in the credit
markets.  There are no specific criteria used in evaluating the credit
quality of borrowers for loans requiring balloon
payments.  Furthermore, a substantial period of time may elapse
between the review of the financial statements of the borrower and the date when
the balloon payment is due.  As a result, there is no assurance that a
borrower will have sufficient resources to make a balloon payment when
due.
 
  - 43
-
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  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.
 
 The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  We may borrow up to 70% of the fair
market value of our outstanding real estate loans at any time and consequently,
subject to the terms of the trust preferred securities, we may borrow additional
funds in order to further expand our loan portfolio.  These borrowings
will require us to carefully manage our cost of funds.  The junior
subordinated notes sold in June 2007 in connection with the trust preferred
financing bear interest at a fixed rate of 8.75% through July 2012; thereafter
the interest rate is LIBOR plus 3.5%, resetting quarterly.  In order
to benefit from this arrangement, we need to loan the proceeds at rates in
excess of the rates payable on the junior subordinated notes.  Loans
made during the three months ended March 31, 2008 had a weighted average
interest rate of 11.9%.  However, no assurance can be given that we
will be successful in continuing to make 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 indenture governing the junior subordinated notes sets forth a
number of covenants, which 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 will likely 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.
 
 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 make distributions.
 
 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.  Any equity
financing may result in substantial dilution to our stockholders, and any debt
financing may include restrictive covenants.  We may not be able to
raise capital on reasonable terms, if at all.
 
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  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 L – Legal Matters Involving The
      Company in the notes to the consolidated financial statement under
      Part I, Item 1
      Consolidated Financial Statementsof this Interim Report 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.
 
 Under
applicable environmental laws, any owner of real property may be fully liable
for the costs involved in cleaning up any contamination by materials hazardous
to the environment.  Even though we might be entitled to
indemnification from the person that caused the contamination, there is no
assurance that the responsible person would be able to indemnify us to the full
extent of our liability.  Furthermore, we would still have court and
administrative expenses for which we may not be entitled to
indemnification.
 
 Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 Our
results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets.  If the economy is
healthy, we expect that more people will be borrowing money to acquire, develop
or renovate real property.  However, if the economy grows too fast,
interest rates may increase too much and the cost of borrowing may become too
expensive.  Alternatively, if the economy enters a recession, real
estate development may slow.  A slowdown in real estate lending may
mean we will have fewer loans to acquire, thus reducing our revenues and
distributions to stockholders.
 
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  Interest
rate fluctuations may affect our operating results as follows:
 
 §
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and distributions will decline if we are unable to reinvest at
      higher rates or if an increasing number of borrowers default on their
      loans; and
 
 §
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if a borrower should prepay
      obligations that have a higher interest rate from an earlier period, we
      will likely not be able to reinvest the funds in real estate loans earning
      that higher rate of interest.  In the absence of a prepayment
      fee, we will receive neither the anticipated revenue stream at the higher
      rate nor any compensation for its loss.  As of March 31, 2008,
      none of our loans had a prepayment penalty, although 26 of our loans,
      totaling approximately $185.0 million, had an exit
      fee.  However, depending upon the amount by which interest rates
      decline, the amount of the exit fees is generally not significant in
      relation to the potential savings borrowers may realize as a result of
      prepaying their loans.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
March 31, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington, with
approximately 42% of our loans in Nevada.  Depending on the market and
on our company’s performance, we plan to expand our investments throughout the
United States.  However, our manager has limited experience outside of
the Western and Southern United States.  Real estate markets vary
greatly from location to location and the rights of secured real estate lenders
vary considerably from state to state.
 
 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 K – Legal Matters Involving The
Manager and Note L – Legal Matters Involving The
Company in the notes to the consolidated financial statement under Part
I, Item 1 Consolidated
Financial Statementsof this Interim Report 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.  This in turn might adversely impact our operating
results.  As of March 31, 2008, we have incurred legal expenses of
approximately $1.5 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
face competition for real estate loans that may reduce available yields and fees
available.
 
 We
consider our direct competitors to be the providers of real estate loans who
offer short-term, equity-based loans on an expedited basis for higher fees and
rates than those charged by other financial institutional lenders such as
commercial banks, insurance companies, mortgage brokers and pension
funds.  Many of the companies against which we compete have
substantially greater financial, technical and other resources than either our
company or our manager.  Competition in our market niche depends upon
a number of factors, including price and interest rates of the loan, speed of
loan processing, cost of capital, reliability, quality of service and support
services.  If our competition decreases interest rates on their loans
or makes funds more easily accessible, yields on our loans could decrease and
the costs associated with making loans could increase, both of which would
reduce our revenues and our distributions to stockholders.
 
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  We
may have a lack of control over participations.
 
 We will
consider investing in or purchasing loans jointly with other lenders and
purchasers, some of whom might be affiliates of Vestin Mortgage.  We
will initially have, and will maintain a controlling interest as lead lender in
participations with non-affiliates.  Although it is not our intention
to lose control, there is a risk that we will be unable to remain as the lead
lender in the loans in which we participate in the future.  In the
event of participation with a publicly registered affiliate, the investment
objectives of the participants shall be substantially
identical.  There shall be no duplicate fees.  The
compensation to the sponsors must be substantially identical, and the investment
of each participant must be on substantially the same terms and
conditions.
 
 Each
participant shall have a right of first refusal to buy the other's interest if
the co-participant decides to sell its interest.  We will not
participate in joint ventures or partnerships with affiliates that are not
publicly registered except as permitted in the NASAA Guidelines or otherwise
approved by 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 make distributions depends
upon our manager’s and its affiliate’s performance in obtaining, processing,
making and brokering loans for us to invest in and determining the financing
arrangements for borrowers.  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, 2008, our loans were in the following states:  Arizona,
California, Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and
Washington.  Depending on the market and on our company’s performance,
we plan to expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southern United States.  Real estate markets vary greatly
from location to location and the rights of secured real estate lenders vary
considerably from state to state.  Our manager’s limited experience in
most U.S. real estate markets may impact its ability to make prudent investment
decisions on our behalf.  Accordingly, where our manager deems it
necessary, it plans to utilize independent real estate advisors and local legal
counsel located in markets where it lacks experience for consultation prior to
making investment decisions.  Stockholders will not have an
opportunity to evaluate the qualifications of such advisors and no assurance can
be given that they will render prudent advice to our manager.
 
 Our
success depends on key personnel of our manager, the loss of whom could
adversely affect our operating results, and on our manager’s ability to attract
and retain qualified personnel.
 
 Our
success depends in part upon the continued contributions of certain key
personnel of our manager, including; Michael V. Shustek (Chief Executive Officer
and President), Rocio Revollo (Chief Financial Officer), James M. Townsend
(Chief Operating Officer) and Daniel B. Stubbs (Senior Vice President,
Underwriting) some of whom would be difficult to replace because of their
extensive experience in the field, extensive market contacts and familiarity
with our company.  If any of these individuals were to cease their
employment with our manager, our operating results could suffer.  None
of the key personnel of our manager is subject to an employment, non-competition
or confidentiality agreement with our manager, or us and we do not maintain “key
man” life insurance policies on any of them.  Our future success also
depends in large part upon our manager’s ability to hire and retain additional
highly skilled managerial, operational and marketing personnel.
  - 47
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  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.
 
 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 $274,000 for the three months ended March 31,
2008.  In addition, Vestin Mortgage and Vestin Originations received a
total of approximately $1.3 million and $1.9 million, respectively, in fees
directly from borrowers for the three months ended March 31,
2008.  The amounts received from borrowers represent fees earned by
Vestin Mortgage and Vestin Originations for loans originated for all funds
managed by Vestin Mortgage, including us, VRM I, Fund III and
inVestin.  Our assets represented approximately 77% of the assets
managed by Vestin Mortgage as of March 31, 2008.
 
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  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.
 
 Our
manager may face conflicts of interest in considering a possible combination of
the Company with VRM I.
 
 VRM I is
a company, which is engaged in making mortgage loans similar to the loans that
we make and is managed by our manager.  There may be cost savings and
operating synergies that could be achieved by combining VRM I with VRM
II.  After initial exploration of a possible combination of VRM I with
VRM II, our Board of Directors decided to postpone further consideration of the
possible combination.  Notwithstanding the postponement, our
management has evaluated issues relevant to a possible combination and it is
possible the potential combination will be pursued again in the
future.  At this time, no decision has been made with respect to
whether a combination will be pursued, or with respect to the possible form of
any such combination.  Since our manager owes a duty to the investors
in each of these entities, it could face a conflict of interest in considering
such a possible combination.  Any decision with respect to a proposed
combination with VRM I will most likely be subject to the approval of the
independent directors or stockholders of VRM I as well as the approval of our
Board of Directors.
 
 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
distributions 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 make distributions 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.
 
 Distributions
from a REIT are currently taxed at a higher rate than corporate
distributions.
 
 Under the
Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax
rate on both distributions 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 distributions
generally will not apply to our distributions (except those distributions
identified by the company as “capital gain dividends” which are taxable as
long-term capital gain) and therefore such distributions 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 distributions may cause the market to devalue our common
stock relative to stock of those corporations whose distributions qualify for
the lower rate of taxation.
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  Please
note that, as a general matter, distributions from a REIT will be taxed at the
same rate as stockholders’ share of Vestin Realty Mortgage II’s taxable income
attributable to its realized net interest income.
 
 A
portion of our business is potentially subject to prohibited transactions
tax.
 
 As a
REIT, we are subject to a 100% tax on our net income from “prohibited
transactions.”  In general, prohibited transactions are sales or other
dispositions of property to customers in the ordinary course of
business.  Sales by us of property in the course of our business will
generally constitute prohibited transactions.
 
 We intend
to avoid the 100% prohibited transactions tax on property foreclosed upon by
Fund II prior to the REIT conversion by holding and selling such properties
through one or more wholly-owned taxable REIT subsidiaries.  However,
under the Code, no more than 20% of the value of the assets of a REIT may be
represented by securities of one or more taxable REIT subsidiaries and a taxable
REIT subsidiary generally cannot operate a lodging or health care
facility.
 
 As of
March 31, 2008, we held four properties with a total carrying value of
approximately $32.4 million recorded as investments in real estate held for sale
and no properties in which we or an affiliate provided the financing, recorded
as real estate held for sale – seller financed.  United States
generally accepted accounting principals (“GAAP”) requires us to include real
estate held for sale – seller financed until the borrower has met and maintained
certain requirements.  The real estate held for sale collectively
constituted approximately 10% of our assets as of March 31, 2008.
 
 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 distributions 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 distributions 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 distributions from a taxable REIT subsidiary.  If,
for any taxable year, the distributions 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.
 
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  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, 2008, has ranged from $2.00 to $15.96 (adjusted for the 1-for-2.6
reverse stock split in December 2007).  We believe the price of our
stock in the months after we were listed was affected by, among other things,
selling pressure from stockholders seeking immediate liquidity and the level of
non-performing assets, which we own.  We continue to own a significant
level of non-performing assets and our sector of the market has suffered from
the problems encountered by sub-prime residential 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
      distributions;
 
 ·
              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.
 
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  We
are the subject of stockholder litigation, which may depress the price of our
stock.
 
 A number
of lawsuits have been filed against us by stockholders who claim, among other
things, that they were improperly denied dissenter’s rights in connection with
the conversion of Fund II into a REIT.  We believe the suits are
without merit and we intend to vigorously defend against such
claims.  Nonetheless, the outcome of the lawsuits cannot be predicted
at this time, nor can a meaningful evaluation be made of the potential impact
upon us if the plaintiffs were to prevail in their claims.  The
resulting uncertainty may depress the price of our stock.  Moreover,
concerns about the costs of defense and the potential diversion of our manager’s
time to deal with these lawsuits may have an adverse effect upon the price of
our stock.
 
 Our
charter documents and Maryland law contain provisions that may delay, defer or
prevent a change of control transaction.
 
 Our
charter and bylaws and Maryland corporate law contain a number of provisions (as
further described in exhibit 3.2 Bylaws of the Registrant
under the Exhibit Index included in Part IV, Item 15 Exhibits and Financial Statement
Schedules of this Report Form 10-K) that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price for
holders of our common stock or otherwise be in their best interests,
including:
 
 ·
              Ownership
      Limit.  Our articles of incorporation, subject to certain
      exceptions, authorizes our board of directors to take such actions as are
      necessary and desirable to preserve our qualification as a REIT and to
      limit any person to actual or constructive ownership of no more than a
      9.8% of the number or value, whichever is more restrictive, of the
      outstanding shares of our stock, unless our board of directors waives this
      ownership limit.  However, our board of directors may not grant
      a waiver of the ownership limit that would permit a person to acquire more
      than 15% of our stock without exception.  The ownership limit
      may have the effect of precluding a change in control of us by a third
      party, even if such change in control would be in the interest of our
      stockholders (and even if such change in control would not reasonably
      jeopardize our REIT status).
 
 ·
              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.
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  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.
 
 ITEM
      2.
              UNREGISTERED
      SALESOF EQUITY AND USE OF
  PROCEEDS
 
 None.
 
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  ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTEOF SECURITY
    HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 None.
 
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 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 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 Agreement21.1(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)
 
 
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 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Realty Mortgage II, Inc.By:
              /s/
      Michael V. ShustekMichael
      V. ShustekPresident
      and Chief Executive OfficerDate:
              May
      6, 2008
 
 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
      6, 2008Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer
              
              May
      6, 2008Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              May
      6, 2008John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              May
      6, 2008Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              May
      6, 2008Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              May
      6, 2008Roland
      M. Sansone
 
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