UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (MARK
ONE)
 
 [X]  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
quarterly period ended September 30,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 Transition
Period From _______ To ________
 
 COMMISSION
FILE NUMBER 333-125121
 
 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
November 10, 2008, there were 14,569,952 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 September 30, 2008
      (unaudited) and December 31, 2007
              1Consolidated Statements of Operations (unaudited) for the
      Three and Nine Months Ended September 30, 2008 and
2007
              2Consolidated Statements of Equity and Other Comprehensive
      Loss (unaudited) for the Nine Months Ended September 30,
      2008
              3Consolidated Statements of Cash Flows (unaudited) for the
      Nine Months Ended September 30, 2008 and 2007
              4Notes to Consolidated Financial Statements
      (unaudited)
              6Report of Independent Registered Public Accounting
      Firm
              37Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              38Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              51Item 4.
              Controls and Procedures
              52Item 4T
              Controls and Procedures
              53Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              53Item 1A.
              Risk Factors
              53Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              65Item 3.
              Defaults Upon Senior Securities
              65Item 4.
              Submission of Matters to a Vote of Security
      Holders
              65Item 5.
              Other Information
              65Item 6.
              Exhibits
              66SIGNATURES
              67Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              CONSOLIDATED
      FINANCIALSTATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSSeptember
      30, 2008
              
              
              December
      31, 2007(Unaudited)AssetsCash
              
              $
              26,522,000
              
              
              $
              20,241,000Certificates
      of deposit
              
              
              --
              
              
              
              102,000Investment
      in marketable securities - related party
              
              
              1,203,000
              
              
              
              2,460,000Interest
      and other receivables, net of allowance of $160,000 at September 30, 2008
      and December 31, 2007
              
              
              1,244,000
              
              
              
              4,162,000Notes
      receivable, net of allowance of $2,340,000 at September 30, 2008 and
      $2,619,000 at December 31, 2007
              
              
              --
              
              
              
              --Real
      estate held for sale
              
              
              41,956,000
              
              
              
              28,563,000Investment
      in real estate loans, net of allowance for loan losses of $50,686,000 at
      September 30, 2008 and $12,873,000 at December 31, 2007
              
              
              182,459,000
              
              
              
              278,190,000Due
      from related parties
              
              
              70,000
              
              
              
              --Investment
      in equity affiliate
              
              
              100,000
              
              
              
              100,000Assets
      under secured borrowings
              
              
              14,669,000
              
              
              
              --Deferred
      financing costs
              
              
              2,650,000
              
              
              
              2,213,000Other
      assets
              
              
              154,000
              
              
              
              137,000Total
      assets
              
              $
              271,027,000
              
              
              $
              336,168,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              2,319,000
              
              
              $
              2,641,000Due
      to related parties
              
              
              --
              
              
              
              122,000Secured
      borrowings
              
              
              13,651,000
              
              
              
              --Junior
      subordinated notes payable
              
              
              56,350,000
              
              
              
              60,100,000Note
      payable
              
              
              94,000
              
              
              
              --Dividend
      payable
              
              
              --
              
              
              
              1,546,000Total
      liabilities
              
              
              72,414,000
              
              
              
              64,409,000Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
              
              
              --
              
              
              
              --Treasury
      stock, at cost (427,411 shares)
              
              
              (3,004,000
              )
              
              
              (1,440,000
              )Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 14,569,952 shares
      issued and outstanding at September 30, 2008 and 14,866,219 shares issued
      and outstanding at December 31, 2007
              
              
              1,000
              
              
              
              1,000Additional
      paid in capital
              
              
              278,550,000
              
              
              
              278,367,000Accumulated
      deficit
              
              
              (76,934,000
              )
              
              
              (4,198,000
              )Accumulated
      other comprehensive loss
              
              
              --
              
              
              
              (971,000
              )Total
      stockholders' equity
              
              
              198,613,000
              
              
              
              271,759,000Total
      liabilities and stockholders' equity
              
              $
              271,027,000
              
              
              $
              336,168,000
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 1
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(UNAUDITED)For
      The Three Months Ended
              
              
              For
      The Nine Months Ended9/30/2008
              
              
              9/30/2007
              
              
              9/30/2008
              
              
              9/30/2007RevenuesInterest
      income from investment in real estate loans
              
              $
              3,605,000
              
              
              $
              6,836,000
              
              
              $
              16,084,000
              
              
              $
              19,915,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,044,000Other
      income
              
              
              82,000
              
              
              
              103,000
              
              
              
              675,000
              
              
              
              902,000Total
      revenues
              
              
              3,687,000
              
              
              
              6,939,000
              
              
              
              16,759,000
              
              
              
              21,861,000Operating
      expensesManagement
      fees - related party
              
              
              274,000
              
              
              
              274,000
              
              
              
              823,000
              
              
              
              822,000Provision
      for loan loss
              
              
              19,966,000
              
              
              
              1,309,000
              
              
              
              42,253,000
              
              
              
              1,309,000Interest
      expense
              
              
              1,828,000
              
              
              
              1,362,000
              
              
              
              4,756,000
              
              
              
              2,008,000Professional
      fees
              
              
              1,359,000
              
              
              
              1,769,000
              
              
              
              1,954,000
              
              
              
              2,667,000Professional
      fees - related party
              
              
              47,000
              
              
              
              34,000
              
              
              
              110,000
              
              
              
              110,000Provision
      for doubtful accounts related to receivable
              
              
              --
              
              
              
              235,000
              
              
              
              --
              
              
              
              235,000Other
              
              
              450,000
              
              
              
              179,000
              
              
              
              998,000
              
              
              
              630,000Total
      operating expenses
              
              
              23,924,000
              
              
              
              5,162,000
              
              
              
              50,894,000
              
              
              
              7,781,000Income
      (loss) from operations
              
              
              (20,237,000
              )
              
              
              1,777,000
              
              
              
              (34,135,000
              )
              
              
              14,080,000Non-operating
      income (loss)Gain
      on purchase of debt
              
              
              --
              
              
              
              --
              
              
              
              1,556,000
              
              
              
              --Dividend
      income - related party
              
              
              --
              
              
              
              73,000
              
              
              
              86,000
              
              
              
              200,000Interest
      income from banking institutions
              
              
              126,000
              
              
              
              720,000
              
              
              
              308,000
              
              
              
              1,088,000Impairment
      on marketable securities – related party
              
              
              (2,228,000
              )
              
              
              --
              
              
              
              (2,228,000
              )
              
              
              --Total
      non-operating income (loss)
              
              
              (2,102,000
              )
              
              
              793,000
              
              
              
              (278,000
              )
              
              
              1,288,000Income
      from real estate held for saleRevenue
      related to real estate held for sale
              
              
              --
              
              
              
              25,000
              
              
              
              --
              
              
              
              34,000Net
      loss on sale of real estate held for sale
              
              
              (259,000
              )
              
              
              --
              
              
              
              (259,000
              )
              
              
              --Gain
      on sale of real estate held for sale - seller financed
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              808,000Expenses
      related to real estate held for sale
              
              
              (525,000
              )
              
              
              (969,000
              )
              
              
              (1,002,000
              )
              
              
              (2,781,000
              )Write
      downs on real estate held for sale
              
              
              (17,023,000
              )
              
              
              (85,000
              )
              
              
              (29,802,000
              )
              
              
              (1,113,000
              )Total
      loss from real estate held for sale
              
              
              (17,807,000
              )
              
              
              (1,029,000
              )
              
              
              (31,063,000
              )
              
              
              (3,052,000
              )Income
      (loss) before provision for income taxes
              
              
              (40,146,000
              )
              
              
              1,541,000
              
              
              
              (65,476,000
              )
              
              
              12,316,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --NET
      INCOME (LOSS)
              
              $
              (40,146,000
              )
              
              $
              1,541,000
              
              
              $
              (65,476,000
              )
              
              $
              12,316,000Basic
      and diluted earnings per weighted average common share
              
              $
              (2.72
              )
              
              $
              0.10
              
              
              $
              (4.41
              )
              
              $
              0.83Dividends
      declared per common share
              
              $
              --
              
              
              $
              0.38
              
              
              $
              0.49
              
              
              $
              1.18Weighted
      average common shares
              
              
              14,772,583
              
              
              
              14,894,003
              
              
              
              14,844,070
              
              
              
              14,926,027
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 2
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 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
      Loss:Net
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (65,476,000
              )
              
              
              
              
              
              
              (65,476,000
              )Recognition
      of Unrealized Loss on Marketable Securities – Related
Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              971,000
              
              
              
              971,000Comprehensive
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (64,505,000
              )Purchase
      of Treasury Stock
              
              
              317,777
              
              
              
              (1,564,000
              )
              
              
              (317,777
              )
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,564,000
              )Dividends
      Declared to Stockholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,260,000
              )
              
              
              
              
              
              
              (7,260,000
              )Reinvestment
      of Dividends
              
              
              
              
              
              
              
              
              
              
              21,510
              
              
              
              --
              
              
              
              183,000
              
              
              
              
              
              
              
              
              
              
              
              183,000Stockholders'
      Equity at
                September
      30, 2008 (Unaudited)
              
              
              427,411
              
              
              $
              (3,004,000
              )
              
              
              14,569,952
              
              
              $
              1,000
              
              
              $
              278,550,000
              
              
              $
              (76,934,000
              )
              
              $
              --
              
              
              $
              198,613,000
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 3
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Nine Months Ended9/30/2008
              
              
              9/30/2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (65,476,000
              )
              
              $
              12,316,000Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for doubtful accounts related to receivable
              
              
              --
              
              
              
              235,000Impairment
      of marketable securities - related party
              
              
              2,228,000Write
      downs on real estate held for sale
              
              
              29,802,000
              
              
              
              1,113,000Loss
      on sale of real estate held for sale
              
              
              259,000
              
              
              
              --Gain
      on sale of real estate held for sale - seller financed
              
              
              --
              
              
              
              (808,000
              )Gain
      on purchase of debt
              
              
              (1,556,000
              )
              
              
              --Recovery
      of allowance for doubtful notes receivable included in other
      income
              
              
              (87,000
              )
              
              
              (594,000
              )Provision
      for loan loss
              
              
              42,253,000
              
              
              
              1,309,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              --
              
              
              
              (1,044,000
              )Amortized
      interest income
              
              
              (94,000
              )
              
              
              (1,323,000
              )Amortized
      financing costs, included in interest expense
              
              
              461,000
              
              
              
              44,000Change
      in operating assets and liabilities:Interest
      and other receivables
              
              
              2,918,000
              
              
              
              (598,000
              )Due
      to/from related parties
              
              
              (192,000
              )
              
              
              33,000Other
      assets
              
              
              150,000
              
              
              
              405,000Accounts
      payable and accrued liabilities
              
              
              (281,000
              )
              
              
              5,100,000Net
      cash provided by operating activities
              
              
              10,385,000
              
              
              
              16,188,000Cash
      flows from investing activities:Investments
      in real estate loans
              
              
              (74,998,000
              )
              
              
              (92,019,000
              )Purchase
      of investments in real estate loans from:VRM
      I
              
              
              (1,800,000
              )
              
              
              --Fund
      III
              
              
              --
              
              
              
              (1,300,000
              )Other
      related parties
              
              
              --
              
              
              
              (661,000
              )Third
      parties
              
              
              (5,001,000
              )
              
              
              (14,246,000
              )Proceeds
      from loan payoffs
              
              
              46,784,000
              
              
              
              82,759,000Sale
      of investments in real estate loans to:VRM
      I
              
              
              500,000
              
              
              
              --Third
      parties
              
              
              42,155,000
              
              
              
              3,319,000Proceeds
      related to investment in real estate held for sale
              
              
              535,000
              
              
              
              100,000925,000
              
              
              
              --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
              
              
              87,000
              
              
              
              641,000Purchase
      of marketable securities - related parties
              
              
              --
              
              
              
              (731,000
              )Purchase
      of investments in certificates of deposit
              
              
              (2,000
              )
              
              
              (1,026,000
              )Proceeds
      from investments in certificates of deposit
              
              
              104,000
              
              
              
              1,175,000Deposit
      liability
              
              
              --
              
              
              
              570,000Net
      cash provided (used) by investing activities
              
              $
              9,289,000
              
              
              $
              (17,862,000
              )
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 4
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Nine Months Ended9/30/2008
              
              
              9/30/2007Cash
      flows from financing activities:Principal
      payments on notes payable
              
              $
              (114,000
              )
              
              $
              (256,000
              )Proceeds
      from issuance of notes payable
              
              
              --
              
              
              
              2,000Proceeds
      from issuance of debt
              
              
              --
              
              
              
              60,000,000Cash
      used for purchase of debt
              
              
              (2,194,000
              )
              
              
              --Deferred
      financing costs
              
              
              (898,000
              )
              
              
              (2,301,000
              )Dividends
      paid to stockholders, net of reinvestments
              
              
              (8,367,000
              )
              
              
              (19,013,000
              )Dividends
      paid to stockholders - related party
              
              
              (256,000
              )
              
              
              (467,000
              )Purchase
      of treasury stock at cost
              
              
              (1,564,000
              )
              
              
              (1,440,000
              )Net
      cash provided (used) in financing activities
              
              
              (13,393,000
              )
              
              
              36,525,000NET
      CHANGE IN CASH
              
              
              6,281,000
              
              
              
              34,851,000Cash,
      beginning of period
              
              
              20,241,000
              
              
              
              16,841,000Cash,
      end of period
              
              $
              26,522,000
              
              
              $
              51,692,000Supplemental
      disclosures of cash flows information:Income
      taxes paid
              
              $
              --
              
              
              $
              --Interest
      paid
              
              $
              4,756,000
              
              
              $
              2,008,000Non-cash
      investing and financing activities:Dividend
      payable
              
              $
              --
              
              
              $
              1,728,000Reinvestment
      of dividends
              
              $
              183,000
              
              
              $
              407,000Payoff
      of loans funded through secured borrowings
              
              $
              6,331,000
              
              
              $
              13,796,000Loans
      funded through secured borrowing
              
              $
              19,982,000
              
              
              $
              --Interest
      reserves related to secured borrowings
              
              $
              1,018,000
              
              
              $
              --Note
      payable relating to prepaid E & O insurance
              
              $
              208,000
              
              
              $
              227,000Real
      estate held for sale acquired through foreclosure
              
              $
              44,915,000
              
              
              $
              --Loan
      rewritten with same or similar collateral
              
              $
              1,690,000
              
              
              $
              30,918,000Purchase
      of equity investment related to junior subordinated notes
      payable
              
              $
              --
              
              
              
              100,000Unearned
      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
              
              $
              192,000
              
              
              $
              978,000Prepaid
      amount applied to accounts payable
              
              $
              41,000
              
              
              $
              --Recognition
      of unrealized loss on marketable securities – related
party
              
              $
              971,000
              
              
              $
              --Unrealized
      gain on marketable securities - related party
              
              $
              --
              
              
              $
              80,000
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 5
-
 Table of Contents
  
 VESTIN
REALTY MORTGAGEII, INC
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 SEPTEMBER
30, 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
 
 Basis of
Presentation
 
 The
financial statements of the Company have been prepared in accordance with the
accounting principles generally accepted in the United States of America
(“GAAP”).  Management has included all normal recurring adjustments
considered necessary to give a fair presentation of operating results for the
periods presented.  Interim results are not necessarily indicative of
results for a full year.  The information included in this Form 10-Q
should be read in conjunction with information included in the 2007 annual
report filed on Form 10-K and our quarterly reports filed on Form 10-Q for the
periods ended March 31, 2008 and June 30, 2008.
 
 Management
Estimates
 
 The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 7
-
 Table of Contents
  Loan-to-value
ratios are initially based on appraisals obtained at the time of loan
origination and are updated, when new appraisals are received, to reflect
subsequent changes in value estimates.  Such appraisals are generally
dated within 12 months of the date of loan origination and may be commissioned
by the borrower.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment.  Our manager’s estimate of losses is
based on a number of factors including the types and dollar amounts of loans in
the portfolio, adverse situations that may affect the borrower’s ability to
repay, prevailing economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Generally, subsequent recoveries of amounts previously
charged off are added back to the allowance and included as income.
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the real estate lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 Additional
facts and circumstances may be discovered as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions, which can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 8
-
 Table of Contents
  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 foreclose on non-performing 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.
 
 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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 9
-
 Table of Contents
  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 September 30, 2008.  All securities are classified
as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”).
 
 We
evaluate our available-for-sale investment for other-than-temporary impairment
charges in accordance with Emerging Issues Task Force, or EITF 03-1, “The
Meaning of Other-Than-Temporary Impairment and it’s Application to Certain
Investments.”  FAS 115 and EITF 03-1 require us to determine when an
investment is considered impaired (i.e., decline in fair value below its
amortized cost), and evaluate whether the impairment is other than temporary
(i.e., investment value will not be recovered over its remaining life), and, if
the impairment is other than temporary, recognize an impairment loss equal to
the difference between the investment’s cost and its fair value.
 
 According
to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M -
Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, there
are numerous factors to be considered in such an evaluation and their relative
significance will vary from case to case.  The following are a few
examples of the factors which, individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
 
 ·
              The
      length of the time and the extent to which the market value has been less
      than cost;
 
 ·
              The
      financial condition and near-term prospects of the issuer, including any
      specific events which may influence the operations of the issuer such as
      changes in technology that may impair the earnings potential of the
      investment or the discontinuance of a segment of the business that may
      affect the future earnings potential;
or
 
 ·
              The
      intent and ability of the holder to retain its investment in the issuer
      for a period of time sufficient to allow for any anticipated recovery in
      market value.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 10
-
 Table of Contents
  Fair Value
Disclosures
 
 On
January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115 (“FAS 159), but we did not make any fair value elections with respect
to any of our eligible assets or liabilities as permitted under the provisions
of FAS 159 as of September 30, 2008.  FAS 159 permits companies to
choose to measure certain financial assets and liabilities at fair value (the
“fair value option”).  If the fair value option is elected, any
upfront costs and fees related to the item must be recognized in earnings and
cannot be deferred, e.g. debt issue costs.  The fair value election is
irrevocable and may generally be made on an instrument-by-instrument basis, even
if a company has similar instruments that it elects not to fair
value.  At the adoption date, unrealized gains and losses on existing
items for which fair value has been elected are reported as a cumulative
adjustment to beginning retained earnings.
 
 We chose
not to elect the fair value option for our financial assets and liabilities
existing on January 1, 2008, and did not elect the fair value option for
financial assets and liabilities transacted during the nine months ended
September 30, 2008.  Therefore, the adoption of FAS 159 had no impact
on our consolidated financial statements.
 
 On
January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements, as
required for financial assets and liabilities (“FAS 157”), which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements
for non-financial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis.  The adoption of FAS
157 for our financial assets and liabilities did not have a material impact on
our consolidated financial statements.  We do not expect the adoption
of FAS 157 as it pertains to non-financial assets and liabilities to have a
material impact on our consolidated financial statements.
 
 Under FAS
157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. “the exit price”) in an orderly
transaction between market participants at the measurement date.  In
determining fair value, the Company uses various valuation approaches, including
quoted market prices and discounted cash flows.  FAS 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources.  Unobservable inputs are inputs
that reflect a company’s judgment concerning the assumptions that market
participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.  The fair value
hierarchy is broken down into three levels based on the reliability of inputs as
follows:
 
 ·
              Level
      1 – Valuations based on quoted prices in active markets for identical
      instruments that the Company is able to access.  Since
      valuations are based on quoted prices that are readily and regularly
      available in an active market, valuation of these products does not entail
      a significant degree of judgment.
 
 ·
              Level
      2 – Valuations based on quoted prices in active markets for instruments
      that are similar, or quoted prices in markets that are not active for
      identical or similar instruments, and model-derived valuations in which
      all significant inputs and significant value drivers are observable in
      active markets.
 
 ·
              Level
      3 – Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, which utilize the Company’s estimates
      and assumptions.
 
 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 and nine months ended September 30, 2008 and 2007.  The
following is a computation of the EPS data for the three and nine months ended
September 30, 2008 and 2007:
  See
review report of Independent Registered Public Accounting Firm.
 - 11
-
 Table of Contents
  
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (loss) available to common stockholders
              
              $
              (40,146,000
              )
              
              $
              1,541,000
              
              
              $
              (65,476,000
              )
              
              $
              12,316,000Weighted
      average number of common shares outstanding during the
    period
              
              
              14,772,583
              
              
              
              14,894,003
              
              
              
              14,844,070
              
              
              
              14,926,027Basic
      and diluted earnings per weighted average common share
              
              $
              (2.72
              )
              
              $
              0.10
              
              
              $
              (4.41
              )
              
              $
              0.83
 
 Common Stock
Dividends
 
 During
the nine months ended September 30, 2008, cash dividends declared totaled
approximately $0.49 per common share, representing ordinary
income.  There were no dividends declared during the three months
ended September 30, 2008.
 
 During
June 2008, our Board of Directors decided to temporarily suspend the payment of
dividends.  We will continue to comply with the REIT requirements and
will distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 Treasury
Stock
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws,
repurchases may be made at such times and in such amounts, as our management
deems appropriate.  The share repurchase program may be discontinued
or terminated at any time and we have not established a date for completion of
the share repurchase program.  The repurchases will be funded from our
available cash.  As of September 30, 2008, we had purchased 427,411
shares of treasury stock through the repurchase program noted
above.  These shares are carried on our books at a cost totaling
approximately $3.0 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.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 12
-
 Table of Contents
  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 nine months ended September 30, 2008, was approximately
zero.
 
 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 based on management review of these financial
institutions.  As of September 30, 2008 and December 31, 2007, we had
approximately $23.1 million and $19.7 million, respectively, in excess of the
federally insured limits.
 
 As of
September 30, 2008, 32%, 26%, 18% and 9% of our loans were in Nevada, Arizona,
Oregon and California, respectively, compared to 45%, 15%, 16% and 7%, at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, the downturn in the local real estate
markets in these states has had a material adverse effect on us.
 
 At
September 30, 2008, the aggregate amount of loans to our three largest borrowers
represented approximately 18% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in Oregon and Hawaii, with first lien positions, interest rates between 13% and
14%, with an aggregate outstanding balance of approximately $43.0
million.  As of September 30, 2008, our three largest loans were
considered non-performing.  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 could have a material
adverse effect on us.
 
 As of
September 30, 2008, five loans totaling approximately $47.6 million,
representing approximately 20% of our portfolio’s total value, had a common
guarantor, of these five loans; four loans totaling approximately $45.4 million
were considered non-performing as of September 30, 2008.  As of
November 7, 2008, the borrower is delinquent on the interest payment on the
performing loan.  In addition, six loans totaling approximately $21.3
million, representing approximately 9% of our portfolio’s total value, have a
common guarantor, of these six loans; five loans were related to our secured
borrowings of approximately $14.7 million and all were performing as required as
of September 30, 2008.  As of November 7, 2008, the borrower is
delinquent on the interest payment on a performing loan with a balance of
approximately $6.1 million.  The borrower is currently in negotiations
to sell the property and has indicated that payment will be received upon
completion of the sale; however, no assurance can be made that the sale will be
completed.
  See
review report of Independent Registered Public Accounting Firm.
 - 13
-
 Table of Contents
  
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  As
the economy weakens and credit has become more difficult to obtain, many of our
borrowers who develop and sell commercial real estate projects have been unable
to complete their projects, obtain takeout financing or have been otherwise
adversely impacted.  In addition, an increase in interest rates over
the loan rate applicable at origination of the loan may have an adverse effect
on our borrower’s ability to refinance.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
September 30, 2008, all of our loans provided for payments of interest only with
a “balloon” payment of principal payable in full at the end of the
term.
 
 In
addition, we may invest in real estate loans that require borrowers to maintain
interest reserves funded from the principal amount of the loan for a period of
time.  At September 30, 2008, we had approximately $48.0 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 $70.1
million.  These loans had interest reserves of approximately $6.3
million, of which our portion was approximately $5.2 million.  As of
September 30, 2008, one of these loans, totaling approximately $3.3 million,
which had interest reserves was considered non-performing.  This
loan’s interest reserves, totaling approximately $0.2 million, has been
suspended as of September 30, 2008.  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
September 30, 2008, we had five real estate loan products consisting of
commercial, construction, acquisition and development, land and
residential.  The effective interest rates on all product categories
range from 5.9% to 15%.  Revenue by product will fluctuate based upon
relative balances during the period.
 
 Loan
Portfolio
 
 Investments
in real estate loans as of September 30, 2008, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      *
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              1
              
              
              $
              13,000,000
              
              
              
              13.00%
              
              
              
              5.57%
              
              
              
              38.15%Commercial
              
              
              21
              
              
              
              131,681,000
              
              
              
              12.67%
              
              
              
              56.48%
              
              
              
              55.56%Construction
              
              
              7
              
              
              
              22,402,000
              
              
              
              10.61%
              
              
              
              9.61%
              
              
              
              85.98%Land
              
              
              9
              
              
              
              66,062,000
              
              
              
              11.58%
              
              
              
              28.34%
              
              
              
              69.79%38
              
              
              $
              233,145,000
              
              
              
              12.18%
              
              
              
              100.00%
              
              
              
              62.22%
 
 Investments
in real estate loans as of December 31, 2007, were as follows:
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      *
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.30%
              
              
              
              46.75%Commercial
              
              
              19
              
              
              
              131,257,000
              
              
              
              12.12%
              
              
              
              45.10%
              
              
              
              74.57%Construction
              
              
              9
              
              
              
              45,883,000
              
              
              
              11.04%
              
              
              
              15.76%
              
              
              
              73.84%Land
              
              
              14
              
              
              
              95,585,000
              
              
              
              12.12%
              
              
              
              32.84%
              
              
              
              62.41%46
              
              
              $
              291,063,000
              
              
              
              12.00%
              
              
              
              100.00%
              
              
              
              68.52%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
“Weighted Average Interest Rate” as shown above is based on the contractual
terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of September 30, 2008 and December 31, 2007, was 12.07% and 11.84%,
respectively.  Please see Non-Performing Loans and
Asset Quality and Loan
Reserves below for further information regarding performing and
non-performing loans.
 
 Loan-to-value
ratios are based on the most recent appraisals and may not reflect subsequent
changes in value and include allowances for loan losses.  Recognition
of allowance for loan losses will result in a maximum loan-to-value ratio of
100% per loan.
 
 The
following is a schedule of priority of real estate loans as of September 30,
2008 and December 31, 2007:
 
 Loan
      Type
              
              Number
      of Loans
              
              
              September
      30, 2008 Balance*
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              31
              
              
              $
              198,551,000
              
              
              
              85.16%
              
              
              
              44
              
              
              $
              288,665,000
              
              
              
              99.18%Second
      deeds of trust
              
              
              7
              
              
              
              34,594,000
              
              
              
              14.84%
              
              
              
              2
              
              
              
              2,398,000
              
              
              
              0.82%38
              
              
              $
              233,145,000
              
              
              
              100.00%
              
              
              
              46
              
              
              $
              291,063,000
              
              
              
              100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of September 30, 2008:
 
 Non-performing
      and past due loans (a)
              
              $
              155,072,000October
      2008 - December 2008
              
              
              15,223,000January
      2009 – March 2009
              
              
              8,671,000April
      2009 - June 2009
              
              
              12,600,000July
      2009 - September 2009
              
              
              8,060,000October
      2009 - December 2009
              
              
              15,555,000Thereafter
              
              
              17,964,000Total
              
              $
              233,145,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to September 30,
2008.
 
 The
following is a schedule by geographic location of investments in real estate
loans as of September 30, 2008 and December 31, 2007:
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  
 September
      30, 2008 Balance *
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2007 Balance *
              
              
              Portfolio
      PercentageArizona
              
              $
              59,664,000
              
              
              
              25.59%
              
              
              $
              43,865,000
              
              
              
              15.07%California
              
              
              21,798,000
              
              
              
              9.35%
              
              
              
              19,673,000
              
              
              
              6.76%Hawaii
              
              
              17,291,000
              
              
              
              7.42%
              
              
              
              17,291,000
              
              
              
              5.94%Nevada
              
              
              75,201,000
              
              
              
              32.26%
              
              
              
              132,000,000
              
              
              
              45.35%New
      York
              
              
              --
              
              
              
              --%
              
              
              
              16,981,000
              
              
              
              5.83%Oklahoma
              
              
              2,155,000
              
              
              
              0.92%
              
              
              
              5,051,000
              
              
              
              1.74%Oregon
              
              
              41,752,000
              
              
              
              17.91%
              
              
              
              46,620,000
              
              
              
              16.02%Texas
              
              
              13,483,000
              
              
              
              5.78%
              
              
              
              7,924,000
              
              
              
              2.72%Washington
              
              
              1,801,000
              
              
              
              0.77%
              
              
              
              1,658,000
              
              
              
              0.57%Total
              
              $
              233,145,000
              
              
              
              100.00%
              
              
              $
              291,063,000
              
              
              
              100.00%
  *
              Please
      see Balance Sheet
      Reconciliation below.
 
 Balance Sheet
      Reconciliation
 
 The
following table reconciles the balance of the loan portfolio to the amount shown
on the accompanying Consolidated Balance Sheets.
 
 September
      30, 2008 Balance (a)
              
              
              December
      31, 2007 BalanceBalance
      per loan portfolio
              
              $
              233,145,000
              
              
              $
              291,063,000Less:Allowance
      for loan losses (b)
              
              
              (50,686,000
              )
              
              
              (12,873,000
              )Balance
      per consolidated balance sheet
              
              $
              182,459,000
              
              
              $
              278,190,000
 
 (a)
              We
      recognized an impairment cost of approximately $0.6 million, which was
      applied to the loan balance, related to the restructuring of a loan,
      whereby the interest rate was reduced from 12% to 6% starting in May
      2008.  In addition, we recognized an allowance for loan loss of
      approximately $2.2 million, of which our portion was approximately $1.7
      million, related to this loan.
 
 (b)
              Please
      refer to Specific
      Reserve Allowance below.
 
 Non-Performing
Loans
 
 As of
September 30, 2008, we had 18 loans considered non-performing (i.e., based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due).  These loans are
currently carried on our books at a value of approximately $98.8 million, net of
allowance for loan losses of approximately $46.0 million, which does not include
the allowances of approximately $4.7 million relating to the decrease in the
property value for performing loans as of September 30, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  At September 30, 2008, the following
loans were non-performing:
 
 ·
              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.  As of September 30, 2008, based on
      our manager’s evaluation and updated appraisals , our manager has provided
      a specific allowance of approximately $14.4 million, of which our portion
      is approximately $9.8 million.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 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 September 30, 2008, this loan has been
      considered non-performing for the last twenty-five months.  Our
      manager brought foreclosure and other legal proceedings to protect our
      interest in the collateral.  The borrowers have alleged that our
      lien on the Oklahoma City apartment complex was extinguished as a result
      of legal actions commenced on our behalf with respect to other collateral
      securing the non-performing loan.  We are vigorously contesting
      their position; however, we cannot determine at this time the outcome of
      these legal proceedings.  As of September 30, 2008, based on our
      manager’s evaluation, our manager has provided a specific allowance of
      approximately $2.8 million, of which our portion is approximately $1.4
      million.
 
 ·
              3900,
      LLC, is a second position loan that provided bridge financing for an
      approximate 7.66 acre neighborhood retail center, located in Tempe,
      Arizona.  The loan is secured by a second position lien, junior
      to a first position lien in the amount of $6.0 million.  In
      addition, the loan is guaranteed by principals of the
      borrower.  The outstanding balance of the loan is approximately
      $3.3 million.  On April 5, 2008, this loan was considered to be
      in default due to the default of the Redwood Place, LLC loan, as a result
      of cross-default provisions.  As of September 30, 2008, this
      loan has been considered non-performing for the last five
      months.  Our manager has commenced foreclosure, and is
      proceeding with legal action to enforce the personal
      guarantees.  As of September 30, 2008, based on our manager’s
      evaluation and updated appraisals, our manager has provided a specific
      allowance of approximately $3.3
million.
 
 ·
              World
      Capital La Piazza, LLC, is a loan to provide financing for the development
      of 8.44 net acres of land located in Henderson, NV.  The loan is
      secured by a first lien on the property, and is guaranteed by principals
      of the borrower.  The outstanding balance on the loan is
      approximately $13.0 million.  As of September 30, 2008, this
      loan has been considered non-performing for the last five
      months.  The loan matured on June 29, 2008, and the borrower
      failed to either payoff the loan or extend the term.  Our
      manager has commenced foreclosure proceedings, and is proceeding with
      legal action to enforce the personal guarantees.  On October 29,
      2008, the borrower filed for bankruptcy protection.  As of
      September 30, 2008, based on our manager’s evaluation and updated
      appraisals, our manager has concluded that the value of the underlying
      collateral is sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      September 30, 2008.
 
 ·
              World
      Capital Durango Alpha, is a loan to provide financing for the development
      of 9.27 acres of land located in Las Vegas, NV with an outstanding balance
      of approximately $7.1 million of which our portion is approximately $4.8
      million and is secured by a first lien on the property and guaranteed by
      the principals of the borrower.  As of September 30, 2008, this
      loan has been considered non-performing for the last five
      months.  Our manager has commenced both foreclosure proceedings
      and litigation against the personal guarantors in order to enforce the
      personal guarantees.  On October 29, 2008, the borrower filed
      for bankruptcy protection.  As of September 30, 2008, based on
      our manager’s evaluation and updated appraisals, our manager has concluded
      that the value of the underlying collateral is sufficient to protect us
      from loss of principal.  No specific allowance was deemed
      necessary as of September 30, 2008.
 
 ·
              Peoria
      180, LLC, is a loan, with a variable interest rate, to provide financing
      for the development of 171 acres located in Glendale, Arizona with an
      outstanding balance of $18.0 million of which our portion is approximately
      $14.8 million and is secured by a first lien on the property and
      guaranteed by the principals of the borrower.  As of September
      30, 2008, this loan has been considered non-performing for the last five
      months.  Our manager has commenced both foreclosure proceedings
      and litigation against the personal guarantors in order to enforce the
      personal guarantees.  On September 26, 2008, the borrower filed
      for bankruptcy protection.  As of September 30, 2008, based on
      our manager’s evaluation and updated appraisals, our manager has provided
      a specific allowance of approximately $9.9 million, of which our portion
      is approximately $8.2 million.
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  
 ·
              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 failed to either pay the loan or extend
      the term.  As of September 30, 2008, this loan has been
      considered non-performing for the last five months.  Our manager
      has commenced both foreclosure proceedings and litigation against the
      personal guarantors in order to enforce the personal
      guarantees.  On August 27, 2008, the borrower filed for
      bankruptcy protection.  On September 30, 2008, we, VRM I, and
      Fund III reached a tentative settlement agreement with the borrower to
      foreclose upon the property.  The guarantors entered into a
      confession of judgment for an amount of $1.1 million and agreed to pay
      annual deficiency payments starting on September 30, 2009, monthly
      interest payments starting on November 1, 2008 and accrued property taxes
      due on or before November 28, 2008.  Foreclosure on the property
      is scheduled for February 2009.  As of September 30, 2008, based
      on our manager’s evaluation and updated appraisals, our manager has
      provided a specific allowance of approximately $4.7 million, of which our
      portion is approximately $3.6
million.
 
 ·
              WCP
      Warm Springs Holdings 1, LLC, is a loan to provide financing for 10 acres
      of vacant land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $8.5 million,
      of which our portion is approximately $5.1 million.  As of
      September 30, 2008, this loan has been considered non-performing for the
      last four months.  Our manager has commenced foreclosure
      proceedings, and is proceeding with legal action to enforce the personal
      guarantees.  On October 29, 2008, the borrower filed for
      bankruptcy protection.  As of September 30, 2008, based on our
      manager’s evaluation and updated appraisals, our manager has provided a
      specific allowance of approximately $1.0 million, of which our portion is
      approximately $0.6 million.
 
 ·
              Babuski,
      LLC, is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $7.7 million.  As of September 30, 2008, this loan has been
      considered non-performing for the last four months.  Our manager
      has commenced foreclosure proceedings, and is proceeding with legal action
      to enforce the personal guarantees.  On October 16, 2008, we,
      VRM I and Fund III entered into a forbearance agreement to postpone the
      foreclosure date on the property.  On November 5, 2008, the
      guarantor paid $250,000 for cost and interest due related to the
      loan.  Based on our manager’s evaluation and updated appraisals,
      our manager has concluded that the current value of the underlying
      collateral should be sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      September 30, 2008.
 
 ·
              Bright
      Haven Builders, LLC, is a construction loan to provide financing for 10
      single family residential lots (lots 74 and 169-177) located within Cherry
      Meadows Subdivision located in Yelm, WA.  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
      $2.2 million, of which our portion is approximately $1.8
      million.  As of September 30, 2008, this loan has been
      considered non-performing for the last four months.  Our manager
      has commenced foreclosure proceedings, and is proceeding with legal action
      to enforce the personal guarantees.  As of September 30, 2008,
      based on our manager’s evaluation and updated appraisals, our manager has
      provided a specific allowance of $175,000, of which our portion is
      $144,000.
 
 ·
              South
      Bay Villas, LLC, is a construction loan to provide financing for a 48 unit
      condominium building which is part of the Desert Sands Condominiums Phase
      2 located in Laughlin, NV.  The loan is secured by a first lien
      on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $6.0 million,
      of which our portion is approximately $5.0 million.  As of
      September 30, 2008, this loan has been considered non-performing for the
      last four months.  Our manager has commenced foreclosure
      proceedings, and is proceeding with legal action to enforce the personal
      guarantees.  As of September 30, 2008, based on our manager’s
      evaluation of completion costs for the project, our manager has provided a
      specific allowance of $500,000, of which our portion is
      $481,000.
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  
 ·
              Preston
      Hollow Assisted Living, L.P., is a commercial loan to provide financing
      for the Preston Hollow Assisted Living Facility located in Dallas,
      TX.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $3.6 million.  As of September 30, 2008,
      this loan has been considered non-performing for the last four
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  Based on our manager’s evaluation and updated
      appraisals, our manager has concluded that the current value of the
      underlying collateral should be sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      September 30, 2008.
 
 ·
              Barger
      Road Cottages, LLC, is a commercial loan to provide financing for the
      Alpine Meadow Retirement Community, consisting of 23 cottage units with
      garages, community building and surplus land, located in Eugene,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $6.0 million, of which our portion is
      $46,000.  As of September 30, 2008, this loan has been
      considered non-performing for the last four months.  Our manager
      has commenced foreclosure proceedings, and is proceeding with legal action
      to enforce the personal guarantees.  Based on our manager’s
      evaluation and updated appraisals, our manager has concluded that the
      current value of the underlying collateral should be sufficient to protect
      us from loss of principal.  No specific allowance was deemed
      necessary as of September 30, 2008.
 
 ·
              Lohrey
      Investments, LLC, is a commercial loan to provide financing for income
      producing property located in Gilroy, CA.  The loan is secured
      by a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $16.0 million,
      of which our portion is $11.6 million.  As of September 30,
      2008, this loan has been considered non-performing for the last three
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  During October 2008, the tenant, which is a related
      party to the borrower, filed for bankruptcy protection.  As of
      September 30, 2008, based on our manager’s evaluation and updated
      appraisals, our manager has provided a specific allowance of approximately
      $7.2 million, of which our portion is approximately $5.2
      million.
 
 ·
              Cascadia
      Canyon, LLC, is a commercial loan to provide financing for 12.39 acres of
      land plus the SUMCO North Campus, SUMCO South Campus located in Salem,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $19.5 million, of which our portion
      is approximately $16.0 million.  As of September 30, 2008, this
      loan has been considered non-performing for the last two
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  Based on our manager’s evaluation and updated
      appraisals, our manager has concluded that the current value of the
      underlying collateral should be sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      September 30, 2008.
 
 ·
              Silver
      Star Destinations, LLC, is a commercial loan to provide financing for
      three commercial retail properties, Sunriver Mall, Marcello Building and
      Chrome Pony comprising approximately 17.53 gross acres located in
      Sunriver, OR and commonly referred to as the Sunriver Mall.  The
      loan is secured by a first lien on the property, and is guaranteed by
      principals of the borrower.  The outstanding balance on the loan
      is $26.7 million, of which our portion is approximately $25.7
      million.  The loan matured on September 28, 2008, and the
      borrower failed to either pay the loan or extend the term.  As
      of September 30, 2008, this loan has been considered non-performing for
      the last month.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  As of September 30, 2008,
      based on our manager’s evaluation, updated appraisals and a letter of
      intent to purchase the note and deed of trust dated October 22, 2008, our
      manager has provided a specific allowance of approximately $13.9 million,
      of which our portion is approximately $13.4 million.  The
      purchase agreement of $13.0 million, which our portion would be
      approximately $12.3 million, is scheduled to close on or before December
      19, 2008; however, there can be no assurance that the sale will be
      completed.
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  
 ·
              Trinity
      Theo, LLC, is a land loan to provide bridge financing for a 1.86 acre
      single family development custom home lot located in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $1.5 million.  As of
      September 30, 2008, this loan has been considered non-performing for the
      last month.  Our manager has commenced foreclosure proceedings,
      and is proceeding with legal action to enforce the personal
      guarantees.  Based on our manager’s evaluation and updated
      appraisals, our manager has concluded that the current value of the
      underlying collateral should be sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      September 30, 2008.
 
 The
following schedule summarizes the non-performing loans as of September 30,
2008:
 
 Loan
      Name
              
              Balance
      at
                September
      30, 2008
              
              Allowance
      for Loan Loss *
              
              Net
      Balance at September 30, 2008
              
              Maturity
      Date
              
              Number
      of Months Non-Performing
              
              Percentage
      of Total Loan BalanceRightStar,
      Inc. (Part I & Part II)
              $
              17,291,000
              $
              (9,757,000)
              $
              7,534,000
              
              3/31/2004
              
              54
              
              45%
      of Part I
                65%
      of Part IIMonterrey
      Associates, L.P.
              
              2,155,000
              
              (1,370,000)
              
              785,000
              
              9/1/2006
              
              25
              
              49%3900
      LLC
              
              3,276,000
              
              (3,276,000)
              
              --
              
              6/10/2008
              
              5
              
              100%World
      Capital La Piazza, LLC
              
              13,000,000
              
              --
              
              13,000,000
              
              6/29/2008
              
              5
              
              100%World
      Capital Durango Alpha (2)
              
              4,846,000
              
              --
              
              4,846,000
              
              5/16/2008
              
              5
              
              68%Peoria
      180, LLC
              
              14,806,000
              
              (8,176,000)
              
              6,630,000
              
              6/30/2008
              
              5
              
              82%Redwood
      Place, LLC
              
              11,388,000
              
              (3,586,000)
              
              7,802,000
              
              4/5/2008
              
              5
              
              76%WCP
      Warm Springs Holdings 1, LLC
              
              5,114,000
              
              (575,000)
              
              4,539,000
              
              5/10/2008
              
              4
              
              60%Babuski,
      LLC
              
              7,707,000
              
              --
              
              7,707,000
              
              6/17/2008
              
              4
              
              81%Bright
      Haven Builders, LLC
              
              1,801,000
              
              (144,000)
              
              1,657,000
              
              3/28/2008
              
              4
              
              82%South
      Bay Villas, LLC
              
              5,042,000
              
              (481,000)
              
              4,561,000
              
              5/6/2008
              
              4
              
              96%Preston
      Hollow Assisted Living, L.P.
              
              3,600,000
              
              --
              
              3,600,000
              
              12/31/2008
              
              4
              
              100%Barger
      Road Cottages, LLC
              
              46,000
              
              --
              
              46,000
              
              12/5/2008
              
              4
              
              1%Lohrey
      Investments, LLC
              
              11,600,000
              
              (5,223,000)
              
              6,377,000
              
              10/29/2008
              
              3
              
              73%Cascadia
      Canyon, LLC
              
              16,002,000
              
              --
              
              16,002,000
              
              2/12/2009
              
              2
              
              82%Silver
      Star Destinations, LLC
              
              25,703,000
              
              (13,430,000)
              
              12,273,000
              
              9/28/2008
              
              1
              
              96%Trinity
      Theo, LLC
              
              1,477,000
              
              --
              
              1,477,000
              
              1/28/2009
              
              1
              
              100%$
              144,854,000
              $
              (46,018,000)
              $
              98,836,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of September 30, 2008, we have
provided specific reserves, related to 11 non-performing loans and 3 performing
loans, of approximately $50.7 million.  Our manager evaluated the
loans and, based on current estimates regarding the value of the remaining
underlying collateral, believes that such collateral is sufficient to protect us
against further losses of principal.  However, such estimates could be
erroneous or the value of underlying real estate could decline.  Our
manager will continue to evaluate these loans in order to determine if any other
allowance for loan losses should be recorded in future periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any distributions payable to our stockholders.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  Specific Reserve
      Allowances
 
 The
following table is a roll-forward of the allowance for loan losses for the nine
months ended September 30, 2008.  Following the table is a discussion
of the status of each identified loan and the reasons for the recording of
additional reserves during the nine months ended September 30,
2008.
 
 Description
              
              Balance
      at
                December
      31, 2007
              
              
              Specific
      Reserve Allocation
              
              
              Transferred
      to REO
              
              
              Balance
      at
                September
      30, 2008RightStar,
      Inc. (Part I & Part II)
              
              $
              9,757,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              9,757,000Monterrey
      Associates, L.P.
              
              
              1,174,000
              
              
              
              196,000
              
              
              
              --
              
              
              
              1,370,000Brawley
      CA 122, LLC
              
              
              256,000
              
              
              
              --
              
              
              
              (256,000
              )
              
              
              --Peoria
      180, LLC
              
              
              1,309,000
              
              
              
              6,867,000
              
              
              
              --
              
              
              
              8,176,000Terravita,
      LLC (a)
              
              
              377,000
              
              
              
              --
              
              
              
              --
              
              
              
              377,000V
      & M Homes at the Palms, Inc.
              
              
              --
              
              
              
              913,000
              
              
              
              (913,000
              )
              
              
              --Redwood
      Place, LLC
              
              
              --
              
              
              
              3,586,000
              
              
              
              --
              
              
              
              3,586,000The
      Laurels at Mesquite Estates, LLC
              
              
              --
              
              
              
              358,000
              
              
              
              (358,000
              )
              
              
              --2503
      Panorama, LLC (a)
              
              
              --
              
              
              
              1,708,000
              
              
              
              --
              
              
              
              1,708,0003900,
      LLC
              
              
              --
              
              
              
              3,276,000
              
              
              
              --
              
              
              
              3,276,000MRPE,
      LLC
              
              
              --
              
              
              
              2,086,000
              
              
              
              (2,086,000
              )
              
              
              --VBP,
      LLC (a)
              
              
              --
              
              
              
              2,583,000
              
              
              
              --
              
              
              
              2,583,000The
      Orleans at Mesquite Estates, LLC
              
              
              --
              
              
              
              380,000
              
              
              
              (380,000
              )
              
              
              --Silver
      Star Destinations, LLC
              
              
              --
              
              
              
              13,430,000
              
              
              
              
              
              
              
              13,430,000WCP
      Warm Springs Holdings 1, LLC
              
              
              --
              
              
              
              575,000
              
              
              
              --
              
              
              
              575,000Bright
      Haven Builders, LLC
              
              
              --
              
              
              
              144,000
              
              
              
              --
              
              
              
              144,000Lohrey
      Investments, LLC
              
              
              --
              
              
              
              5,223,000
              
              
              
              --
              
              
              
              5,223,000South
      Bay Villas, LLC
              
              
              --
              
              
              
              481,000
              
              
              
              --
              
              
              
              481,000Total
              
              $
              12,873,000
              
              
              $
              41,806,000
              
              
              $
              (3,993,000
              )
              
              $
              50,686,000
 
 (a)
              As
      of September 30, 2008, these loans were considered
    performing.
 
 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);
  See
review report of Independent Registered Public Accounting Firm.
 - 21
-
 Table of Contents
  
 ·
              Third
      to pay past due interest on the Junior Principal Amount (Part I)
      (including default rate interest);
 
 ·
              Fourth
      to pay Senior Principal; and
 
 ·
              Fifth
      to pay Junior Principal.
 
 We and
VRM I acquired the senior portion of the loan on July 14, 2005 for approximately
$15.5 million of which our portion was approximately $10.1 million (including
accrued interest of approximately $1.0 million).  We and VRM I
acquired this balance to expedite the foreclosure process and remove the prior
senior lender from its priority position, which had the potential to impair the
value we may receive at the time the property is sold.  In exchange
for assistance in expediting the foreclosure process, the lenders jointly agreed
to release the guarantors from their guaranty of the loan.  In March
2007, Vestin Mortgage purchased the junior principal amount owned by the
unrelated third party for $500,000.  Vestin Mortgage has agreed that
any monies it receives as a result of payment of the notes or proceeds from a
foreclosure sale are limited to its $500,000 investment in the notes plus
expenses.
 
 In early
2006, the State of Hawaii notified the lenders of a potential statutory trust
fund deficiency, estimated to be between $20 million and $30 million and claimed
that this balance has priority over all lenders.  The State of Hawaii
is pursuing approximately $30 million in recoveries from the former trustees,
prior owners of the property and other parties.  The proceeds from
these recoveries, if any, will be used to fund the potential deficiency in the
statutory trust.  The lenders dispute the amount and priority of this
deficit.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  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.
 
 In June
2008, the State of Hawaii allowed us and the other lenders to put in place a new
management team that replaced the previous receiver.
 
 We have
evaluated the estimated value of the underlying collateral and the expected cost
and length of litigation.  Based on this estimate we have maintained
our total specific reserve allowance for loss.  The reserve allowance
includes approximately $1.0 million for estimated litigation fees and expenses
that we have incurred in enforcing our rights against the underlying collateral,
which were fully consumed as of December 31, 2007.  We will continue
to evaluate our position in the RightStar loan as the situation
progresses.  As of September 30, 2008, our specific reserve allowance
on the RightStar loans totaled approximately $9.8 million.
  See
review report of Independent Registered Public Accounting Firm.
 - 22
-
 Table of Contents
  Monterrey Associates, L.P. –
As of September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing commercial loan on a 248-unit apartment complex in
Oklahoma City, OK, of approximately $2.8 million, of which our portion was
approximately $1.4 million.  This specific reserve allowance was based
on our manager’s evaluation and an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January 2008, and our
manager’s evaluation.  Our manager will continue to evaluate our
position in the loan.
 
 Peoria 180, LLC – As of
September 30, 2008, our manager has provided a specific reserve allowance,
related to a land loan on property located in Glendale, AZ, of approximately
$9.9 million, of which our portion was approximately $8.2
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan and evaluation of the
borrower’s financial condition, obtained by our manager during July
2008.  As of September 30, 2008, the loan was considered
non-performing.  Our manager will continue to evaluate our position in
the loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100 unit condominium/apartment project in
North Las Vegas, NV, totaling approximately $0.7 million, of which our portion
was approximately $0.4 million.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which included a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $1.7
million.  The terms of the rewritten loan remain the same as those of
the original loans and the loan was performing as required as of September 30,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Redwood Place, LLC – As of
September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan for the acquisition and conversion to
condominiums of a 186-unit apartment complex located in Phoenix, Arizona, of
approximately $4.7 million, of which our portion was approximately $3.6
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.
 
 2503 Panorama, LLC – As of
September 30, 2008, our manager has provided a specific reserve allowance,
related to a performing loan for a 5,700 square foot penthouse located on the
25th floor of Panorama Towers I in Las Vegas, NV, of approximately $2.2 million,
of which our portion is approximately $1.7 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during July 2008.  In addition,
we recognized an impairment cost of approximately $0.6 million, which was
applied to the loan balance, related to the restructuring of the loan, whereby
the interest rate was reduced from 12% to 6% starting in May
2008.  Our manager will continue to evaluate our position in the
loan.
 
 3900, LLC – As of September
30, 2008, our manager has provided a specific reserve allowance, related to a
non-performing loan on 7.66 acre neighborhood retail center, located in Tempe,
AZ, of approximately $3.3 million.  This specific reserve allowance
was based on an updated appraisal of the underlying collateral for this loan,
obtained by our manager during July 2008 and represents the outstanding balance
of the loan.  Our manager will continue to evaluate our position in
the loan.
 
 VBP, LLC – As of September
30, 2008, our manager has provided a specific reserve allowance, related to a
performing loan for the development of 4.14 acres of land located in Las Vegas,
NV, of approximately $2.8 million, of which our portion is approximately $2.6
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.  As of November 7, 2008, the borrower is delinquent on an
interest payment due on the loan.  The borrower is currently in
negotiations to sell the property and has indicated that payment will be
received upon completion of the sale; however, no assurance can be made that the
sale will be completed.
  See
review report of Independent Registered Public Accounting Firm.
 - 23
-
 Table of Contents
  Silver Star Destinations, LLC
– As of September 30, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on three commercial retail
properties, Sunriver Mall, Marcello Building and Chrome Pony comprising
approximately 17.53 gross acres located in Sunriver, OR, of approximately $13.9
million, of which our portion is approximately $13.4 million.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during September 2008 and a
letter of intent to purchase the note and deed of trust dated October 22,
2008.  The purchase agreement of $13.0 million, of which our portion
would be approximately $12.3 million, is scheduled to close on or before
December 19, 2008; however, there can be no assurance that the sale will be
completed.  Our manager will continue to evaluate our position in the
loan.
 
 WCP Warm Springs Holdings 1,
LLC – As of September 30, 2008, our manager has provided a specific
reserve allowance, related to a non-performing loan on 10 acres of vacant land
located in Las Vegas, NV, of approximately $1.0 million, of which our portion is
approximately $0.6 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Bright Haven Builders, LLC –
As of September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on 10 single family residential lots (lots 74
and 169-177) located within Cherry Meadows Subdivision located in Yelm, WA, of
$175,000, of which our portion is $144,000.  This specific reserve
allowance was based on our manager’s evaluation of the underlying collateral for
this loan during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Lohrey Investments, LLC – As
of September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on income producing property located in Gilroy,
CA, of approximately $7.2 million, of which our portion is approximately $5.2
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during October 2008.  Our manager will continue to evaluate our
position in the loan.
 
 South Bay Villas, LLC – As of
September 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on a 48 unit condominium building part of the
Desert Sands Condominiums Phase 2 located in Laughlin, NV, of $500,000, of which
our portion is $481,000.  This specific reserve allowance was based on
completion costs of the property evaluated by our manager during September
2008.  Our manager will continue to evaluate our position in the
loan.
 
 As of
September 30, 2008, our manager had granted extensions on 21 loans, totaling
approximately $189.4 million, of which our portion was approximately $138.7
million, pursuant to the terms of the original loan agreements, which permit
extensions by mutual consent.  Such extensions are generally provided
on loans where the original term was 12 months or less and where a borrower
requires additional time to complete a construction project or negotiate
take-out financing.  However, our manager generally grants extensions
when a borrower is in compliance with the material terms of the loan, including,
but not limited to the borrower’s obligation to make interest payments on the
loan.  Subsequent to their extension, 10 of the 21 loans have become
non-performing.  The loans, which became non-performing after their
extension, had a total principal amount at September 30, 2008 of approximately
$130.8 million, of which our portion is approximately $104.4
million.
 
 Asset Quality and Loan
Reserves
 
 Losses
may occur from investing in real estate loans.  The amount of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
  See
review report of Independent Registered Public Accounting Firm.
 - 24
-
 Table of Contents
  
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the loan
      amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  The following is a breakdown of allowance for loan losses
related to performing and non-performing loans as of September 30, 2008 and
December 31, 2007:
 
 As
      of September 30, 2008Balance
              
              
              Allowance
      for loan losses *
              
              
              Balance,
      net of allowanceNon-performing
      loans – no related allowance
              
              $
              46,678,000
              
              
              $
              --
              
              
              $
              46,678,000Non-performing
      loans – related allowance
              
              
              98,176,000
              
              
              
              (46,018,000
              )
              
              
              52,158,000Subtotal
      nonperforming loans
              
              
              144,854,000
              
              
              
              (46,018,000
              )
              
              
              98,836,000Performing
      loans – no related allowance
              
              
              76,958,000
              
              
              
              --
              
              
              
              76,958,000Performing
      loans – related allowance
              
              
              11,333,000
              
              
              
              (4,668,000
              )
              
              
              6,665,000Subtotal
      performing loans
              
              
              88,291,000
              
              
              
              (4,668,000
              )
              
              
              83,623,000Total
              
              $
              233,145,000
              
              
              $
              (50,686,000
              )
              
              $
              182,459,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesabove.
 
 As
      of December 31, 2007Balance
              
              
              Allowance
      for loan losses
              
              
              Balance,
      net of allowanceNon-performing
      loans – no related allowance
              
              $
              10,364,000
              
              
              $
              --
              
              
              $
              10,364,000Non-performing
      loans – related allowance
              
              
              20,201,000
              
              
              
              (11,187,000
              )
              
              
              9,014,000Subtotal
      nonperforming loans
              
              
              30,565,000
              
              
              
              (11,187,000
              )
              
              
              19,378,000Performing
      loans – no related allowance
              
              
              240,603,000
              
              
              
              --
              
              
              
              240,603,000Performing
      loans – related allowance
              
              
              19,895,000
              
              
              
              (1,686,000
              )
              
              
              18,209,000Subtotal
      performing loans
              
              
              260,498,000
              
              
              
              (1,686,000
              )
              
              
              258,812,000Total
              
              $
              291,063,000
              
              
              $
              (12,873,000
              )
              
              $
              278,190,000
 
 Our
manager evaluated our loans and, based on current estimates with respect to the
value of the underlying collateral, believes that such collateral is sufficient
to protect us against further losses of principal or
interest.  However, such estimates could be erroneous or the value of
the underlying real estate could decline.  Our manager will continue
to evaluate our loans in order to determine if any other allowance for loan
losses should be recorded.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 25
-
 Table of Contents
  NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
September 30, 2008, we owned 533,675 shares of VRM I’s common stock,
representing approximately 7.76% of their total outstanding common
stock.
 
 In
accordance with FAS 115 and EITF 03-1, we have evaluated our investment in VRM
I’s common stock and determined there is an other-than-temporary impairment as
of September 30, 2008.  Based on this evaluation we have written down
our investment to its fair value, as of September 20, 2008, to $2.25 per share
totaling approximately $1.2 million dollars and recognizing an impairment of
approximately $2.2 million.  We will continue to evaluate our
investment in marketable securities on a quarterly basis.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At
September 30, 2008, we held 11 properties with a total carrying value of
approximately $42.0 million, which were acquired through foreclosure and
recorded as investments in real estate held for sale.  The summary
below includes our percentage of ownership in each of the
properties.  Our investments in real estate held for sale are
accounted for at the lower of cost or fair value less costs to sell with fair
value based on appraisals and knowledge of local market
conditions.  It is not our intent to invest in or own real estate as a
long-term investment.  We seek to sell properties acquired through
foreclosure as quickly as circumstances permit.  Set forth below is a
roll-forward of investments in real estate held for sale during the nine months
ended September 30, 2008, followed by a discussion of the basis for recording
additional write-downs during the nine months ended September 30,
2008:
 
 Description
              
              Date
      Acquired
              
              Percentage
      of Ownership
              
              Balance
      at December 31, 2007
              
              Acquisitions
              
              Write
      Downs
              
              Cash
      Reductions
              
              Net
      Cash Proceeds on Sales
              
              Gain
      (Loss) on Sale of Real Estate
              
              Balance
      at September 30, 2008Marshall's
      Vista, LTD (1)
              
              8/3/2004
              
              100%
              $
              4,438,000
              $
              --
              $
              --
              $
              (450,000)
              $
              --
              $
              --
              $
              3,988,000Rio
      Vista Nevada, LLC(2)
              
              12/21/2006
              
              86%
              
              24,125,000
              
              --
              
              (9,872,000)
              
              --
              
              --
              
              --
              
              14,253,000Pirates
      Lake, LTD (3)
              
              2/5/2008
              
              48%
              
              --
              
              4,100,000
              
              (3,127,000)
              
              (86,000)
              
              --
              
              --
              
              887,000Forest
      Development, LLC (4)
              
              3/7/2008
              
              64%
              
              --
              
              1,681,000
              
              (497,000)
              
              --
              
              (925,000)
              
              (259,000)
              
              --Brawley
      CA 122, LLC(5)
              
              5/1/2008
              
              33%
              
              --
              
              499,000
              
              (191,000)
              
              --
              
              --
              
              --
              
              308,000V
      & M Homes at the Palms, Inc. (6)
              
              7/15/2008
              
              39%
              
              --
              
              597,000
              
              --
              
              --
              
              --
              
              --
              
              597,000The
      Orleans at Mesquite Estates, LLC (7)
              
              8/8/2008
              
              100%
              
              --
              
              1,946,000
              
              (869,000)
              
              --
              
              --
              
              --
              
              1,077,000MRPE,
      LLC (8)
              
              8/11/2008
              
              72%
              
              --
              
              10,100,000
              
              (4,656,000)
              
              --
              
              --
              
              --
              
              5,444,000The
      Laurels at Mesquite Estates, LLC(9)
              
              8/11/2008
              
              100%
              
              --
              
              2,432,000
              
              (1,217,000)
              
              --
              
              --
              
              --
              
              1,215,000Jeffrey's
      Court, LLC(10)
              
              9/3/2008
              
              61%
              
              --
              
              3,073,000
              
              --
              
              --
              
              --
              
              --
              
              3,073,000Cliff
      Shadows Properties, LLC(11)
              
              9/8/2008
              
              95%
              
              --
              
              16,118,000
              
              (6,954,000)
              
              --
              
              --
              
              --
              
              9,164,000The
      Sycamore Glenn at Mesquite Estates, LLC(12)
              
              9/8/2008
              
              100%
              
              --
              
              4,369,000
              
              (2,419,000)
              
              --
              
              --
              
              --
              
              1,950,000$
              28,563,000
              $
              44,915,000
              $
              (29,802,000)
              $
              (536,000)
              $
              (925,000)
              $
              (259,000)
              $
              41,956,000
 
 (1)
              Marshall's Vista, LTD –
      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 property value recorded 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 October 2008, by paying a non-refundable extension fee of
      $50,000 every 30 days until closing.  As of September 30, 2008,
      we had received a total of $700,000 in extension
      fees.  Subsequently, the buyer paid $50,000 in October 2008 to
      extend the closing date an extra 30 days.  There can be no
      assurance that the sale will be
completed.
  See
review report of Independent Registered Public Accounting Firm.
 - 26
-
 Table of Contents
  
 (2)
              Rio Vista Nevada, LLC –
      During December 2006, we, VRM I and Fund III acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the year ended December 31, 2007, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s evaluation and an updated
      appraisal obtained during July 2008, the property was written down
      approximately $11.5 million, of which our portion was approximately $9.9
      million.
 
 (3)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings approximately 46.75 acres of land in Galveston,
      TX.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in April 2008 and the
      current sales price, the property was written down approximately $6.5
      million, of which our portion was approximately $3.1
      million.  During June 2008, we received a deposit refund
      totaling $86,000.  The property is currently listed for sale at
      $2.0 million, which approximates the total book value, plus selling costs,
      for this property held by us, VRM I and Fund
  III.
 
 (4)
              Forest Development, LLC
      – During March 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 that evaluation the property was written down
      approximately $0.8 million, of which our portion was approximately $0.5
      million.  During September 2008, we, VRM I and Fund III sold
      this property for approximately $1.4 million, of which our portion was
      approximately $0.9 million.  The sale resulted in a net loss of
      approximately $0.4 million, of which our portion was approximately $0.3
      million.
 
 (5)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings a 25 acre proposed 122 single-family subdivision to be known
      as River Drive Subdivision in Brawley, CA.  Our manager has
      evaluated the carrying value of the property and based on an updated
      appraisal obtained in May 2008, the property was written down
      approximately $0.6 million, of which our portion was approximately $0.2
      million.
 
 (6)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings an 80 acre parcel of land in Florence,
      AZ.  Our manager has evaluated the carrying value of the
      property and based on its estimate, no write down was deemed necessary as
      of September 30, 2008.
 
 (7)
              The Orleans at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 21.7 gross acres of Mesquite Estates Planned Unit Development
      with 65 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate and
      current sales price, the property was written down approximately $0.9
      million.  The property is currently listed for sale at
      approximately $1.2 million, which approximates the total book value, plus
      selling costs, for this property.
 
 (8)
              MRPE, LLC – During
      August 2008, we, VRM I, and Fund III acquired through foreclosure
      proceedings 132.03 acres of land within the Wolf Creek Estates Master
      Planned Community, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate and
      current sales price, the property was written down approximately $6.5
      million, of which our portion was approximately $4.7
      million.  The property is currently listed for sale at
      approximately $8.3 million, which approximates the total book value, plus
      selling costs, for this property held by us, VRM I and Fund
      III.
 
 (9)
              The Laurels at Mesquite
      Estates, LLC – During August 2008, we acquired through foreclosure
      proceedings 26.5 gross acres of Mesquite Estates Planned Unit Development
      with 60 "paper" lots, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its estimate,
      the property was written down approximately $1.2 million.  The
      property is currently listed for sale at approximately $1.3 million, which
      approximates the total book value, plus selling costs, for this
      property.
  See
review report of Independent Registered Public Accounting Firm.
 - 27
-
 Table of Contents
  
 (10)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and Fund III acquired through
      foreclosure proceedings 4.92 acres of land to be developed into 119
      condominium units in Las Vegas, NV.  Our manager has evaluated
      the carrying value of the property and based on its estimate, no write
      down was deemed necessary as of September 30, 2008.  On October
      30, 2008, our manager received a sales agreement to purchase the property
      for approximately $6.3 million, of which our portion would be
      approximately $3.9 million.  The sale is scheduled to close on
      December 8, 2008, where the buyer is to pay approximately $4.0 million
      down along with a one year note for the remaining $2.3
      million.  There can be no assurance that the sale will be
      completed.
 
 (11)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and Fund III acquired
      through foreclosure proceedings a 106 Unit Townhouse Project known as
      Cliff Shadows Townhomes located in Las Vegas, NV.  Our manager
      has evaluated the carrying value of the property and based on their
      evaluation, the property was written down approximately $7.3 million, of
      which our portion was approximately $7.0
  million.
 
 (12)
              The Sycamore Glenn at Mesquite
      Estates, LLC – During September 2008, we acquired through
      foreclosure proceedings 32.3 gross acres of Mesquite Estates Planned Unit
      Development with 180 "paper" lots, located in Mesquite, NV.  Our
      manager has evaluated the carrying value of the property and based on its
      estimate, the property was written down approximately $2.4
      million.  The property is currently listed for sale at
      approximately $2.1 million, which approximates the total book value, plus
      selling costs, for this property.
 
 NOTE
G — RELATED PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties.  Pursuant to the terms of our
Management Agreement, such acquisitions and sales are made without any mark up
or mark down.  No gain or loss is recorded on these transactions, as
it is not our intent to make a profit on the purchase or sale of such
investments.  The purpose is generally to diversify our portfolio by
syndicating loans, thereby providing us with additional capital to make
additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us an annual management fee of up to 0.25%
of our aggregate capital contributions received by us and Fund II from the sale
of shares or membership units, paid monthly.  The amount of management
fees paid to our manager for the three and nine months ended September 30, 2008,
were $274,000 and $823,000, respectively.  The amount of management
fees paid to our manager for the three and nine months ended September 30, 2007,
were $274,000 and $822,000, respectively.
 
 As of
September 30, 2008, our manager owned 92,699 of our common
shares.  For the three and nine months ended September 30, 2008, we
declared $0 and $45,000, respectively, in dividends payable to our manager based
on the number of shares our manager held on the dividend record
dates.  For the three and nine months ended September 30, 2007, we
declared $35,000 and $109,000, respectively, in dividends payable to our manager
based on the number of shares our manager held on the dividend record
dates.
 
 As of
September 30, 2008, we did not have a balance due to or due from our
manager.  As of December 31, 2007, we had receivables from our manager
of $1,000.
 
 Transactions with Other
Related Parties
 
 As of
September 30, 2008, we owned 533,675 common shares of VRM I, representing
approximately 7.76% of their total outstanding common stock.  For the
three and nine months ended September 30, 2008, we recognized $0 and $86,000,
respectively, in dividend income from VRM I based on the number of shares we
held on the dividend record dates.  For the three and nine months
ended September 30, 2007, we recognized $73,000 and $200,000, 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.
 - 28
-
 Table of Contents
  As of
September 30, 2008, VRM I owned 225,134 of our common shares, representing
approximately 1.55% of our total outstanding common stock.  For the
three and nine months ended September 30, 2008, we declared $0 and $110,000,
respectively, in dividends payable to VRM I based on the number of shares VRM I
held on the dividend record dates.  For the three and nine months
ended September 30, 2007, we declared $85,000 and $221,000, respectively, in
dividends payable to VRM I based on the number of shares VRM I held on the
dividend record dates.
 
 During
the nine months ended September 30, 2008, we sold approximately $0.5 million in
real estate loans to VRM I and purchased $1.8 million in real estate loans from
VRM I.  No gain or loss resulted from these
transactions.  No similar transactions occurred during the nine months
ended September 30, 2007.
 
 As of
September 30, 2008, we had receivables from VRM I of $59,000.  As of
December 31, 2007, we owed VRM I $123,000.
 
 As of
September 30, 2008, Fund III owned 114,117 of our common shares, representing
approximately 0.78% of our total outstanding common stock.  For the
three and nine months ended September 30, 2008, we declared $0 and $56,000,
respectively, in dividends payable to Fund III based on the number of shares
Fund III held on the dividend record dates.  For the three and nine
months ended September 30, 2007, we declared $43,000 and $106,000, respectively,
in dividends payable to Fund III based on the number of shares Fund III held on
the dividend record dates.
 
 During
the nine months ended September 30, 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 nine months
ended September 30, 2008.
 
 As of
September 30, 2008, we had receivables from Fund III of $11,000.  As
of December 31, 2007, we did not have a balance due to or due from Fund
III.
 
 During
the three and nine months ended September 30, 2008, we incurred $47,000 and
$110,000, respectively, for legal fees to the law firm of Levine, Garfinkel
& Katz in which the Secretary of Vestin Group has an equity ownership
interest in the law firm.  During the three and nine months ended
September 30, 2007, we incurred $34,000 and $110,000, respectively, for legal
fees to the law firm of Levine, Garfinkel & Katz.
 
 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 September 30, 2008, we have received $104,000
in principal payments.  Payments will be recognized as income when
received.  The balance of $336,000 was fully reserved as of September
30, 2008.
 
 During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
approximately $5.5 million of which our share of the proceeds were approximately
$3.8 million, which resulted in a loss of approximately $0.8
million.  In addition, during June 2005, we and VRM I entered into a
settlement agreement with the guarantors of the loan in the amount of $2.0
million in exchange for a release of their personal guarantees, of which our
share was approximately $1.4 million.  The balance is secured by a
second deed of trust, with a first installment of $100,000 due in July 2005 and
monthly interest only payments of 5% on $1.1 million from July 2005 through July
2008, at which time the entire balance is due.  As of September 30,
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 September 30, 2008.
  See
review report of Independent Registered Public Accounting Firm.
 - 29
-
 Table of Contents
  
 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 approximately
$6.0 million.  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.  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 for 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 were 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 June
2007, we and VRM I entered into a settlement agreement, which reduced the note
to $175,000, of which our portion is $115,000.  On July 16, 2007, we
and VRM I received a payment totaling $50,000, of which our portion was
$33,000.  On July 1, 2008, we and VRM I received a $113,000 payment,
of which our portion was $74,000.  The payment represented full
settlement of the note and the remaining balance of $8,000 was written
off.
 
 During
2006, we and VRM I entered into a settlement agreement in the amount of $1.5
million with the guarantors of a loan collateralized by a 126 unit (207 bed)
assisted living facility in Phoenix, AZ, which we had foreclosed
on.  Our portion was approximately $1.3 million.  The
promissory note is payable in seven annual installments of $100,000 with an
accruing interest rate of 7%, with the remaining note balance due in April
2013.  As of September 30, 2008, we had received $2,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of approximately $1.3 million was fully
reserved as of September 30, 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 and nine months ended September 30,
2008, interest expense on the junior subordinated notes totaled approximately
$1.3 million and $2.6 million, respectively.  As of September 30,
2008, the balance outstanding was approximately $56.4 million.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 30
-
 Table of Contents
  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.
 
 As of
September 30, 2008, we were not in compliance with the tangible net worth
covenant related to the junior subordinated notes.  On November 7,
2008, we entered into an agreement with Taberna Capital Management, LLC
(“Taberna”), in its capacity as collateral manager for certain collateral debt
obligation vehicles that are the holders of the junior subordinated notes,
providing for an amendment of the tangible net worth covenant (the “Taberna
Letter Agreement”).  Our tangible net worth as of September 30, 2008
is in compliance with the revised tangible net worth covenant.
 
 The
Taberna Letter Agreement provides as follows (defined terms refer to the
definitions in the indenture):
 
 ·
              The
      tangible net worth covenant will be changed from not less than $225
      million to not less than the lesser of $150 million or 2.5 times the then
      outstanding principal balance of the junior subordinated
      notes.
 
 ·
              The
      EBITDA covenant will be changed from 2.5 times Interest Expense to 1.5
      times Interest Expense, provided that, for one quarter only, the
      requirement will be 1.2 times Interest Expense for the four quarter period
      ending June 30, 2009.
 
 ·
              The
      restriction on the Company redeeming notes at par prior to July 30, 2012
      will be removed and no pre-payment penalty will be applied to such
      redemptions.
 
 ·
              We
      are required to post a $3,750,000 letter of credit by November 12, 2008
      and a $1,250,000 letter of credit by April 12, 2009.  Taberna is
      entitled to draw upon such letters of credit to pay principal and interest
      on the junior subordinated notes if an Event of Default has
      occurred.  The letters of credit may not be subordinated to any
      of our Senior Debt.
 
 ·
              The
      notice and cure provisions in the indenture have been changed from 30 days
      to 15 days.
 
 ·
              Taberna
      has been granted expanded rights to examine our books and
      records.
 
 ·
              We
      agreed to reimburse Taberna’s fees related to the Taberna Letter Agreement
      in an amount not to exceed $50,000.
 
 During
the nine months ended September 30, 2008, we acquired debt securities resulting
in a gain on extinguishment of debt totaling approximately $1.6
million.
 
 NOTE
J— SECURED BORROWINGS
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue in any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In
the event of borrower non-performance, the Inter-creditor Agreements generally
provide that the Lead Lenders must repay the Investor’s loan amount either by
(i) continuing to remit to the Investor the interest due on the participated
loan amount; (ii) substituting an alternative loan acceptable to the Investor;
or (iii) repurchasing the participation from the Investor for the outstanding
balance plus accrued interest.
  See
review report of Independent Registered Public Accounting Firm.
 - 31
-
 Table of Contents
  
 Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowings arrangements.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part II – Other
Information, Item 6 Exhibits of this Report Form 10-Q).  The
participation interest is at 11% on the outstanding balance.  We
incurred approximately $0.9 million in finance costs related to the secured
borrowings, these costs are being amortized to interest expense over the term of
the agreements.  As of September 30, 2008, we had $14.7 million in
funds, including approximately $1.0 million in interest reserves, used under
Inter-creditor Agreements as compared to none as of December 31,
2007.  During the three months ended September 30, 2008, we paid down
approximately $6.3 million of the $21.0 million in funds used under
Inter-creditor Agreements.
 
 NOTE
K — NOTE PAYABLE
 
 In May
2008, we financed a 12-month insurance policy for Directors and Officers
liability, with an annual interest rate of 4.9%.  The agreement
required a down payment of $38,000 and nine monthly payments of $23,000
beginning on May 27, 2008.  As of September 30, 2008, the outstanding
balance of the note was approximately $93,000.
 
 NOTE
L — FAIR VALUE
 
 As of
September 30, 2008, financial assets and liabilities utilizing Level 1 inputs
included investment in marketable securities - related party.  We had
no assets or liabilities utilizing Level 2 inputs and assets and liabilities
utilizing Level 3 inputs included investments in real estate loans, secured
borrowings, real estate held for sale and junior subordinated notes
payable.
 
 To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment.  Accordingly, our degree of judgment exercised in
determining fair value is greatest for instruments categorized in Level
3.  In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy.  In such cases, FAS
157 requires that an asset or liability be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair
value.
 
 Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure.  Therefore, even when market assumptions are
not readily available, our own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement
date.  We use prices and inputs that are current as of the measurement
date, including during periods of market dislocation, such as the recent
illiquidity in the auction rate securities market.  In periods of
market dislocation, the observability of prices and inputs may be reduced for
many instruments.  This condition may cause our financial instruments
to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
 
 FAS 157
requires that the valuation techniques used by us be consistent with at least
one of the three possible approaches: the market approach, income approach
and/or cost approach.  Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active
securities exchanges.  Our Level 2 inputs are primarily based on the
market approach of quoted prices in active markets or current transactions in
inactive markets for the same or similar collateral that do not require
significant adjustment based on unobservable inputs.  Our Level 3
inputs are primarily based on the income and cost approaches, specifically,
discounted cash flow analyses, which utilize significant inputs based on our
estimates and assumptions.
 
 The
following table presents the valuation of our financial assets and liabilities
as of September 30, 2008 measured at fair value on a recurring basis by the
input levels prescribed by FAS 157:
  See
review report of Independent Registered Public Accounting Firm.
 - 32
-
 Table of Contents
  
 Quoted
      Prices in Active Markets For Identical Assets (Level 1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs (Level 3)
              
              
              Balance
      at 09/30/2008AssetsInvestment
      in marketable securities - related party
              
              $
              1,203,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              1,203,000Real
      estate held for sale
              
              $
              --
              
              
              $
              --
              
              
              $
              41,956,000
              
              
              $
              41,956,000Investment
      in real estate loans
              
              $
              --
              
              
              $
              --
              
              
              $
              180,657,000
              
              
              $
              180,657,000Assets
      under secured borrowings
              
              $
              --
              
              
              $
              --
              
              
              $
              14,669,000
              
              
              $
              14,669,000LiabilitiesSecured
      borrowings
              
              $
              --
              
              
              $
              --
              
              
              $
              13,651,000
              
              
              $
              13,651,000Junior
      subordinated notes payable
              
              $
              --
              
              
              $
              --
              
              
              $
              56,350,000
              
              
              $
              56,350,000
 
 NOTE
M — RECENT ACCOUNTING PRONOUNCEMENTS
 
 On
October 10, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-3 – Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
clarifies the application of FAS 157 – Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  Additionally, this FSP
specifies that in situations in which there is little, if any, market activity
for an asset at the measurement date, the fair value measurement objective
remains the same, that is, the price that would be received by the holder of the
financial asset in an orderly transaction (an exit price notion) that is not a
forced liquidation or distressed sale at the measurement date.  This
FSP shall be effective upon issuance, including prior periods for which
financial statements have not been issued.  Revisions resulting from a
change in the valuation technique or its application shall be accounted for as a
change in accounting estimate (FASB Statement No. 154, Accounting Changes and
Error Corrections, paragraph 19).  The adoption of FSP FAS 157-3 has
not had a material impact on our financial condition or results of
operation.
 
 NOTE
N — LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and Fund III.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
 In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of units in Fund III and in our
predecessor, Vestin Fund II, LLC.  The Respondents consented to the
entry of a cease and desist order, the payment by Mr. Shustek of a fine of
$100,000 and Mr. Shustek’s suspension from association with any broker or dealer
for a period of six months, which expired in March 2007.  In addition,
the Respondents agreed to implement certain undertakings with respect to future
sales of securities.  We are not a party to the Order.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
United States Court of Appeals for the Ninth Circuit, which dismissal was upheld
when the United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, prior to the formation of Fund II.  On March
6, 2006, Desert Land amended the state court complaint to name VRM
I.
  See
review report of Independent Registered Public Accounting Firm.
 - 33
-
 Table of Contents
  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.
 
 On
October 16, 2008 the Court granted partial summary judgment in favor of Desert
Land on a $2.5 million claim against Del Mar Mortgage Company,
Inc.  Judgment has not yet been entered, but the plaintiffs are asking
the Court to make Vestin Mortgage, Inc., the judgment debtor, which Vestin
Mortgage is opposing.
 
 The
remainder of the plaintiffs' claims have been scheduled for trial on December 4,
2008.  The Defendants intend to vigorously defend the claims, as well
as ask the Court to reconsider and vacate its October 16 order granting the
summary judgment described in the preceding paragraph.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The court certified a class of all former Fund I unit holders
who voted against the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The trial is currently scheduled to begin on March 27,
2009.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages, and a
rescission of the REIT conversion.  The trial is currently scheduled
to begin on April 19, 2010.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM I’s management agreement and Fund I’s
operating agreement contain indemnity provisions whereby Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM I with respect to
the above actions.
 
 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
O — LEGAL MATTERS INVOLVING THE COMPANY
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
  See
review report of Independent Registered Public Accounting Firm.
 - 34
-
 Table of Contents
  
 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
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund II into Vestin Realty Mortgage II,
Inc.  The court certified a class of all former Fund II unit holders
who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc.,
and a subclass of all class members who were over the age of 60 and Nevada
residents at the time of the merger.  The trial is currently scheduled
to begin on March 27, 2009.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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 trial is currently scheduled
to begin on April 19, 2010.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of 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.
 
 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
P — 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.
 
 Our Board
of Directors decided to temporarily suspend the payment of dividends during June
2008.  We will continue to comply with the REIT requirements and will
distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 NOTE
Q — SUBSEQUENT EVENTS
 
 During
October 2009, we paid down approximately $2.1 million of the secured
borrowings.
  See
review report of Independent Registered Public Accounting Firm.
 - 35
-
 Table of Contents
  
 We, VRM I
and Fund III have received a letter of intent to purchase the note and deed of
trust for the Silver Star Destinations, LLC, loan dated October 22,
2008.  The purchase agreement of $13.0 million, which our portion
would be approximately $12.3 million, is scheduled to close on or before
December 19, 2008; however, there can be no assurance that the sale will be
completed.
 
 On
October 16, 2008, we, VRM I and Fund III entered into a forbearance agreement to
postpone the foreclosure date on Babuski, LLC.  On November 5, 2008,
the guarantor paid $250,000 for cost and interest due related to the
loan.
 
 On
October 30, 2008, our manager received a sales agreement to purchase Jeffrey's
Court, LLC for approximately $6.3 million, of which our portion would be
approximately $3.9 million.  The sale is scheduled to close on
December 8, 2008, where the buyer is to pay approximately $4.0 million down
along with a one year note for the remaining $2.3 million.  There can
be no assurance that the sale will be completed.
 
 As of
November 7, 2008, four performing loans, totaling approximately $12.9 million,
are delinquent in interest payments, our manager is currently working with the
borrowers to receive full payment.  However, no assurance can be given
at this time that full payment will be received on these newly delinquent
loans.
 
 On
November 7, 2008, we entered into the Taberna Letter Agreement described in Note
I – Junior Subordinated
Notes above.
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 - 36
-
 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 September 30, 2008, and the related
consolidated statements of operations for the three and nine month periods ended
September 30, 2008 and 2007, the consolidated statement of equity and other
comprehensive loss for the nine month period ended September 30, 2008 and the
consolidated statements of cash flows for the nine month periods ended September
30, 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
 November
10, 2008
 
 
  - 37
-
 Table of Contents
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three and nine months ended September 30, 2008 and
2007.  This discussion should be read in conjunction with our
consolidated financial statements and accompanying notes and other detailed
information regarding us appearing elsewhere in this report on Form 10-Q and our
report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis
of Financial Conditions and Results of Operations for the year ended
December 31, 2007 and our quarterly reports filed on Form 10-Q for the periods
ended March 31, 2008 and June 30, 2008.
 
 FORWARD
- LOOKING STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 2, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” should be read in conjunction with the consolidated
financial statements, related notes, and other detailed information included
elsewhere in this report on Form 10-Q.  We are including this
cautionary statement to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995.  Statements that are not historical fact are forward-looking
statements.  Certain of these forward-looking statements can be
identified by the use of words such as “believes,” “anticipates,” “expects,”
“intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,”
or other similar expressions.  Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors, which could
cause actual results, performance or achievements to differ materially from
future results, performance or achievements.  These forward-looking
statements are based on our current beliefs, intentions and
expectations.  These statements are not guarantees or indicative of
future performance.  Important assumptions and other important factors
that could cause actual results to differ materially from those forward-looking
statements include, but are not limited to, those factors, risks and
uncertainties described in Part II Item 1A Risk Factors of this
Quarterly Report on Form 10-Q and in our other securities filings with the
Securities and Exchange Commission (“SEC”).  Our future financial
condition and results of operations, as well as any forward-looking statements,
are subject to change and involve inherent risks and
uncertainties.  Our estimates of the value of collateral securing our
loans may prove erroneous, or the value of the underlying property could decline
subsequent to the date of our evaluation.  As a result, such estimates
are not guarantees of the future value of the collateral.  The
forward-looking statements contained in this report are made only as of the date
hereof.  We undertake no obligation to update or revise information
contained herein to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.
 
 Our
recent operating results have been adversely affected by increases in allowances
for loan losses and increases in non-performing assets.  This negative
trend accelerated sharply during the nine months ended September 30,
2008.
  - 38
-
 Table of Contents
  As of
September 30, 2008, we had 18 loans considered non-performing (i.e., based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due).  These loans are
currently carried on our books at a value of approximately $98.8 million, net of
allowance for loan losses of approximately $46.0 million.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  As of September 30, 2008, six loans
totaling approximately $62.4 million, representing approximately 27% of our
portfolio’s total value, had a common guarantor, of these six loans; five loans
totaling approximately $60.2 million were considered non-performing as of
September 30, 2008.  For additional information, see “Specific Loan
Allowance” in Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statements of this report Form 10-Q.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $140.8 million
or 52% of our total assets as of September 30, 2008, as compared to
approximately $48.0 million or 14% of our total assets as of December 31,
2007.  At September 30, 2008, non-performing assets consisted of
approximately $42.0 million of real estate held for sale and approximately $98.8
million of non-performing loans, net of allowance for loan
losses.  See Note F – Real Estate Held for Sale and
Note D – Investments In Real
Estate Loans of the Notes to the Consolidated Financial Statements
included in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 We
believe that the significant increase in the level of our non-performing assets
is a direct result of the deterioration of the economy and credit
markets.  As the economy has weakened and credit has become more
difficult to obtain, many of our borrowers who develop and sell commercial real
estate projects have been unable to complete their projects, obtain takeout
financing or have been otherwise adversely impacted.  Our exposure to
the negative developments in the credit markets and general economy has likely
been increased by our business strategy, which entails more lenient underwriting
standards and expedited loan approval procedures.  Moreover, declining
real estate values in the principal markets in which we operate has in many
cases eroded the current value of the security underlying our
loans.
 
 We expect
that the weakness in the credit markets and the weakness in lending will
continue to have an adverse impact upon our markets for the foreseeable
future.  This may result in a further increase in defaults on our
loans and we might be required to record additional reserves based on decreases
in market values or we may be required to restructure loans.  This
increase in loan defaults has materially harmed our operating results and led to
the suspension of dividend payments to our stockholders.
 
 As of
November 10, 2008, four performing loans, totaling approximately $12.9 million,
are delinquent in interest payments, our manager is currently working with the
borrowers to receive full payment.  However, no assurance can be given
at this time that full payment will be received on these newly delinquent
loans.
 
 As of
September 30, 2008, our loan-to-value ratio was 62.22%, net of allowances for
loan losses, on a weighted average basis generally using appraisals prepared on
an “as-if developed basis” in connection with the loan
origination.  Additional marked increases in loan defaults accompanied
by a rapid decline in real estate values, as evidenced by updated appraisals
generally prepared on an “as-is-basis,” will have a material adverse effect upon
our financial condition and operating results.  The current
loan-to-value ratio is primarily a result of declining real estate values, which
have eroded the market value of our collateral.
 
 As of
September 30, 2008, we have provided a specific reserve allowance for 11
non-performing loans and 3 performing loans based on updated appraisals of the
underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year ended December 31, 2007, and the nine
months ended September 30, 2008.  For further information regarding
allowance for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated financials statements in Part I,
Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 Our
capital, subject to a 3% reserve, will constitute the bulk of the funds we have
available for investment in real estate loans.  We do not have any
arrangements in place, except for the funds we received pursuant to the VCT I
closing and through our secured borrowing agreements, to materially increase the
funds we will have available to invest from any other sources.  See
discussion under – “Capital and Liquidity.”
  - 39
-
 Table of Contents
  
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 As of
September 30, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington.  The weighted
average term of our outstanding loans, including extensions, was 20 months and
19 months as of September 30, 2008 and December 31, 2007,
respectively.
 
 Comparison
of Operating Results for the three and nine months ended September 30, 2008 to
the three and nine months ended September 30, 2007.
 
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Total
      revenues
              
              $
              3,687,000
              
              
              $
              6,939,000
              
              
              $
              16,759,000
              
              
              $
              21,861,000Total
      operating expenses
              
              
              23,924,000
              
              
              
              5,162,000
              
              
              
              50,894,000
              
              
              
              7,781,000Non-operating
      income (loss)
              
              
              (2,102,000
              )
              
              
              793,000
              
              
              
              (278,000
              )
              
              
              1,288,000Loss
      from real estate held for sale
              
              
              (17,807,000
              )
              
              
              (1,029,000
              )
              
              
              (31,063,000
              )
              
              
              (3,052,000
              )Income
      (loss) before provision for income taxes
              
              
              (40,146,000
              )
              
              
              1,541,000
              
              
              
              (65,476,000
              )
              
              
              12,316,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Net
      income (loss)
              
              $
              (40,146,000
              )
              
              $
              1,541,000
              
              
              $
              (65,476,000
              )
              
              $
              12,316,000Basic
      and diluted earnings per common share
              
              $
              (2.72
              )
              
              $
              0.10
              
              
              $
              (4.41
              )
              
              $
              0.83Dividends
      declared per common share
              
              $
              --
              
              
              $
              0.38
              
              
              $
              0.49
              
              
              $
              1.18Weighted
      average common shares
              
              
              14,772,583
              
              
              
              14,894,003
              
              
              
              14,844,070
              
              
              
              14,926,027Weighted
      average term of outstanding loans, including extensions
              
              20
      months
              
              
              18
      months
              
              
              20
      months
              
              
              18
      months
 
 Comparison
of Operating Results for the three months ended September 30, 2008 to the three
months ended September 30, 2007.
 
 Total
Revenues:  For the three months ended September 30, 2008, total
revenues were approximately, $3.7 million compared to approximately $6.9 million
during the three months ended September 30, 2007, a decrease of approximately
$3.2 million or 47% due in significant part to the following
factors:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $3.6 million during the three months ended September 30, 2008, compared to
      approximately $6.8 million during the same period in 2007, primarily due
      to the increase in non-performing loans during the three months ended
      September 30, 2008, compared to three months ended September 30,
      2007.  As of September 30, 2008, approximately $144.9 million of
      our loans were non-performing compared to approximately $29.8 million as
      of September 30, 2007.  For additional information on our loan
      portfolio, see Note D – Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements of this
      Interim Report Form 10-Q.
 
 Total Operating
Expenses:  For the three months ended September 30, 2008, total
operating expenses were approximately $23.9  million compared to
approximately $5.2 million during the three months ended September 30, 2007, an
increase of approximately $18.7 million or 363% due in significant part to the
following factors:
  - 40
-
 Table of Contents
  
 ·
              Operating
      expenses increased primarily because of the recognition of provisions for
      loan losses.  During the three months ended September 30, 2008,
      we recognized provisions for loan loss related to five non-performing
      loans and one performing loan totaling approximately $20.0
      million.  The significant increase in loan losses is primarily a
      result of declining values in real estate as reflected in updated
      appraisals obtained by our manager in 2008.  We believe that the
      continued weakness in real estate markets may result in our recording
      additional losses related to the declining value of real estate securing
      our non-performing loans.  See “Specific Loan Allowance “ in
      Note D Investment Real
      Estate Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statements of this Interim Report Form 10-Q.  During the
      three months ended September 30 2007, we recognized provision for loan
      loss of approximating $1.3 million.  During the three months
      ended September 30, 2008, we, VRM I and Fund III foreclosed upon six loans
      and classified the collateralized properties as real estate held for
      sale.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 ·
              We
      recognized approximately $1.3 million of interest expense during the three
      months ended September 30, 2008 and 2007 related to the junior
      subordinated notes issued in connection with the trust preferred financing
      in June 2007.  In addition, we recognized approximately $0.5
      million of interest expense for the three months ended September 30, 2008
      related to secured borrowings held during the
  period.
 
 ·
              During
      the three months ended September 30, 2008 and 2007, we incurred
      professional fees of approximately $1.4 million and $1.8 million,
      respectively, primarily due to legal actions that have been filed against
      us in connection with the REIT conversion and foreclosure costs on
      non-performing loans.  See Note O – Legal Matters Involving The
      Company of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 Total Non-Operating Income
(Loss):  For the three months ended September 30, 2008, total
non-operating loss was approximately, $2.1 million compared to income of
approximately $0.8 million during the three months ended September 30, 2007, a
decrease of approximately $2.9 million or 365%.  This decrease is
mainly due to the recognition of an other than temporary impairment of our
marketable securities – related party, totaling approximately $2.2 million, for
the three months ended September 30, 2008.  In addition, we also
experienced a decrease in interest income from banking institutions as the
result of a decrease of approximately $25.2 million in cash balances from
September 30, 2007 to 2008.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended September 30, 2008, total
losses from real estate held for sale were approximately $17.8 million compared
to approximately $1.0 million during the three months ended September 30, 2007,
an increase of approximately $16.8 million or 1,631%.  As detailed
below, such losses are primarily a result of declining real estate values as
reflected in updated appraisals obtained in 2008.  We believe that the
continued weakness in real estate markets may result in additional losses on our
real estate held for sale.
 
 ·
              During
      the three months ended September 30, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings a 106 Unit Townhouse Project known as
      Cliff Shadows Townhomes located in, Las Vegas, NV, (Cliff Shadows
      Properties, LLC).  Our manager evaluated the carrying value of
      the acquired property and estimated the net realizable value of the asset
      totaled approximately $9.7 million of which our portion totaled
      approximately $9.2 million.  Based on this estimate, our write
      down on this real estate held for sale totaled approximately $7.0 million
      during the three months ended September 30, 2008.  In October
      2008, we entered into a sales contract with a third party at a price
      approximating the net realizable value.  The sales contract
      requires that the buyer complete the purchase within 30 days, however,
      there can be no assurance that the sale will be
  completed.
  - 41
-
 Table of Contents
  
 ·
              During
      the three months ended September 30, 2008, our manager evaluated the
      carrying value of a 25 acre parcel in Brawley, CA, (Brawley CA 122, LLC),
      and estimated the net realizable value of the asset totaled approximately
      $0.9 million of which our portion totaled approximately $0.3
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $0.1 million during the three
      months ended September 30, 2008.  In addition, our manager
      estimated a write down of approximately $1.7 million, of which our portion
      was approximately $0.8 million, related to 46.75 acres of land in
      Galveston, TX, based on the current sales price of $2.0
      million.
 
 ·
              During
      the three months ended September 30, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings 132.03 acres of Land within the Wolf Creek
      Estates Master Planned Community, located in Mesquite, NV, (MRPE,
      LLC).  Our manager evaluated the carrying value of the acquired
      property and estimated the net realizable value of the asset totaled
      approximately $7.6 million of which our portion totaled approximately $5.4
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $4.7 million during the three
      months ended September 30, 2008.  In addition, we acquired
      through foreclosure proceedings three additional properties located in
      Mesquite, NV (The Orleans at Mesquite Estates, LLC, The Laurels at
      Mesquite Estates, LLC and The Sycamore Glenn at Mesquite Estates,
      LLC).  Our manager evaluated the carrying value of the acquired
      properties and estimated the net realizable value of the assets totaled
      approximately $4.2 million.  Based on this estimate, our write
      down on the real estate held for sale totaled approximately $4.5 million
      during the three months ended September 30,
  2008.
 
 ·
              We
      recorded a loss on sale of real estate held for sale of approximately $0.3
      million during the three months ended September 30, 2008, on the sale of
      real estate located on Mt. Charleston, NV, (Forest Development,
      LLC).  There was no loss on sale of real estate held for sale
      during the same period in 2007.
 
 ·
              During
      the three months ended September 30, 2007, we wrote down approximately
      $0.1 on property located in Cathedral City, CA, (Rio Vista Nevada,
      LLC).  In addition, we recognized expenses related to real
      estate held for sale for this property, which totaled $771,000 for the
      three months ended September 30,
2007.
 
 Comparison
of Operating Results for the nine months ended September 30, 2008 to the nine
months ended September 30, 2007
 
 Total
Revenues:  For the nine months ended September 30, 2008, total
revenues were approximately, $16.8 million compared to approximately $21.9
million during the nine months ended September 30, 2007, a decrease of
approximately $5.1 million or 23%.  Revenues were primarily affected
by the following factors:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $16.1 million during the nine months ended September 30, 2008, compared to
      approximately $19.9 million during the same period in 2007, primarily due
      to the increase in non-performing loans referred to above.  Our
      revenue is also dependent upon the balance of our investment in real
      estate loans and the interest earned on these loans.  As of
      September 30, 2008, our investment in real estate loans was approximately
      $233.1 million compared to our investment in real estate loans, including
      loans related to seller financed real estate held for sale, of
      approximately $262.2 million as of September 30, 2007.  This
      decline is largely attributable to the increase in non-performing assets
      which has reduced the amount of cash available for investment in new
      loans.  For additional information see Note D- Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q
 
 ·
              During
      the nine months ended September 30, 2007, we recognized a gain of
      approximately $1.0 million related to an impaired real estate loan that
      was paid in full.  We had no related gain during the same period
      in 2008.
 
 ·
              During
      the nine months ended September 30, 2007, we earned $0.6 million in other
      income from principal payments on notes receivable that were fully
      reserved, compared to $0.1 million during the same period in
      2008.
  - 42
-
 Table of Contents
  
 Total Operating
Expenses:  For the nine months ended September 30, 2008, total
operating expenses were approximately $50.9 million compared to approximately
$7.8 million during the nine months ended September 30, 2007, an increase of
approximately $43.1 million or 554%.  Expenses were primarily affected
by the following factors in addition to the factors discussed above in Total Operating Expenses for
the three months ended September 30, 2008:
 
 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the nine months ended September 30,
      2008, we recognized provisions for loan losses totaling approximately
      $42.3 million, compared to $1.3 million for the same period in
      2007.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statements of this Interim Report Form 10-Q.  During the
      nine months ended September 30, 2008, we foreclosed upon ten loans and
      classified the collateralized properties as real estate held for
      sale.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 ·
              We
      recognized approximately $4.1 million of interest expense during the nine
      months ended September 30, 2008 related to the junior subordinated notes
      issued in connection with the trust preferred financing, compared to
      approximately $1.5 million during the same period in
  2007.
 
 Total Non-Operating Income
(Loss):  For the nine months ended September 30, 2008, total
non-operating loss was approximately, $0.3 million compared to income of
approximately $1.3 million during the nine months ended September 30, 2007, a
decrease of approximately $1.6 million or 122%.  Total Non-Operating Income
(Expense) was primarily affected by the following factors in addition to
the factors discussed above in Total Non-Operating Income
(Loss) for the three months ended September 30, 2008:
 
 ·
              This
      decrease is mainly due to the recognition of an other-than-temporary
      impairment of our marketable securities – related party, totaling
      approximately $2.2 million, for the nine months ended September 30,
      2008.  In addition, we experienced a decrease of approximately
      $0.8 million of interest income from banking institutions due to a
      decrease in cash balances referred to
above.
 
 ·
              The
      decrease was partially off set by a gain of approximately $1.6 million,
      relating to the purchase of outstanding debt at a discount to the face
      amount of such debt.  No assurances can be given that any
      additional purchases of debt at a discount will occur in future
      periods.
 
 Total Loss from Real Estate Held for
Sale:  For the nine months ended September 30, 2008, total
losses from real estate held for sale were approximately $31.1 million compared
to approximately $ 3.0 million during the nine months ended September 30, 2007,
an increase of approximately $28.0 million or 918% due in significant part to
the following factors:
 
 ·
              In
      addition to the write downs and loss on real estate held for sale
      discussed above in Total
      Loss from Real Estate Held for Salefor the three months ended
      September 30, 2008, we wrote down approximately $12.8 million on four
      properties held for sale, totaling approximately $28.1 million for the
      nine months ended September 30, 2008.  For additional
      information see Note F- Real Estate Held For
      Sale of the Notes to the Consolidated Financial Statements included
      in Part I, Item 1Consolidated Financial Statementsof this Interim Report Form
      10-Q.  As of September 30, 2008, we had 11 properties held for
      sale totaling approximately $42.0 million compared to 2 properties held
      for sale as of September 30, 2007 totaling approximately $28.9
      million.
  - 43
-
 Table of Contents
  
 ·
              We
      recorded a gain on sale of real estate held for sale related to seller
      financed loans of approximately $0.8 million during the nine months ended
      September 30, 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.  As of September 30, 2007, we had approximately $7.4
      million, in real estate held for sale – seller financed.  Upon
      the sale of real estate held for sale where we provide the financing, GAAP
      requires the new borrower to have a certain percentage equity ownership
      (ranging from 10% to 25%) to allow us to record the sale of
      property.  In addition, the borrower must maintain a minimum
      commitment in the property on a continuing basis.  Therefore,
      until the borrower meets these requirements, the proceeds received from
      the borrower are recorded as a deposit liability or applied to the balance
      of the real estate held for sale - seller financed, depending on the
      guidelines established by GAAP.  Our revenues will continue to
      be impacted until we are able to convert these assets into investment in
      real estate loans or the loans are paid in full and we reinvest the
      proceeds into new loans.  We have no real estate held for sale –
      seller financed as of September 30, 2008 and no related income during the
      nine months ended September 30,
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.  Based on our current tax estimates, all of 2007 distributions
may be a return of capital.
 
 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 reported by other
companies.
 
 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 carry back distributions made, for example, in 2008 to 2007, for the purposes
of zeroing out our 2007 REIT taxable income.  As a result, included in
the distributions of approximately $7.3 million declared during the nine months
ended September 30, 2008 is approximately $0.4 million that was used to reduce
our 2007 REIT taxable income to zero.
 
 The table
below reconciles the differences between reported net income and total estimated
taxable income and estimated REIT taxable income for the nine months ended
September 30, 2008:
  - 44
-
 Table of Contents
  
 For
      the Nine
                Months
      EndedSeptember
      30, 2008Net
      loss, as reported
              
              $
              (65,476,000
              )Add
      (deduct):Impairment
      of marketable securities - related party
              
              
              2,228,000Provision
      for loan losses
              
              
              42,253,000Write
      down on real estate held for sale
              
              
              29,802,000Net
      tax loss on foreclosure of real estate loans
              
              
              (14,285,000
              )Book
      loss on sale of real estate held for sale
              
              
              259,000Tax
      loss on sale of real estate held for sale
              
              
              (756,000
              )Recovery
      of allowance for doubtful notes receivable
              
              
              (87,000
              )Payment
      on accrued legal expenses
              
              
              (1,049,000
              )Total
      taxable loss
              
              
              (7,111,000
              )Add:
      Taxable loss attributable to TRS II, Inc.
              
              
              7,000Estimated
      REIT taxable loss (prior to deductions for dividends paid)
              
              $
              (7,104,000
              )
 
 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 Fund II and
us from the sale of shares or membership units.
 
 During
the nine months, ended September 30, 2008, net cash flows provided by operating
activities approximated $10.4 million.  Operating cash flows were
adversely impacted by the payment of approximately $1.9 million in legal fees
relating to legal actions that have been filed against us in connection with the
REIT conversion and RightStar.  In addition, we incurred approximately
$28.1 million in write-downs on real estate held for sale and approximately
$39.5 million in provisions for loan losses, during the nine months ended
September 30, 2008.  Cash flows related to investing activities
consisted of cash provided by loan payoffs and sales of real estate loans of
approximately $89.4 million and cash used for new investments and purchases of
real estate loans totaled approximately $81.8 million.  Cash flows
used for financing activities consisted of dividends to stockholders, net of
reinvestment, of approximately $8.6 million and the purchase of debt totaled
approximately $2.2 million.  Financing activities also consisted of
cash flows used for the purchase of our own stock totaled approximately $1.6
million.
 
 At
September 30, 2008, we had approximately $26.5 million in cash, $1.2 million in
marketable securities – related party and approximately $271.0 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales, sales of real estate held
for sale and/or borrowings.  We believe we have sufficient working
capital to meet our operating needs in the near term, provided that payment on
the junior subordinated notes discussed below is not accelerated, and provided
further that there is not a significant increase in our non-performing
assets.
 
 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 and
proceeds from sales of real estate held for sale to provide capital for
investment in new loans.  The significant level of defaults on
outstanding loans has reduced the funds we have available for investment in new
loans.  Resulting foreclosure proceedings may not generate full
repayment of our loans and may result in significant delays in the return of
invested funds.  This has diminished our capital resources and
impaired our ability to invest in new loans.
 
  - 45
-
 Table of Contents
  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 $98.8 million and $42.0 million, respectively, as of September 30,
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.  Our manager believes that these non-performing
assets have increased in significant part as a result of conditions in the real
estate and credit markets.  Based on our estimates of the value of the
underlying properties, we do not currently believe that any losses beyond those
already recognized should be incurred from these assets upon final
disposition.  However, these estimates may prove erroneous or the
value of the underlying properties may deteriorate.  As a result, it
is possible that we will not be able to realize the full estimated carrying
values upon disposition.
 
 As of
November 107, 2008, four performing loans, totaling approximately $12.9 million,
are delinquent in interest payments, our manager is currently working with the
borrowers to receive full payment.  However, no assurance can be given
at this time that full payment will be received on these newly delinquent
loans.
 
 We have
no current plans to sell any new shares except through our dividend reinvestment
program.  As of November 10, 2008, 2008, approximately 10% of our
stockholders owning less than 1% our outstanding shares have elected to reinvest
their dividends.  The level of dividend reinvestment in the future
will depend upon our performance, as well as the number of our stockholders who
prefer to reinvest rather than receive current dividends.
 
 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
original indenture governing the notes included a number of covenants including
the following financial covenants:  (i) we were required to maintain a
Tangible Net Worth of not less than $225 million, (ii) our trailing twelve
months EBITDA was required to be not 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
September 30, 2008, we were not in compliance with the tangible net worth
covenant included in the indenture.  On November 7, 2008, we entered
into an agreement with Taberna Capital Management, LLC (“Taberna”), in its
capacity as collateral manager for certain collateral debt obligation vehicles
that are the holders of the junior subordinated notes, providing for an
amendment of the tangible net worth covenant (the “Taberna Letter
Agreement”).  As amended, the tangible net worth covenant will require
us to maintain Tangible Net Worth of not less than the lesser of $150 million or
2.5 times the then outstanding principal balance of junior subordinated notes
(which amount is currently approximately $56.4 million.)  Pursuant to
the Taberna Letter Agreement, the EBITDA covenant in the indenture was also
amended to provide that our EBITDA for the four preceding quarters shall not be
less than 1.5 times Interest Expense for such period, provided that, for one
quarter only, EBITDA shall not be less than 1.2 times Interest Expense for the
four quarters ending June 30, 2009.  The Taberna Letter Agreement also
requires us to post a $3,750,000 letter of credit by November 12, 2008 and a
$1,250,000 letter of credit by April 12, 2009.  Taberna would be
entitled to draw upon such letters of credit to pay principal and interest due
on the junior subordinated notes if we are subject to an Event of Default under
the indenture.  For further information about the Taberna Letter
Agreement, see Note I to our financial statements.
 
 Our
Tangible Net Worth as of September 30, 2008 ($198.6 million) was in compliance
with the revised tangible net worth covenant.  In addition, we believe
the change to the EBITDA covenant will facilitate our compliance with such
obligation in the future.  However, no assurance can be given that we
will maintain compliance with the revised covenants.  If we do not
comply and the lenders refuse to grant a waiver with respect to such
non-compliance, then they could declare the junior subordinated notes to be in
default and could seek to accelerate all amounts due under such
notes.  In such event, we could face a severe liquidity problem as we
might not have sufficient cash resources to pay the amounts due on the
notes.
 
  - 46
-
 Table of Contents
  On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws
repurchases may be made at such times and in such amounts, as our management
deems appropriate.  The share repurchase program may be discontinued
or terminated at any time and we have not established a date for completion of
the share repurchase program.  The repurchases will be funded from our
available cash.  As of September 30, 2008, we had purchased 427,411
shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $3.0 million.
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
 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 5% to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 38 real estate loans, as of
September 30, 2008, with a balance of approximately $233.1 million as compared
to investments in 46 real estate loans as of December 31, 2007, with a balance
of approximately $291.1 million.
 
 As of
September 30, 2008, we had 18 loans considered non-performing (i.e., based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due).  These loans are
currently carried on our books at a value of approximately $98.8 million, net of
allowance for loan losses of approximately $46.0 million, which does not include
the allowances of approximately $4.7 million relating to the decrease in the
property value for performing loans as of September 30, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and, based on current estimates, believes that the value of the underlying
collateral is sufficient to protect us from loss of
principal.  However, such estimates may prove erroneous, or the value
of the underlying collateral may deteriorate, in which case further losses may
be incurred.
 
 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 September 30, 2008, we have
provided a specific reserve related to 11 non-performing loans and 3 performing
loans, based on updated appraisals and evaluation of the borrower obtained by
our manager during the year ended December 31, 2007, and the nine months ended
September 30, 2008.  Our manager evaluated these loans and concluded
that the remaining underlying collateral was sufficient to protect us against
further losses of principal or interest.  Our manager will continue to
evaluate these loans in order to determine if any other allowance for loan
losses should be recorded.  For additional information on our
investments in real estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statements of this Interim Report Form 10-Q.
 
  - 47
-
 Table of Contents
  Asset
Quality and Loan Reserves
 
 Losses
may occur from investing in real estate loans.  The amounts of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the real
      estate loan amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses.  For additional information regarding
the roll-forward of the allowance for loan losses for the nine months ended
September 30, 2008, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 Investments
in Real Estate Held for Sale
 
 At
September 30, 2008, we held 11 properties with a total carrying value of
approximately $42.0 million, which were acquired through foreclosure and
recorded as investments in real estate held for sale.  Our investments
in real estate held for sale are accounted for at the lower of cost or fair
value less costs to sell with fair value based on appraisals and knowledge of
local market conditions.  It is not our intent to invest in or own
real estate as a long-term investment.  We seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  For
additional information on our investments in real estate held for sale, refer to
Note F – Real Estate Held for Sale of the Notes to the Consolidated Financial
Statements included in Part I, Item 1 Consolidated Financial Statements of this
Interim Report Form 10-Q.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities, other than the
interest in VCT I as discussed in Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part I, Item
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 September 30,
2008:
  - 48
-
 Table of Contents
  
 Contractual
      Obligation
              
              Total
              
              
              Less
      Than 1 Year
              
              
              1-3
      Years
              
              
              3-5
      Years
              
              
              More
      Than
                5
      YearsJunior
      subordinated notes payable (1)
              
              $
              56,350,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              56,350,000Secured
      borrowings (2)
              
              
              13,651,000
              
              
              
              13,651,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Notes
      payable (3)
              
              
              93,000
              
              
              
              93,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Total
              
              $
              70,094,000
              
              
              $
              13,744,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              56,350,000
 
 (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.
 
 (2)
              See
      Note J – Secured
      Borrowings of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 (3)
              See
      Note K – Notes
      Payable 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
non-performing.  A loan is considered non-performing when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at September 30, 2008, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
              
              $
              2,735,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              13,677,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (2,735,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (13,677,000
              )
 
 The
purpose of this analysis is to provide an indication of the impact that the
weighted average interest rate fluctuations would have on our financial
results.  It is not intended to imply our expectation of future
revenues or to estimate earnings.  We believe that the assumptions
used above are appropriate to illustrate the possible material impact on the
consolidated financial statements.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment in our investment in real estate loans
portfolio.  Our manager’s estimate of losses is based on a number of
factors including the types and dollar amounts of loans in the portfolio,
adverse situations that may affect the borrower’s ability to repay, prevailing
economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Subsequent recoveries of amounts previously charged off are
added back to the allowance or included as income.
 
  - 49
-
 Table of Contents
  The
following table presents a sensitivity analysis to show the impact on our
financial condition at September 30, 2008, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 Changed Assumption
              
              Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
              
              $
              2,331,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              11,657,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (2,331,000
              )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
              
              $
              (11,657,000
              )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 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;
  - 50
-
 Table of Contents
  
 ·
              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 QUALITATIVEDISCLOSURES ABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.
 
 Most of
our assets consisted of investments in real estate loans, which from time to
time include those that are financed under Inter-creditor
Agreements.  At September 30, 2008, our aggregate investment in real
estate loans was approximately $182.5 million, net of allowance of approximately
$50.7 million, with a weighted average effective interest rate of
12.18%.  The weighted average interest rate of 12.18% is base on the
contractual terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of September 30, 2008, was 12.07%.  Most of the real estate loans
had an initial term of 12 months.  The weighted average term of
outstanding loans, including extensions, at September 30, 2008, was 20
months.  All but one of the outstanding real estate loans at September
30, 2008, was a fixed rate loan.  The variable interest rate loan was
considered non-performing as of September 30, 2008, see Note D – Investments in Real Estate
Loans in the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial 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
25 loans, totaling approximately $141.3 million, had an exit fee.  Out
of the 25 loans with an exit fee, 11 loans, totaling approximately $81.4
million, were considered non-performing as of September 30, 2008.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
dividend distribution to stockholders.  On the other hand, a
significant increase in interest rates could result in a slowdown in real estate
development activity that would reduce the demand for commercial real estate
loans.
  - 51
-
 Table of Contents
  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 September 30, 2008.  The presentation
aggregates the investment in real estate loans by their maturity dates for
maturities occurring in each of the years 2008 through 2012 and thereafter and
separately aggregates the information for all maturities arising after
2012.  The carrying values of these assets approximate their fair
value as of September 30, 2008.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at September 30, 2008Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              Total(a)Investments
      In Real Estate Loans
              
              $
              170,295,000
              
              
              $
              44,886,000
              
              
              $
              17,964,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              233,145,000Weighted
      Average Interest Rates
              
              
              12.07%
              
              
              
              12.80%
              
              
              
              11.63%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              12.18%
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to September 30,
2008.
 
 At
September 30, 2008, we also had approximately $27.7 million invested in cash,
certificates of deposit, and marketable securities – related party (VRM
I).  Approximately 3% of our assets will be held in such accounts as a
cash reserve; additional deposits in such accounts will be made as funds are
received from investors and repayment of loans pending the deployment of such
funds in new real estate loans.  We believe that these financial
assets do not give rise to significant interest rate risk due to their
short-term nature.
 
 ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 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 September 30, 2008, of the effectiveness of the
design and operation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Exchange Act.  Based upon our
evaluation, our CEO and CFO concluded that, as of September 30, 2008, our
disclosure controls and procedures are designed at a reasonable assurance level
and are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our 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.
  - 52
-
 Table of Contents
  
 Changes in Internal Control
Over Financial Reporting
 
 As
required by Rule 13a-15(d) under the Exchange Act, our management, including our
CEO and our CFO, has evaluated our internal control over financial reporting to
determine whether any changes occurred during the third fiscal quarter of 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  Based on that
evaluation, there has been no such change during the third fiscal quarter of
2008.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
 
 Not
applicable.
 
 PART
II – OTHERINFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note N – Legal
Matters Involving the Manager and Note O – Legal Matters Involving the
Company in Part I, Item 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.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and our distributions to
shareholders.  Current economic conditions increase the risk of
defaults on our loans.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.
 
 As of
September 30, 2008, we had in our portfolio approximately $98.8 million in
non-performing loans, net of allowance for loan losses of approximately $46.0
million, which does not include allowances of approximately $4.7 million for
performing loans, and approximately $42.0 million of real estate held for sale
for a total of approximately $140.8 million in non-performing assets, which
represented approximately 71% 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.
 
 Our
weighted average loan-to-value ratio, not including allowance for loan losses,
as of September 30, 2008, was 107.15%, as compared to 72.64% as of December 31,
2007, primarily as a result of declining real estate values, which have eroded
the market value of our collateral.  As a result, we may not be able
to recover the full amount of our loans if the borrower
defaults.  Moreover, any failure of a borrower to pay interest on
loans will reduce our revenues, the dividends we pay to stockholders and, most
likely, the value of our stock.  Similarly, any failure of a borrower
to repay loans when due may reduce the capital we have available to make new
loans, thereby adversely affecting our operating results.  As of
September 30, 2008 and December 31, 2007, we had approximately $50.7 million and
$12.9 million in allowances for loan losses, respectively, resulting in net
weighted average loan-to-value ratios of 62.22% and 68.52%,
respectively.
 
  - 53
-
 Table of Contents
  A
prolonged economic slowdown, lengthy or severe recession and constraints in the
credit markets could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the nine months ended
September 30, 2008, we conducted updated appraisals on 25 properties securing
our loans, representing approximately 70% of our total loan portfolio value, and
concluded that the estimated value of such properties should be reduced by
approximately $74.6 million, which negatively impacted our weighted average loan
to value ratio.  As a commercial real estate lender willing to invest
in riskier loans, rates of delinquencies, foreclosures and losses on our loans
could be higher than those generally experienced in the commercial mortgage
lending industry during periods of economic slowdown or recession.  We
are of the opinion that problems in the sub-prime residential mortgage market
have adversely affected the general economy and the availability of funds for
commercial real estate developers.  We believe this lack of available
funds has led to an increase in defaults on our loans.  Furthermore,
problems experienced in U.S. credit markets since the summer of 2007 have
reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary to pay back our
loans.  Thus, an extended period of illiquidity in the credit markets
could result in a material increase in the number of our loans that are not paid
back on time.  Any sustained period of increased delinquencies,
defaults or foreclosures will likely have an adverse affect upon our ability to
originate, purchase and securitize loans, which could significantly harm our
business, financial condition, liquidity and results of operations.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.  This may lead to an
increase in non-performing assets in our loan portfolio and create additional
risks of return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.  We
are currently experiencing a trend of declining real estate values, which
increases the risk that our collateral will prove insufficient to protect our
loans.
 
 We depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.  During the past 12 months, there has been
a significant decline in real estate values in many of the markets where we
operate, resulting in a decline in the estimated value of the real estate
securing our loans.
 
 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.
  - 54
-
 Table of Contents
  
 We
typically make “balloon payment” loans, which are riskier than loans with
payments of principal over an extended period of time.
 
 The loans
we invest in or purchase generally require the borrower to make a “balloon
payment” on the principal amount upon maturity of the loan.  A balloon
payment is a large principal balance that is payable after a period of time
during which the borrower has repaid none or only a small portion of the
principal balance.  As of September 30, 2008, all of our loans
provided for payments of interest only with a “balloon” payment of principal
payable in full at the end of the term.  Loans with balloon payments
are riskier than loans with payments of principal over an extended time period
such as 15 or 30 years because the borrower’s repayment depends on its ability
to sell the property, obtain suitable refinancing or otherwise raise a
substantial amount of cash when the loan comes due.  The borrower’s
ability to achieve a successful sale or refinancing of the property may be
adversely impacted by deteriorating economic conditions or illiquidity in the
credit markets.  There are no specific criteria used in evaluating the
credit quality of borrowers for loans requiring balloon
payments.  Furthermore, a substantial period of time may elapse
between the review of the financial statements of the borrower and the date when
the balloon payment is due.  As a result, there is no assurance that a
borrower will have sufficient resources to make a balloon payment when
due.
 
 Our
loans are not guaranteed by any governmental agency.
 
 Our loans
are not insured or guaranteed by a federally owned or guaranteed mortgage
agency.  Consequently, our recourse, if there is a default, may be to
foreclose upon the real property securing a loan and/or pursuing the borrower’s
guarantee of the principal.  The value of the foreclosed property may
have decreased and may not be equal to the amount outstanding under the
corresponding loan, resulting in a decrease of the amount available to
distribute.
 
 Our
real estate loans may not be marketable, and we expect no secondary market to
develop.
 
 We do not
expect our real estate loans to be marketable, and we do not expect a secondary
market to develop for them.  As a result, we will generally bear all
the risk of our investment until the loans mature.  This will limit
our ability to hedge our risk in changing real estate markets and may result in
reduced returns to our investors.
 
 We
may not be able to maintain compliance with all of the financial covenants
contained in the indenture governing our junior subordinated
notes.  Failure to comply could result in acceleration of all amounts
due under such notes.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  The amount currently due on such notes
is approximately $56.4 million.  The junior subordinated notes sold in
June 2007 in connection with the trust preferred financing bear interest at a
fixed rate of 8.75% through July 2012; thereafter the interest rate is LIBOR
plus 3.5%, resetting quarterly.  The indenture governing the junior
subordinated notes sets forth a number of financial covenants.  As of
September 30, 2008 we were not in compliance with the tangible net worth
covenant.  We subsequently entered into an agreement with the agent
representing the note holders providing for an amendment of such covenant as
well as the EBITDA covenant.  As a result, we are currently in
compliance with all of the financial covenants set forth in the
indenture.  Nonetheless, it is possible that a further deterioration
in our financial condition or operating performance could result in our
violating the revised financial covenants.  In such event, absent a
waiver from the note holders, the lenders could declare an event of default and
could seek to accelerate all amounts due under the junior subordinated
notes.  We might not have cash resources sufficient to pay the amounts
due in the event of acceleration.  As a result, our business
operations would suffer severe disruption if the lenders sought to accelerate
payment of the junior subordinated notes.  In addition, an unresolved
event of default under the indenture would prevent us from paying any dividends
or other distributions to our shareholders.
 
 The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
  - 55
-
 Table of Contents
  We may
borrow up to 70% of the fair market value of our outstanding real estate loans
at any time.  We currently have outstanding approximately $56.4
million of trust preferred securities bearing interest at
8.75%.  These borrowings will require us to carefully manage our cost
of funds.  In order to benefit from the trust preferred securities, we
need to loan the proceeds at rates in excess of the rates payable on the junior
subordinated notes.  Loans made during the nine months ended September
30, 2008 had a weighted average interest rate of 14.43%.  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 financial covenants in the indenture governing the junior
subordinated notes may constrain our flexibility in operating our
business.  Should we breach a material covenant or if we are unable to
meet our payment obligations on the junior subordinated notes, the purchasers of
the trust preferred securities may declare us in default, resulting in
acceleration of the principal sums due on the notes and restrictions on the
payment of dividends to our stockholders.
 
 During
June 2008, we, our manager, and Vestin Originations entered into an
intercreditor agreement with an unrelated third party related to the funding of
six real estate loans.  (See exhibit 10.11 Intercreditor
Agreement  under the Exhibit Index included in Part II – Other
Information, Item 6 Exhibits of this Report Form 10-Q).  The
participation interest is at 11% on the outstanding balance.  We
incurred approximately $0.9 million in finance costs related to the secured
borrowings, these costs are being amortized to interest expense over the term of
the agreements.  As of September 30, 2008, we had $14.7 million in
funds, including approximately $1.0 million in interest reserves, used under
Inter-creditor Agreements as compared to none as of December 31,
2007.
 
 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.
 
 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;
  - 56
-
 Table of Contents
  
 ·
              The
      rights of senior or junior secured parties in the same property can create
      procedural hurdles for us when we foreclose on
  collateral;
 
 ·
              Required
      licensing and regulatory approvals may complicate our ability to foreclose
      or to sell a foreclosed property where our collateral includes an
      operating business.  See Note O – Legal Matters Involving The
      Company in the notes to the consolidated financial statement under
      Part I, Item 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.  See Note F – Real Estate Held for Sale in
the notes to the consolidated financial statement under Part I, Item 1 Consolidated Financial Statementsof this Interim Report Form 10-Q.
 
 Under
applicable environmental laws, any owner of real property may be fully liable
for the costs involved in cleaning up any contamination by materials hazardous
to the environment.  Even though we might be entitled to
indemnification from the person that caused the contamination, there is no
assurance that the responsible person would be able to indemnify us to the full
extent of our liability.  Furthermore, we would still have court and
administrative expenses for which we may not be entitled to
indemnification.
 
 Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 Our
results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets.  If the economy is
healthy, we expect that more people will be borrowing money to acquire, develop
or renovate real property.  However, if the economy grows too fast,
interest rates may increase too much and the cost of borrowing may become too
expensive.  Alternatively, if the economy enters a recession, real
estate development may slow.  A slowdown in real estate lending may
mean we will have fewer loans to acquire, thus reducing our revenues and
distributions to stockholders.
 
 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
  - 57
-
 Table of Contents
  
 ·
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if a borrower should prepay
      obligations that have a higher interest rate from an earlier period, we
      will likely not be able to reinvest the funds in real estate loans earning
      that higher rate of interest.  In the absence of a prepayment
      fee, we will receive neither the anticipated revenue stream at the higher
      rate nor any compensation for its loss.  As of September 30,
      2008, none of our loans had a prepayment penalty, although 25 of our
      loans, totaling approximately $141.3 million, had an exit
      fee.  Out of the 25 loans with an exit fee, 11 loans, totaling
      approximately $81.4 million, were considered non-performing as of
      September 30, 2008.  However, depending upon the amount by which
      interest rates decline, the amount of the exit fees is generally not
      significant in relation to the potential savings borrowers may realize as
      a result of prepaying their loans.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
September 30, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington, with approximately 32%
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 N – Legal Matters Involving The
Manager and Note O – Legal Matters Involving The
Company in the notes to the consolidated financial statement under Part
I, Item 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.  The increased legal costs have adversely impacted
our operating results.  As of September 30, 2008, we have incurred
legal expenses of approximately $2.6 million related to such
actions.  Moreover, any adverse outcome in such actions could result
in our having to pay substantial damages, which would reduce our cash resources
and harm our financial condition.
 
 We
may have a lack of control over participations.
 
 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.
  - 58
-
 Table of Contents
  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
September 30, 2008, our loans were in the following states:  Arizona,
California, Hawaii, Nevada, 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), and Daniel B. Stubbs
(Senior Vice President, Underwriting) some of whom would be difficult to replace
because of their extensive experience in the field, extensive market contacts
and familiarity with our company.  If any of these individuals were to
cease their employment with our manager, our operating results could
suffer.  None of the key personnel of our manager is subject to an
employment, non-competition or confidentiality agreement with our manager, or us
and we do not maintain “key man” life insurance policies on any of
them.  Our future success also depends in large part upon our
manager’s ability to hire and retain additional highly skilled managerial,
operational and marketing personnel.  Our manager may require
additional operations and marketing people who are experienced in obtaining,
processing, making and brokering loans and who also have contacts in the
relevant markets.  Competition for personnel is intense, and we cannot
be assured that we will be successful in attracting and retaining skilled
personnel.  If our manager were unable to attract and retain key
personnel, the ability of our manager to make prudent investment decisions on
our behalf may be impaired.
 
 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.
  - 59
-
 Table of Contents
  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 approximately $0.8 million for the nine months
ended September 30, 2008.  In addition, Vestin Mortgage and Vestin
Originations received a total of approximately $3.5 million and $4.1 million,
respectively, in fees directly from borrowers for the nine months ended
September 30, 2008.  The amounts received from borrowers represent
fees earned by Vestin Mortgage and Vestin Originations for loans originated for
all funds managed by Vestin Mortgage, including us, VRM I, Fund III and
inVestin.  Our assets represented approximately 77% of the assets
managed by Vestin Mortgage as of September 30, 2008.
 
 Our
manager will face conflicts of interest relating to other investments in real
estate loans.
 
 We expect
to invest in real estate loans when one or more other companies managed by our
manager are also investing in real estate loans.  There is a risk that
our manager may select for us a real estate loan investment that provides lower
returns than a real estate loan investment purchased by another program or
entity managed by our manager.  Our manager also serves as the manager
for VRM I, 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.
  - 60
-
 Table of Contents
  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.  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
September 30, 2008, we held 11 properties with a total carrying value of
approximately $42.0 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 19% of our assets as of September 30,
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.
  - 61
-
 Table of Contents
  
 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.
 
 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
September 30, 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;
  - 62
-
 Table of Contents
  
 ·
              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.
 
 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.
  - 63
-
 Table of Contents
  
 ·
              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.
 
 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.
 
  - 64
-
 Table of Contents
  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.
              UNREGISTEREDSALES OF EQUITY AND USE OF
      PROCEEDS
 
 On March
21, 2007, our Board of Directors authorized the repurchase of up to $10 million
worth of the company’s common stock.  Depending upon market
conditions, shares may be repurchased from time to time at prevailing market
prices through open market or privately negotiated transactions.
 
 We are
not obligated to purchase any shares.  Subject to applicable
securities laws repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
financed from our available cash.
 
 The
following is a summary of our treasury stock purchases during the three months
ended September 30, 2008, as required by Regulation S-K, Item 703.
 
 Period
              
              (a)
      Total Number of Shares Purchased
              
              
              (b)
      Average Price Paid per Share
              
              
              (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              (d)
      Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be
      Purchase Under the Plans or ProgramsJuly
      1 - July 31, 2008
              
              
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              8,560,000August
      1 - August 31, 2008
              
              
              218,499
              
              
              
              4.83
              
              
              
              218,499
              
              
              
              7,505,000September
      1 - September 30, 2008
              
              
              99,278
              
              
              
              5.13
              
              
              
              99,278
              
              
              
              6,996,000Total
              
              
              317,777
              
              
              $
              9.45
              
              
              
              317,777
              
              
              $
              6,996,000
 
 ITEM
      3.
              DEFAULTS
      UPON SENIORSECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 None.
 
  - 65
-
 Table of Contents
  ITEM
      6.
              EXHIBITS
 
 EXHIBIT
INDEX
 
 
 Exhibit
      No.
              
              Description
      of Exhibits2.1(2)
              
              Agreement
      and Plan of Merger between Vestin Fund II, LLC and the
      Registrant3.1(1)
              
              Articles
      of Incorporation of the Registrant3.2(1)
              
              Bylaws
      of the Registrant3.3(1)
              
              Form
      of Articles Supplementary of the Registrant3.4(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.5(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.6
      (6)
              
              Amended
      Articles of Incorporation of the Registrant4.1(1)
              
              Reference
      is made to Exhibits 3.1, 3.2 and 3.34.2(2)
              
              Specimen
      Common Stock Certificate4.3(1)
              
              Form
      of Rights Certificate4.4(4)
              
              Junior
      Subordinated Indenture4.5
              
              Letter Agreement dated November 7, 2008 pertaining
      to Junior Subordinated Indenture10.1(1)
              
              Form
      of Management Agreement between Vestin Mortgage, Inc. and the
      Registrant10.2(1)
              
              Form
      of Rights Agreement between the Registrant and the rights
      agent10.9(4)
              
              Form
      of Purchase Agreement10.10(4)
              
              Amended
      and Restated Trust Agreement10.11(7)
              
              Intercreditor
      Agreement, dated June 16, 2008, by and between Vestin Originations, Inc.,
      Vestin Mortgage, Inc., Vestin Realty Mortgage II, Inc., and Owens Mortgage
      Investment Fund21.1(2)
              
              List
      of subsidiaries of the Registrant31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      135099.2R(3)
              
              Vestin
      Realty Mortgage II, Inc. Code of Business Conduct and
    Ethics
 
 (1)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 6 to our Form S-4
      Registration Statement filed on January 4, 2006 (File No.
      333-125121).(2)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 7 to our Form S-4
      Registration Statement filed on January 13, 2006 (File No.
      333-125121).(3)
              
              Incorporated
      herein by reference to the Transition Report on Form 10-K for the nine
      month transition period ended March 31, 2006 filed on September 7, 2006
      (File No. 000-51892)(4)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on June 27,
      2007 (File No. 000-51892)(5)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on January 4,
      2008 (File No. 000-51892)(6)
              
              Incorporated
      herein by reference to the Annual Report on Form 10-K filed on March 14,
      2008 (File No. 000-51892)(7)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed on August
      11, 2008 (File No. 000-51892)
 
 
  - 66
-
 Table of Contents
  
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Realty Mortgage II, Inc.By:
              /s/
      Michael V. ShustekMichael
      V. ShustekPresident
      and Chief Executive OfficerDate:
              November
      10, 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
              
              November
      10, 2008Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer
              
              November
      10, 2008Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              November
      10, 2008John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              November
      10, 2008Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              November
      10, 2008Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              November
      10, 2008Roland
      M. Sansone
 
 
  - 67
-
 Table of Contents