UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q/A
 (Amendment No. 1)
 
 (Mark one)
 
 [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended March 31, 2009
 
 Or
 
 [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from _________ to _________
 
 Commission File Number: 333-125121
 
 VESTIN REALTY MORTGAGE II, INC.(Exact name of registrant as specified in its charter)
 
 
 MARYLAND

61-1502451(State or Other Jurisdiction of

(I.R.S. EmployerIncorporation or Organization)

Identification No.)
 
 6149 SOUTH RAINBOW BOULEVARD, LAS VEGAS, NEVADA 89118
 (Address of Principal Executive Offices)(Zip Code)
 
 Registrant’s Telephone Number: 702.227.0965
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 Yes  [X]    No   [   ]
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer [   ]
Accelerated filer [   ]Non-accelerated filer [X]
(Do not check if a smaller reporting company)
Smaller reporting company [   ]
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes  [   ]    No   [X]
 
 As of May 4, 2009, there were 13,785,040 shares of the Company’s Common Stock outstanding.
   
   EXPLANATORY NOTE
 
 
 The purpose of this Form 10-Q/A, Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, as filed with the Securities and Exchange Commission on May 8, 2009 (the “Original Filing”) is to amend an incorrect footnote statement in Part I, Item 1, Notes to Financial Statements on pages
20 and 21 in the Original Filing.
 
 Except for the item described above, no other information in the Original Filing is amended hereby, and this amendment does not reflect events occurring after the Original Filing or modify or update those disclosures affected by subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the Securities
and Exchange Commission subsequent to the Original Filing.
    
  
  TABLE OF CONTENTS
 
 PagePart I
FINANCIAL INFORMATIONItem 1.
Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
1Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2009 and 2008
2Consolidated Statements of Equity and Other Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2009
3Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2009 and 2008
4Notes to Consolidated Financial Statements (unaudited)
6Report of Independent Registered Public Accounting Firm
41Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53Item 4.
Controls and Procedures
53Item 4T
Controls and Procedures
54Part II
OTHER INFORMATIONItem 1.
Legal Proceedings
54Item 1A.
Risk Factors
55Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
68Item 3.
Defaults Upon Senior Securities
68Item 4.
Submission of Matters to a Vote of Security Holders
68Item 5.
Other Information
68Item 6.
Exhibits
69SIGNATURES
70Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  
  PART I - FINANCIAL INFORMATION
 
 ITEM 1.
CONSOLIDATEDFINANCIAL STATEMENTS
 
 VESTIN REALTY MORTGAGEII, INC.CONSOLIDATED BALANCE SHEETSASSETSMarch 31, 2009


December 31, 2008(Unaudited)AssetsCash

$
6,664,000


$
8,026,000Cash - restricted


5,000,000



5,000,000Investment in marketable securities - related party


427,000



496,000Interest and other receivables, net of allowance of $482,000 at March 31, 2009 and $593,000 at December 31, 2008


1,329,000



1,345,000Notes receivable, net of allowance of $2,340,000 at March 31, 2009 and $2,340,000 at December 31, 2008


--



--Real estate held for sale


32,092,000



24,433,000Investment in real estate loans, net of allowance for loan losses of $51,332,000 at March 31, 2009 and $78,208,000 at December 31, 2008


138,087,000



146,834,000Due from related parties


255,000



--Investment in equity affiliate


100,000



100,000Assets under secured borrowings


10,600,000



10,600,000Deferred financing costs


2,358,000



2,504,000Other assets


341,000



144,000Total assets

$
197,253,000


$
199,482,000LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesAccounts payable and accrued liabilities

$
3,989,000


$
2,154,000Due to related parties


--



522,000Secured borrowings


9,907,000



9,907,000Junior subordinated notes payable


56,350,000



56,350,000Note payable


3,000,000



24,000Total liabilities


73,246,000



68,957,000Commitments and contingenciesStockholders' equityPreferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued


--



--Treasury stock, at cost 1,212,323 shares at March 31, 2009 and 1,198,573 at December 31, 2008


(5,734,000
)


(5,692,000
)Common stock, $0.0001 par value; 100,000,000 shares authorized; 14,997,363 shares issued and 13,785,040 outstanding at March 31, 2009 and 14,997,363 shares issued and 13,798,790 outstanding at December 31, 2008


1,000



1,000Additional paid in capital


278,550,000



278,550,000Accumulated deficit


(148,034,000
)


(141,627,000
)Accumulated other comprehensive loss


(776,000
)


(707,000
)Total stockholders' equity


124,007,000



130,525,000Total liabilities and stockholders' equity

$
197,253,000


$
199,482,000
 
  See review report of Independent Registered Public Accounting Firm.
 The accompanying notes are an integral part of these consolidated statements.
 - 1 -
    VESTIN REALTY MORTGAGEII, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)For The Three
Months Ended3/31/2009


3/31/2008RevenuesInterest income from investment in real estate loans

$
2,135,000


$
7,087,000Other income


13,000



69,000Total revenues


2,148,000



7,156,000Operating expensesManagement fees - related party


274,000



274,000Provision for loan loss


1,274,000



--Interest expense


1,649,000



1,359,000Professional fees


2,055,000



193,000Professional fees - related party


133,000



27,000Provision for doubtful accounts related to receivable


53,000



--Other


375,000



250,000Total operating expenses


5,813,000



2,103,000Income (loss) from operations


(3,665,000
)


5,053,000Non-operating income (loss)Dividend income - related party


--



44,000Interest income from banking institutions


19,000



141,000Settlement expense


(76,000
)


--Total other non-operating income (loss)


(57,000
)


185,000Loss from real estate held for saleRevenue related to real estate held for sale


51,000



--Expenses related to real estate held for sale


(258,000
)


(173,000
)Write downs on real estate held for sale


(2,478,000
)


(1,792,000
)Total loss from real estate held for sale


(2,685,000
)


(1,965,000
)Income (loss) before provision for income taxes


(6,407,000
)


3,273,000Provision for income taxes


--



--NET INCOME (LOSS)

$
(6,407,000
)

$
3,273,000Basic and diluted earnings (loss) per weighted average common

$
(0.46
)

$
0.22Dividends declared per common share

$
--


$
0.32Weighted average common shares


13,788,859



14,872,330
   See review report of Independent Registered Public Accounting Firm.
 The accompanying notes are an integral part of these consolidated statements.
 - 2 -
  
 VESTIN REALTY MORTGAGEII, INC.CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSSFOR THE THREE MONTHS ENDED MARCH 31, 2009(UNAUDITED)Treasury Stock


Common StockNumber of Shares


Amount


Number of Shares


Amount


Additional Paid-in-Capital


Accumulated deficit


Accumulated Other Comprehensive Loss


TotalStockholders' Equity at
December 31, 2008


1,198,573


$
(5,692,000
)


13,798,790


$
1,000


$
278,550,000


$
(141,627,000
)

$
(707,000
)

$
130,525,000Comprehensive Loss:Net Loss






















(6,407,000
)






(6,407,000
)Unrealized Loss on Marketable Securities - Related Party


























(69,000
)


(69,000
)Comprehensive Loss






























(6,476,000
)Purchase of Treasury Stock


13,750



(42,000
)


(13,750
)


--















(42,000
)Stockholders' Equity at
March 31, 2009 (Unaudited)


1,212,323


$
(5,734,000
)


13,785,040


$
1,000


$
278,550,000


$
(148,034,000
)

$
(776,000
)

$
124,007,000
 
 
 
  See review report of Independent Registered Public Accounting Firm.
 The accompanying notes are an integral part of these consolidated statements.
 - 3 -
  
 VESTIN REALTY MORTGAGEII, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For The Three
Months Ended3/31/2009


3/31/2008Cash flows from operating activities:Net income (loss)

$
(6,407,000
)

$
3,273,000Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:Provision for doubtful accounts related to receivable


53,000



--Write downs on real estate held for sale


2,478,000



1,792,000Provision for loan loss


1,274,000



--Amortized financing costs, included in interest expense


146,000



45,000Change in operating assets and liabilities:Interest and other receivables


(37,000
)


2,366,000Due to/from related parties


(777,000
)


(168,000
)Other assets


(197,000
)


40,000Accounts payable and accrued liabilities


1,835,000



(1,000
)Net cash provided (used) by operating activities


(1,632,000
)


7,347,000Cash flows from investing activities:Investments in real estate loans


(15,753,000
)


(32,361,000
)Proceeds from loan payoffs


136,000



14,797,000Sale of investments in real estate loans to:


--VRM I


--



500,000Third party


6,214,000



--Proceeds from sale of real estate held for sale


6,739,000



150,000Purchase of investments in certificates of deposit


--



(1,000
)Net cash used by investing activities


(2,664,000
)


(16,915,000
)Cash flows from financing activities:Principal payments on notes payable


(24,000
)


--Proceeds from issuance of notes payable


3,000,000



--Dividends paid to stockholders, net of reinvestments


--



(4,464,000
)Dividends paid to stockholders - related party


--



(137,000
)Purchase of treasury stock at cost


(42,000
)


--Net cash provided (used) by financing activities


2,934,000



(4,601,000
)NET CHANGE IN CASH


(1,362,000
)


(14,169,000
)Cash, beginning of period


8,026,000



20,241,000Cash, end of period

$
6,664,000


$
6,072,000
 
 
  See review report of Independent Registered Public Accounting Firm.
 The accompanying notes are an integral part of these consolidated statements.
 - 4 -
  
 VESTIN REALTY MORTGAGE II, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For The Three
Months Ended3/31/2009


3/31/2008Supplemental disclosures of cash flows information:Interest paid

$
1,649,000


$
1,359,000Non-cash investing and financing activities:Dividend payable

$
--


$
1,577,000Reinvestment of dividends

$
--


$
98,000Impairment on restructured loan re-classed to allowance for loan loss

$
799,000


$
--Real estate held for sale acquired through foreclosure, net of prior allowance

$
16,877,000


$
--Loan rewritten with same or similar collateral

$
6,981,000


$
1,690,000Write off of interest receivable and related allowance

$
163,000



--Adjustment to note receivable and related allowance

$
--


$
(184,000
)Prepaid amount applied to accounts payable

$
--


$
41,000Unrealized loss on marketable securities - related party

$
(69,000
)

$
(304,000
)
 
 
 
 
 
 
  See review report of Independent Registered Public Accounting Firm.
 The accompanying notes are an integral part of these consolidated statements.
 - 5 -
  
 VESTIN REALTY MORTGAGEII, INC
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 MARCH 31, 2009
 
 (UNAUDITED)
 
 NOTE A — ORGANIZATION
 
 Vestin Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”).  Vestin Realty Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
corporation for the sole purpose of effecting a merger with Fund II.  On March 31, 2006, Fund II merged into VRM II and the members of Fund II received one share of VRM II’s common stock for each membership unit of Fund II.  References in this report to the “Company”, “we”, “us” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.  Because
we were a limited liability company (“LLC”) during the prior periods reflected in this report, we make reference to Fund II’s “members” rather than “stockholders” in reporting our financial results.
 
 We invest in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Management Agreement as “Mortgage Assets”).  We commenced operations in June 2001.
 
 We operate as a real estate investment trust (“REIT”).  We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.  As a REIT, we are required to have a December 31 fiscal year end.
 
 Our manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin Group”), a Delaware corporation.  Michael Shustek, the CEO and director of our manager and CEO, President and a director of us, wholly
owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”) that
has continued the business of brokerage, placement and servicing of real estate loans.  Vestin Originations is a wholly owned subsidiary of Vestin Group.  On September 1, 2007, the servicing of real estate loans was assumed by our manager.
 
 Pursuant to our management agreement, our manager implements our business strategies on a day-to-day basis, manages and provides services to us, and provides similar services to our subsidiaries.  Without limiting the foregoing, our manager performs other services as may be required from time to time for management and other activities
relating to our assets, as our manager shall deem appropriate.  Consequently, our operating results are dependent upon our manager’s ability and performance in managing our operations and servicing our assets.
 
 Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III, LLC (“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned by our manager’s CEO.  These entities
have been formed to invest in real estate loans.
 
 The consolidated financial statements include the accounts of us and our wholly owned taxable REIT subsidiary, TRS II, Inc.  All significant inter-company transactions and balances have been eliminated in consolidation.
 
  See review report of Independent Registered Public Accounting Firm.
 - 6 -
  On June 22, 2007, we completed the issuance of $60.1 million in unsecured trust preferred securities through Vestin II Capital Trust I (“VCT I”), a special purpose business trust.  VCT I, is a Delaware statutory trust.  Our interest in VCT I is accounted for using the equity method and the assets and liabilities
are not consolidated into our financial statements due to our determination that VCT I is a variable interest entity in which we are not the primary beneficiary under Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”).  See Note – Secured Borrowings for additional information.
 
 NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation
 
 The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  Interim
results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with information included in the 2008 annual report filed on Form 10-K.
 
 Management Estimates
 
 The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those estimates.
 
 Cash and Cash Equivalents
 
 Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.
 
 Restricted Cash
 
 On November 7, 2008, we entered into an agreement with Taberna Capital Management, LLC (“Taberna”), in its capacity as collateral manager for certain collateral debt obligation vehicles that are the holders of the Junior Subordinated Notes, providing for an amendment of the tangible net worth covenant (the “First Supplemental
Indenture”).  As of March 31, 2009, we had restricted cash of $5.0 million in the form of letters of credit upon which Taberna is entitled to draw if we default upon our obligation to pay principal and interest on the Junior Subordinated Notes.  The letters of credit may not be subordinated to any of our Senior Debt.  On December 31, 2008, we were not in compliance with the revised tangible net worth covenant and the debt to tangible net worth covenant in the First Supplemental
Indenture.  On March 25, 2009, we entered into a letter agreement with Taberna providing for a waiver of all financial covenants effective December 31, 2008 through June 30, 2009.  In addition, pursuant to the letter agreement we exchanged $20 million of the Junior Subordinated Notes for certain replacement securities, which we acquired for approximately $10 million, in April 2009.  The transaction will reduce our obligation on the Junior Subordinated Notes to approximately $36.3
million, which we expect will facilitate future compliance with financial covenants.  This transaction will result in a net gain of approximately $9 million, net of transaction costs.  In addition, we are to pay additional interest equal to $250,000 per year, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.  The
replacement securities were acquired with funds consisting of $5 million from our operating and financing funds and $5 million from the letters of credit.  For additional information regarding the First Supplemental Indenture see Note I – Junior Subordinated Notes.
 
  See review report of Independent Registered Public Accounting Firm.
 - 7 -
  Revenue Recognition
 
 Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method.  We do not accrue interest income on loans once they are determined to be non-performing.  A loan is non-performing when based on current information and events, it is probable that
we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.  Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction.  Interest is recognized on impaired loans on the cash basis method.
 
 Investments in Real Estate Loans
 
 We may from time to time acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess
capital in investments to maximize the use of our capital.  Selling or buying loans allows us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value.  Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these
transactions, regardless of whether to a related or unrelated party.
 
 Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified
and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates.  Such
appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.
 
 The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructuring, and performing and non-performing
loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.
 
 Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) in accordance with FAS 15 Accounting by Debtor and Creditors for Troubled Debt Restructurings and FAS 114 Accounting
by Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and 15.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.
 
 Allowance for Loan Losses
 
 We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing
economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included as income.
  See review report of Independent Registered Public Accounting Firm.
 - 8 -
  
 Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate
lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
 
 Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that may cause
significant changes in our estimated allowance include, but are not limited to:
 
 ·
Declines in real estate market conditions, which can cause a decrease in expected market value;
 
 ·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
 
 ·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
 
 ·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and
 
 ·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
 
 Real Estate Held For Sale
 
 Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing
foreclosure actions, we seek to identify potential purchasers of such property.  It is not our intent to invest in or own real estate as a long-term investment.  In accordance with Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or Disposal of Long Lived Assets(“FAS 144”), we generally seek to sell properties acquired through foreclosure as quickly as circumstances
permit.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
 
 Management classifies real estate held for sale when the following criteria are met:
 
 ·
Management commits to a plan to sell the properties;
 
 ·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;
 
 ·
An active program to locate a buyer and other actions required to complete a sale have been initiated;
 
 ·
The sale of the property is probable;
 
 ·
The property is being actively marketed for sale at a reasonable price; and
  See review report of Independent Registered Public Accounting Firm.
 - 9 -
  
 ·
Withdrawal or significant modification of the sale is not likely.
 
 Classification of Operating Results from Real Estate Held for Sale
 
 FAS 144 generally requires operating results from long lived assets held for sale to be classified as discontinued operations as a separately stated component of net income.  Our operations related to real estate held for sale are separately identified in the accompanying consolidated statements of income.
 
 Secured Borrowings
 
 Secured borrowings provide an additional source of capital for our lending activity.  Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in.  We do not receive any fees for entering into secured borrowing arrangements; however, we
may receive revenue for any differential of the interest spread, if applicable.  Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings in accordance with Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).
 
 The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari passu basis in certain real estate loans with us and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In the event of borrower
non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.
 
 Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements.  In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid.  Real
estate loan financing under the Participation Agreements are also accounted for as a secured borrowing in accordance with FAS 140.  We do not receive any revenues for entering into secured borrowing arrangements.
 
 Investment in Marketable Securities – Related Party
 
 Investment in marketable securities – related party consists of stock in VRM I.  The securities are stated at fair value as determined by the closing market price as of March 31, 2009.  All securities are classified as available-for-sale under the provisions of FAS 115 – Accounting
for Certain Investments in Debt and Equity Securities (“FAS 115”).
 
 We evaluate our available-for-sale investment for other-than-temporary impairment charges in accordance with Emerging Issues Task Force, or EITF 03-1, The Meaning of Other-Than-Temporary Impairment and it’s Application to Certain Investments.  FAS 115 and EITF 03-1
require us to determine when an investment is considered impaired(i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life), and, if the impairment is other than temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value.
 
 According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary
from case to case.  The following are a few examples of the factors that individually or in combination, indicate that a decline is other than temporary and that a write down of the carrying value is required:
  See review report of Independent Registered Public Accounting Firm.
 - 10 -
  
 ·
The length of the time and the extent to which the market value has been less than cost;
 
 ·
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or
 
 ·
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
 
 Fair Value Disclosures
 
 On January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“FAS 159”).  FAS 159 permits companies to choose to measure certain financial assets and liabilities
at fair value (the “fair value option”).  If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs.  The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value.  At the adoption date, unrealized gains and losses on existing items for which fair value
has been elected are reported as a cumulative adjustment to beginning retained earnings.
 
 We chose not to elect the fair value option for our financial assets and liabilities existing on January 1, 2008, and did not elect the fair value option for financial assets and liabilities transacted during the three months ended March 31, 2009.  Therefore, the adoption of FAS 159 had no impact on our consolidated financial
statements.
 
 On January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements (“FAS 157”), as required for financial assets and liabilities, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements.  In February 2008, the FASB issued FASB Staff Position No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis.  The adoption of FAS 157 for our financial assets and liabilities did not have a material impact on our consolidated financial statements.  We do not expect the adoption of FAS 157 as it
pertains to non-financial assets and liabilities to have a material impact on our consolidated financial statements.
 
 Under FAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various valuation approaches, including quoted
market prices and discounted cash flows.  FAS 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.  Unobservable inputs are inputs that reflect
a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
 
 ·
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
 
 ·
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
  See review report of Independent Registered Public Accounting Firm.
 - 11 -
  
 ·
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.
 
 Basic and Diluted Earnings Per Common Share
 
 Basic earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share, by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except
that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the three months ended March 31, 2009 and 2008.  The following is a computation of the EPS data for the three months ended March 31, 2009 and 2008:
 
 For the Three Months
Ended March 31,2009


2008Net income (loss) to common stockholders

$
(6,407,000
)

$
3,273,000Weighted average number of common shares outstanding during the period


13,788,859



14,872,330Basic and diluted earnings (loss) per weighted average common share

$
(0.46
)

$
0.22
 
 Common Stock Dividends
 
 During June 2008, our Board of Directors decided to suspend the payment of dividends.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income.  Our Board of Directors will closely monitor our operating results in order to determine when dividends
should be reinstated.
 
 Treasury Stock
 
 On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any
shares.  Subject to applicable securities laws, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2009, we had purchased 1,198,573 shares as treasury stock through the repurchase program noted above.  These
shares are carried on our books at cost totaling approximately $5.7 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of March 31, 2009, we had a total of 1,212,323 shares of treasury stock carried on our books at cost totaling approximately $5.7
million.  As of December 31, 2008, we had a total of 1,198,573 shares of treasury stock carried on our books at cost totaling approximately $5.7 million.
 
 Segments
 
 We operate as one business segment.
 
  See review report of Independent Registered Public Accounting Firm.
 - 12 -
  Principles of Consolidation
 
 The accompanying consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary.  All significant intercompany balances and transactions have been eliminated in consolidation.  Our
interest in VCT I (see Note I – Junior Subordinated Notes) is accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that VCT I is a variable interest entity in which we are not the primary beneficiary under FIN 46R.
 
 Income Taxes
 
 We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject
to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met.  Our taxable income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write downs on real estate
held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.  Certain assets of ours are held in a taxable REIT subsidiary (“TRS”).  The income of a TRS is subject to federal and state income taxes.  The net income tax provision for the three months ended March 31, 2009 and 2008, was approximately zero.
 
 NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial instruments with concentration of credit and market risk include cash, marketable securities related party and loans secured by deeds of trust.
 
 We maintain cash deposit accounts and certificates of deposit, which at times may exceed federally insured limits.  We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk related to cash deposits based on management review of these financial institutions.  As
of March 31, 2009 and December 31, 2008, we had approximately $10.3 million and $11.4 million, respectively, in excess of the federally insured limits.
 
 As of March 31, 2009, 44%, 18%, 13% and 9% of our loans were in Nevada, Arizona, California and Hawaii, respectively, compared to 40%, 27%, 11% and 8%, at December 31, 2008, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has
had a material adverse effect on us.
 
 At March 31, 2009, the aggregate amount of loans to our three largest borrowers represented approximately 18% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon and Hawaii, with first lien positions, interest rates between 12% and 14%, with an aggregate outstanding
balance of approximately $33.3 million.  As of March 31, 2009, our three largest loans were considered non-performing, see Note D – Investments in Real Estate Loans.  At December 31, 2008, the aggregate amount of loans to our three largest borrowers represented approximately 15% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon and Hawaii, with first
lien positions, interest rates between 12% and 14%, with an aggregate outstanding balance of approximately $33.3 million.  As of December 31, 2008, our three largest loans were considered non-performing.  We have a significant concentration of credit risk with our largest borrowers.  Any additional defaults could have a material adverse effect on us.
 
 The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  As the economy continues to weaken and credit continues to become more difficult to obtain,
many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.
  See review report of Independent Registered Public Accounting Firm.
 - 13 -
  
 Common Guarantors
 
 As of March 31, 2009, three loans totaling approximately $18.3 million, representing approximately 9.7% of our portfolio’s total value, had a common guarantor.  All three loans were considered non-performing as of March 31, 2009.  As of December 31, 2008, we had five loans totaling approximately $23.7 million,
representing approximately 10.5% of our portfolio’s total value, with the same guarantor.  All five loans were considered non-performing as of December 31, 2008.
 
 As of March 31, 2009, four loans totaling approximately $19.8 million, representing approximately 10.5% of our portfolio’s total value, had a common guarantor.  All four loans were considered performing as of March 31, 2009.  As of December 31, 2008, we had three loans totaling approximately $17.9 million, representing
approximately 7.9% of our portfolio’s total value, with the same common guarantor.  All three loans were considered performing as of December 31, 2008.
 
 As of March 31, 2009, six loans totaling approximately $23.9 million, representing approximately 13.0% of our portfolio’s total value, had a common guarantor; of these six loans, three loans were related to our secured borrowings of approximately $10.6 million, including approximately $0.7 million in interest reserves.  These
loans were considered performing as of March 31, 2009.  As of December 31, 2008, we had six loans totaling approximately $23.6 million, representing approximately 10.5% of our portfolio’s total value, with the same common guarantor; of these six loans, three loans were related to our secured borrowings of approximately $10.6 million, including approximately $0.7 million in interest reserves.  One of the six loans, totaling approximately $7.2 million, was considered non-performing as
of December 31, 2008.  During the three months ended March 31, 2009, these loans were modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly, ranging from 3.0% to 4.25%, beginning January 25, 2009, and accrue in amounts ranging from of 3.75% to 5.0% payable at the maturity of the loan for five of the six loans.  The remaining loan’s interest payments are payable quarterly at 3.0% beginning March 25, 2009, and accrued
at 5.0% payable at the maturity of the loan.  Deferred interest on these loans will be recorded as interest income as cash is collected.
 
 For additional information regarding the above non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans.
 
 NOTE D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of March 31, 2009 and December 31, 2008, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.
 
 In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At March 31, 2009, we had approximately $47.5 million in investments in real estate loans that had interest reserves where the total outstanding principal due
to our co-lenders and us was approximately $53.2 million.  These loans had interest reserves of approximately $4.9 million, of which our portion was approximately $4.2 million.  As of March 31, 2009, two of our loans, totaling approximately $18.8 million, which had interest reserves, were considered non-performing.  These loans’ interest reserves, totaling approximately $3.8 million, of which our portion was $3.2 million, have been suspended as of March 31, 2009, and we no
longer draw monthly interest income from them.  At December 31, 2008, we had approximately $52.7 million in investments in real estate loans that had interest reserves where the total outstanding principal due to our co-lenders and us was approximately $60.0 million.  These loans had interest reserves of approximately $5.7 million, of which our portion was approximately $4.9 million.  As of December 31, 2008, two of these loans, totaling approximately $18.8 million, which had interest
reserves, were considered non-performing.  These loans’ interest reserves, totaling approximately $3.8 million, of which our portion was $3.2 million, were suspended as of December 31, 2008.
 
  See review report of Independent Registered Public Accounting Firm.
 - 14 -
  During the three month ended March 31, 2009, the following transactions took place regarding our loan portfolio:
 
 ·
On January 7, 2009, we sold the Preston Hollow Assisted Living, L.P. loan to an unaffiliated third party for approximately $1.1 million, which approximated our book value of the loan, net of allowances.  No gain or loss was recognized.
 
 ·
On February 11, 2009, we sold the Trinity Theo, LLC loan to an unaffiliated third party for approximately $1.6 million.  The sale resulted in no gain or loss.
 
 ·
On March 13, 2009, we refinanced the Rancho Santalina, LLC loan with the same collateral totaling approximately $7.0 million.
 
 ·
On March 23, 2008, we, VRM I and Fund III, sold the Peoria 180, LLC loan to an unaffiliated third party for $3.0 million, of which our portion was approximately $2.5 million, which approximated our book value of the loan, net of allowances.  The sale resulted in no gain or loss.
 
 As of March 31, 2009, we had five real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 6% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.
 
 Loan Portfolio
 
 Investments in real estate loans as of March 31, 2009, were as follows:
 
 Loan Type

Number of Loans


Balance *


Weighted Average Interest Rate


Portfolio Percentage


Current Weighted Average Loan-To-Value, Net of Allowance for Loan LossesAcquisition and Development


--


$
--



--%



--%



--%Commercial


20



106,384,000



13.04%



56.16%



68.63%Construction


6



26,056,000



8.97%



13.76%



91.31%Land


8



56,979,000



11.52%



30.08%



74.58%Total


34


$
189,419,000



12.02%



100.00%



74.14%
 
 Investments in real estate loans as of December 31, 2008, were as follows:
 
 Loan Type

Number of Loans


Balance *


Weighted Average Interest Rate


Portfolio Percentage


Current Weighted Average Loan-To-Value, Net of Allowance for Loan LossesAcquisition and Development


1


$
13,000,000



13.00%



5.78%



92.00%Commercial


20



107,456,000



12.64%



47.75%



81.09%Construction


7



27,612,000



10.55%



12.27%



103.26%Land


11



76,974,000



11.87%



34.20%



78.59%Total


39


$
225,042,000



12.14%



100.00%



84.01%
 
 *
Please see Balance Sheet Reconciliation below.
  See review report of Independent Registered Public Accounting Firm.
 - 15 -
  
 The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of March 31, 2009 and December 31, 2008, was 12.59% and 12.42%, respectively.  Please
see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.
 
 Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.
 
 The following is a schedule of priority of real estate loans as of March 31, 2009 and December 31, 2008:
 
 Loan Type

Number of Loans


March 31, 2009 Balance*


Portfolio
Percentage


Number of Loans


December 31, 2008 Balance*


Portfolio
PercentageFirst deeds of trust


25


$
150,672,000



79.54%



31


$
188,219,000



83.64%Second deeds of trust


9



38,747,000



20.46%



8



36,823,000



16.36%Total


34


$
189,419,000



100.00%



39


$
225,042,000



100.00%
 
 *
Please see Balance Sheet Reconciliation below.
 
 The following is a schedule of contractual maturities of investments in real estate loans as of March 31, 2009:
 
 Non-performing and past due loans (a)

$
107,244,000April 2009 – June 2009


--July 2009 – September 2009


6,980,000October 2009 – December 2009


15,597,000January 2010 – March 2010


7,431,000April 2010 – June 2010


22,575,000July 2010 – September 2010


--October 2010 – December 2010


14,486,000January 2011 – March 2011


15,106,000Thereafter


--Total

$
189,419,000
 
 (a)
Amounts include the balance of non-performing loans and loans that have been extended subsequent to March 31, 2009.
 
 The following is a schedule by geographic location of investments in real estate loans as of March 31, 2009 and December 31, 2008:
 
 March 31, 2009 Balance *


Portfolio Percentage


December 31, 2008 Balance *


Portfolio PercentageArizona

$
33,471,000



17.67%


$
59,628,000



26.50%California


24,748,000



13.07%



24,298,000



10.80%Hawaii


17,291,000



9.13%



17,291,000



7.68%Nevada


83,502,000



44.08%



89,917,000



39.95%Oklahoma


2,155,000



1.14%



2,155,000



0.96%Oregon


16,048,000



8.47%



16,048,000



7.13%Texas


12,204,000



6.44%



13,904,000



6.18%Washington


--



--%



1,801,000



0.80%Total

$
189,419,000



100.00%


$
225,042,000



100.00%
 
  See review report of Independent Registered Public Accounting Firm.
 - 16 -
  
 *
Please see Balance Sheet Reconciliation below.
 
 Balance Sheet Reconciliation
 
 The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.
 
 March 31, 2009
Balance (a)


December 31, 2008
Balance (a)Balance per loan portfolio

$
189,419,000


$
225,042,000Less:Allowance for loan losses (b)


(51,332,000
)


(78,208,000
)Balance per consolidated balance sheet

$
138,087,000


$
146,834,000
 
 (a)
As of December 31, 2008, the 2503 Panorama, LLC loan and the VBP Partners, LLC loan included an impairment reserve, applied to the loan balance, of approximately $0.3 million and $0.5 million, respectively.  During March 2009, the impairment reserve for these two loans was reclassified to their existing allowance for loan losses.
 
 (b)
Please refer to Specific Reserve Allowance below.
 
 Non-Performing Loans
 
 As of March 31, 2009, we had 15 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our
books at a value of approximately $63.7 million, net of allowance for loan losses of approximately $43.4 million, which does not include the allowances of approximately $7.9 million relating to performing loans as of March 31, 2009.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.  At March 31, 2009, the following loans were non-performing:
 
 ·
RightStar, Inc. (Part I & Part II), are loans secured by a lien on the business and virtually all of the property of RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii with an outstanding balance of approximately $32.3 million of which our portion is approximately $17.3 million ($8.2 million for Part I and $9.1 million for Part II).  As of March 31, 2009, this loan has been considered
non-performing for the last 60 months.  The lenders have commenced a judicial foreclosure on the loans, Part I and Part II.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has provided a specific allowance of approximately $14.4 million, of which our portion is approximately $9.8 million.  See Note O – Legal Matters Involving The Company for further information.
 
 ·
Monterrey Associates, L.P. is a non-performing loan, which was originally secured by various real estate collateral, including a 248 unit apartment complex in Oklahoma City, Oklahoma.  The outstanding balance on the loan is approximately $4.4 million, of which our portion is approximately $2.2 million.  As of March 31, 2009, this loan has been considered non-performing for the last 31 months.  Our
manager brought foreclosure and other legal proceedings to protect our interest in the collateral.  The borrowers have alleged that our lien on the Oklahoma City apartment complex was extinguished as a result of our foreclosure of a Deed of Trust and sale of other collateral located in Kansas City, Missouri securing the non-performing loan.  We filed a Petition to set aside the sale of the Missouri collateral, which the court dismissed and was affirmed on appeal.  We are vigorously
contesting Monterrey’s position in Oklahoma; however, we cannot determine at this time the outcome of these legal proceedings.  As of March 31, 2009, based on our manager’s evaluation, our manager has provided a specific allowance for the full amount of the loan totaling approximately $4.4 million, of which our portion is approximately $2.2 million.
  See review report of Independent Registered Public Accounting Firm.
 - 17 -
  
 ·
3900, LLC, is a second position loan that provided bridge financing for an approximate 7.66 acre neighborhood retail center, located in Tempe, Arizona.  The loan is secured by a second position lien, junior to a first position lien in the amount of $6.0 million.  In addition, the loan is guaranteed by principals of the borrower.  The outstanding balance of the loan is approximately $3.3
million.  On April 5, 2008, this loan was considered to be in default due to the default of the Redwood Place, LLC loan, as a result of cross-default provisions.  Our manager has commenced foreclosure, and is proceeding with legal action to enforce the personal guarantees.  On October 17, 2008, the borrower filed for bankruptcy protection.  A settlement agreement was negotiated with the borrower and guarantors; however, they are currently in default under the settlement
agreement.  We intend to proceed against them; however, it cannot be determined at this time how much, if any, will be collected.  As of March 31, 2009, this loan has been considered non-performing for the last 11 months, and based on our manager’s evaluation and an updated appraisal, our manager has provided a specific allowance for the full amount of the loan totaling approximately $3.3 million.
 
 ·
WCP Warm Springs Holdings 1, LLC is a loan to provide financing for 10 acres of vacant land located in Las Vegas, NV.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $8.5 million, of which our portion is approximately $5.1 million.  As of March 31, 2009, this loan has been considered non-performing
for the last 10 months.  On October 29, 2008, the borrower filed for bankruptcy protection.  Our manager was successful in lifting the automatic stay, and has commenced both foreclosure proceedings and litigation to enforce the personal guarantees.  On May 7, 2009, we, VRM I and Fund III foreclosed on this property and classified it as real estate held for sale.  As of March 31, 2009, based
on our manager’s evaluation and an updated appraisal, our manager has provided a specific allowance of approximately $4.1 million, of which our portion is approximately $2.5 million.
 
 ·
Babuski, LLC is a loan to provide financing for 9.23 acres of land in Las Vegas, NV.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $9.5 million, of which our portion is approximately $7.7 million.  The borrowers defaulted and the loan became non-performing.  On October 16, 2008,
we, VRM I and Fund III entered into a forbearance agreement to postpone the foreclosure date on the property.  The guarantor paid $250,000 for cost and interest due related to the loan.  As of April 30, 2009, the borrower paid an additional $100,000 in cost and interest due, of which our portion was $61,000.  As of March 31, 2009, this loan has been considered non-performing for the last 10 months.  Our manager has commenced foreclosure proceedings, and is proceeding with
legal action to enforce the personal guarantees.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal.  No specific allowance was deemed necessary as of March 31, 2009.
 
 ·
South Bay Villas, LLC is a construction loan to provide financing for a 48 unit condominium building which is part of the Desert Sands Condominiums Phase 2 located in Laughlin, NV.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $6.0 million, of which our portion is approximately $5.8 million.  As
of March 31, 2009, this loan has been considered non-performing for the last 10 months.  A settlement agreement has been negotiated with the borrower, wherein they will be responsible for the completion of the property at the borrower’s expense, with the lenders to receive 100% of the net sales proceeds from the sale of condominiums units until the loan has been repaid in full.  As of March 31, 2009, based on our manager’s evaluation of completion costs for the project and an updated
appraisal, our manager has provided a specific allowance of approximately $1.2 million, of which our portion is approximately $1.2 million.
  See review report of Independent Registered Public Accounting Firm.
 - 18 -
  
 ·
Barger Road Cottages, LLC is a commercial loan to provide financing for the Alpine Meadow Retirement Community, consisting of 23 cottage units with garages, community building and surplus land, located in Eugene, OR.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $6.0 million, of which our portion is
$46,000.  As of March 31, 2009, this loan has been considered non-performing for the last 10 months.  Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees.  On January 7, 2009, the main principal of the borrower filed for bankruptcy protection and has filed a motion to enjoin us from proceeding to foreclose.  This motion was denied.  On March 9, 2009, the United States District Court for the
District of Oregon, entered its Order Granting Preliminary Injunction and Appointing Receiver, which has the effect of enjoining us from proceeding with our foreclosure.  We have filed a motion to lift the injunction and allow us to proceed with our foreclosure.  We are opposing the motion and we are confident that we will prevail in our position.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has concluded that the current value
of the underlying collateral should be sufficient to protect us from loss of principal.  No specific allowance was deemed necessary as of March 31, 2009.
 
 ·
Lohrey Investments, LLC is a commercial loan to provide financing for income producing property located in Gilroy, CA.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is $16.0 million, of which our portion is $11.6 million.  As of March 31, 2009, this loan has been considered non-performing for
the last nine months.  Our manager has commenced foreclosure proceedings, and has been awarded a default judgment against the guarantors for approximately $21.3 million, although it cannot be determined at this time how much, if any, can be recovered from the guarantors.  During October 2008, the tenant, who is a related party to the borrower, filed for bankruptcy protection.  On January 6, 2009 the borrower filed for bankruptcy protection and on February 11, 2009, the guarantors
filed for bankruptcy protection.  The property is not currently generating any income.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal obtained in May 2009, our manager has provided a specific allowance of approximately $9.0 million, of which our portion is approximately $6.5 million.
 
 ·
Cascadia Canyon, LLC is a commercial loan to provide financing for 12.39 acres of land plus the SUMCO North Campus and SUMCO South Campus located in Salem, OR.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is approximately $19.5 million, of which our portion is approximately $16.0 million.  As
of March 31, 2009, this loan has been considered non-performing for the last eight months.  Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees.  As of March 31, 2009, based on our manager’s evaluation, an updated appraisal and current sales price, our manager has provided a specific allowance totaling approximately $10.3 million, of which our portion is approximately $8.4 million.
 
 ·
WHM Copper Mountain Investments, LLC is a land loan to provide financing for various parcels of land within Copper Mountain Ranch Master Planned Community totaling approximately 2,330 acres lying within sections 15, 16, 21, 28 & 33 of the Copper Mountain Ranch Master Planned Community located in Casa Grande, AZ.  The loan is secured by a first lien on the property and is guaranteed by the principals
of the borrower.  The outstanding balance on the loan is $22.3 million, of which our portion is approximately $15.6 million.  As of March 31, 2009, this loan has been considered non-performing for the last six months.  On October 31, 2008, the borrower filed for bankruptcy protection.  Our manager has commenced legal action to enforce the personal guarantees.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has
provided a specific allowance of approximately $4.9 million, of which our portion is approximately $4.1 million.
  See review report of Independent Registered Public Accounting Firm.
 - 19 -
  
 ·
Meadowlark Assisted Living Community, LLC is a commercial loan to provide financing for a 74 bed Assisted Living/Memory Care residential facility, located on approximately 4.35 acres of land, located in the Yreka, CA.  The loan is secured by a second lien on the property, with a preexisting first lien of approximately $3.5 million, and is guaranteed by the principals of the borrower.  The outstanding
balance on the second lien loan is approximately $3.8 million, of which our portion is approximately $2.2 million.  As of March 31, 2009, this loan has been considered non-performing for the last six months.  Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees.  As of March 31, 2009, based on our manager’s evaluation and foreclosure of the first lien position, our manager has provided a specific allowance
for the full amount of the loan totaling approximately $3.8 million, of which our portion is approximately $2.2 million.
  ·
Essex Real Estate Partners, LLC is a participation in a commercial loan on five parcels in the Inspirada Town Center Project 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 principal balance on the loan is $3.0 million.  As of March 31, 2009, this loan has been considered non-performing
for the last three months.  The Company entered into an intercreditor agreement with another lender wherein the lender agreed to repurchase the Company’s participation interest by February 1, 2008.  The lender defaulted on its repurchase obligation and the Manager commenced legal action to enforce the intercreditor agreement.  As of March 31, 2009, based on our manager’s evaluation, our manager has concluded that the current value of the loan should be sufficient to protect
us from loss of principal.  No specific allowance was deemed necessary as of March 31, 2009.
  ·
Spectrum Town Center Property, LLC is a commercial loan to provide bridge financing for a shadow anchored multi-tenant retail property located in Gilbert, AZ.  The loan is secured by a second lien on the property, with a pre-existing first lien of $20.0 million, and is guaranteed by the principals of the borrower.  The outstanding balance on the second lien loan is approximately $14.0 million,
of which our portion is approximately $12.6 million.  As of March 31, 2009, this loan has been considered non-performing for the last month.  Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees.  As of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal.  No
specific allowance was deemed necessary as of March 31, 2009.
 
 ·
2503 Panorama, LLC is a commercial loan for a 5,700 square foot penthouse located on the 25th floor of the Panorama Towers I, located in Las Vegas, NV.  The loan is secured by a first lien on the property and is guaranteed by the principals of the borrower.  The outstanding balance on the loan is approximately $6.2
million, of which our portion is approximately $4.7 million.  As of March 31, 2009, this loan has been non-performing for the last month.  Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees.  During March 2009, the impairment reserve for this loan, totaling approximately $0.4 million, of which our portion was approximately $0.3 million, was reclassified to its existing allowance for loan losses.  As
of March 31, 2009, based on our manager’s evaluation and an updated appraisal, our manager has provided a specific allowance of $4.4 million, of which our portion is approximately $3.3 million.
 See review report of Independent Registered Public Accounting Firm.
 - 20 -
 The following schedule summarizes the non-performing loans as of March 31, 2009:
 
 Loan Name

Balance at
March 31, 2009


Allowance for
Loan Loss *


Net Balance at
March 31, 2009

Maturity Date

Number of Months
Non-Performing

Percentage of Total
Loan BalanceRightStar, Inc. (Part I & Part II)

$
17,291,000


$
(9,757,000
)

$
7,534,000

3/31/2004

60

45% of Part I
65% of Part IIMonterrey Associates, L.P.


2,155,000



(2,155,000
)


--

9/1/2006

31

49%3900 LLC


3,276,000



(3,276,000
)


--

6/10/2008

11

100%WCP Warm Springs Holdings 1, LLC


5,114,000



(2,457,000
)


2,657,000

5/10/2008

10

60%Babuski, LLC


7,707,000



--



7,707,000

6/17/2008

10

81%South Bay Villas, LLC


5,800,000



(1,188,000
)


4,612,000

5/6/2008

10

97%Barger Road Cottages, LLC


46,000



--



46,000

12/5/2008

10

1%Lohrey Investments, LLC


11,600,000



(6,497,000
)


5,103,000

10/29/2008

9

73%Cascadia Canyon, LLC


16,002,000



(8,434,000
)


7,568,000

2/12/2009

8

82%WHM Copper Mountain Investments, LLC


15,555,000



(4,093,000
)


11,462,000

12/11/2009

6

83%Meadowlark Assisted Living Community, LLC


2,217,000



(2,217,000
)


--

8/7/2009

6

59%Essex Real Estate Partners, LLC


3,000,000



--



3,000,000

12/1/2008

3

100%Spectrum Town Center Property, LLC


12,600,000



--



12,600,000

4/30/2009

1

90%2503 Panorama, LLC


4,740,000



(3,343,000
)


1,397,000

2/2/2010

1

76%$
107,103,000


$
(43,417,000
)

$
63,686,000
 
 *
Please refer to Specific Reserve Allowancesbelow.
 
 Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Management’s evaluation may include, but is not limited to, appraisals, real estate broker comps, the borrower’s current financial standing and other market conditions.  Additions
to the allowance for loan losses are made by charges to the provision for loan losses.  Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed.  As of March 31, 2009, we have provided specific reserves, related to 11 non-performing loans and 7 performing loans, of approximately $51.3 million.  Our manager evaluated the loans and, based on current estimates regarding the value of the remaining underlying
collateral or the borrowers’ ability to pay, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of underlying real estate could decline.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded in future periods.
 
 Because any decision regarding the allowance for loan losses reflects a judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect.  In such event, actual losses may exceed (or be less than) the amount of any reserve.  To the extent that we experience losses greater
than the amount of our reserves, we may incur a charge to our earnings that will adversely affect our operating results and the amount of any dividends payable to our stockholders.
 
 Specific Reserve Allowances
 
 The following table is a roll-forward of the allowance for loan losses for the three months ended March 31, 2009.  Following the table is a discussion of the status of each identified loan and the reasons for the recording of additional reserves during the three months ended March 31, 2009.
  See review report of Independent Registered Public Accounting Firm.
 - 21 -
  
 Description

Balance at
December 31, 2008


Specific Reserve Allocation


Sales &
Transfers to REO


Balance at
March 31, 2009RightStar, Inc. (Part I & Part II)

$
9,757,000


$
--


$
--


$
9,757,000Monterrey Associates, L.P.


2,155,000



--



--



2,155,000Peoria 180, LLC


12,337,000



--



(12,337,000
)


--Terravita, LLC (a)


377,000



--



--



377,000Redwood Place, LLC (b)


5,284,000



--



(5,284,000
)


--2503 Panorama, LLC


3,051,000



292,000



--



3,343,0003900, LLC


3,276,000



--



--



3,276,000VBP, LLC (a)


3,430,000



508,000



--



3,938,000WCP Warm Springs Holdings 1, LLC


2,457,000



--



--



2,457,000Bright Haven Builders, LLC (b)


628,000



--



(628,000
)


--Lohrey Investments, LLC


5,223,000



1,274,000



--



6,497,000South Bay Villas, LLC


1,188,000



--



--



1,188,000World Capital La Piazza, LLC (b)


6,836,000



--



(6,836,000
)


--Meadowlark Assisted Living Community, LLC


2,217,000



--



--



2,217,000WHM Copper Mountain Investments, LLC


4,093,000



--



--



4,093,000Preston Hollow Assisted Living, L.P.


2,501,000



--



(2,501,000
)


--World Capital Durango Alpha (2) (b)


1,364,000



--



(1,364,000
)


--Wolfpack Properties, LLC (a)


1,082,000



--



--



1,082,000ExecuSuite Properties, LLC (a)


528,000



--



--



528,000SE Property Investments, LLC (a)


407,000



--



--



407,000Devonshire, LLC (a)


1,493,000



--



--



1,493,000Building A, LLC & Building C, LLC (a)


90,000



--



--



90,000Cascadia Canyon, LLC


8,434,000



--



--



8,434,000Total

$
78,208,000


$
2,074,000


$
(28,950,000
)

$
51,332,000
 
 (a)
As of March 31, 2009, these loans were considered performing.
 
 (b)
During the three months ended March 31, 2009, these properties were foreclosed upon and classified as real estate held for sale.
 
 RightStar Loan Allowance – RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of 2004.  The lenders commenced a judicial foreclosure on the loans, part I and part II, which is secured by a lien on the business and virtually all of the property
of RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii.  The aggregate principal balance of the loan is approximately $32.3 million.  The loans, part I and part II, are owned as follows:
  See review report of Independent Registered Public Accounting Firm.
 - 22 -
  
 Senior Principal Amount
(Part II)


Junior Principal Amount
(Part I)


TotalVRM I

$
4,892,000


$
4,415,000


$
9,307,000VRM II


9,108,000



8,183,000



17,291,000Vestin Mortgage


--



5,657,000



5,657,000Total

$
14,000,000


$
18,255,000


$
32,255,000
 
 The loans are subject to an inter-creditor agreement which states the order of priority for any payments received are disbursed as follows:
 
 ·
First to reimburse collection and foreclosure expenses advanced by the lenders;
 
 ·
Second to pay past due interest on the Senior Principal Amount (Part II) (including default rate interest);
 
 ·
Third to pay past due interest on the Junior Principal Amount (Part I) (including default rate interest);
 
 ·
Fourth to pay Senior Principal; and
 
 ·
Fifth to pay Junior Principal.
 
 We and VRM I acquired the senior portion of the loan on July 14, 2005 for approximately $15.5 million of which our portion was approximately $10.1 million (including accrued interest of approximately $1.0 million).  We and VRM I acquired this balance to expedite the foreclosure process and remove the prior senior lender from
its priority position, which had the potential to impair the value we may receive at the time the property is sold.  In exchange for assistance in expediting the foreclosure process, the lenders jointly agreed to release the guarantors from their guaranty of the loan.  In March 2007, Vestin Mortgage purchased the junior principal amount owned by the unrelated third party for $500,000.  Vestin Mortgage has agreed that any monies it receives as a result of payment of the notes or proceeds
from a foreclosure sale are limited to its $500,000 investment in the notes plus expenses.
 
 In early 2006, the State of Hawaii notified the lenders of a potential statutory trust fund deficiency, estimated to be between $20 million and $30 million and claimed that this balance has priority over all lenders.  The State of Hawaii is pursuing approximately $30 million in recoveries from the former trustees, prior owners
of the property and other parties.  The proceeds from these recoveries, if any, will be used to fund the potential deficiency in the statutory trust.  The lenders dispute the amount and priority of this deficit.
 
 In April 2006, the lenders filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the
pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii.  The State of Hawaii responded by filing allegations against Vestin Mortgage and us alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to us.
 
 On May 9, 2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated announced that an arrangement had been reached to auction the RightStar assets.  On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale will be allocated in part to VRM I,
Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have received offers and are currently requesting, entertaining, and reviewing bids on the RightStar properties.  To
date the auction has not been successful.  Vestin and the State are in the process of negotiating a new agreement that would permit the foreclosure to proceed.  Agreements in principle have been reached; however, an agreement has not yet been signed.
  See review report of Independent Registered Public Accounting Firm.
 - 23 -
  
 During December 2007, we, VRM I, and the statutory trust fund received a settlement totaling $2.8 million, of which approximately $2.0 million was applied against outstanding trust obligations.  Approximately $0.8 million, of which our portion was approximately $0.5 million, was applied towards the allowance for doubtful accounts
on this loan and was recorded as a reimbursement of legal fees totaling approximately $0.4 million.
 
 In June 2008, the State of Hawaii allowed us and the other lenders to put in place a new management team that replaced the previous receiver.
 
 We have evaluated the estimated value of the underlying collateral and the expected cost and length of litigation.  Based on this estimate we have maintained our total specific reserve allowance for loss.  The reserve allowance includes approximately $1.0 million for estimated litigation fees and expenses that we have
incurred in enforcing our rights against the underlying collateral, which were fully consumed as of December 31, 2007.  We will continue to evaluate our position in the RightStar loan as the situation progresses.  As of March 31, 2009, our specific reserve allowance on the RightStar loans totaled approximately $9.8 million.
 
 Monterrey Associates, L.P. – As of March 31, 2009, our manager has provided a specific reserve allowance for the outstanding balance of the loan, related to a non-performing commercial loan on a 248-unit apartment complex in Oklahoma City, OK, of approximately $4.4 million,
of which our portion was approximately $2.2 million.  This specific reserve allowance was based on our manager’s evaluation and an updated appraisal of the underlying collateral for this loan, obtained by our manager during January 2008.  Our manager will continue to evaluate our position in the loan.
 
 Terravita, LLC – During the year ended December 31, 2007, our manager provided a specific reserve allowance, related to a commercial loan on a 100 unit condominium/apartment project in North Las Vegas, NV, totaling approximately $0.7 million, of which our portion was approximately
$0.4 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan and evaluation of the borrower, obtained by our manager during January 2008.  During February 2008, the loans on the Terravita LLC property, with first and second positions were rewritten into one loan, which included a principal pay down of $6.6 million, with a second position totaling approximately $3.1 million of which our portion is approximately $1.7 million.  The
terms of the rewritten loan remain the same as those of the original loans and the loan was performing as required as of March 31, 2009.  Our manager will continue to evaluate our position in the loan.
 
 2503 Panorama, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan for a 5,700 square foot penthouse located on the 25th floor of Panorama Towers I in Las Vegas, NV, of approximately $4.4 million, of which our
portion is approximately $3.3 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during February 2009.  During March 2009, we reclassified an impairment reserve of approximately $0.3 million to the specific reserve allowance.  Our manager will continue to evaluate our position in the loan.
 
 3900, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance for the outstanding balance of the loan, related to a non-performing loan on a 7.66 acre neighborhood retail center, located in Tempe, AZ, of approximately $3.3 million.  This
specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2008.  Our manager will continue to evaluate our position in the loan.
 
 VBP Partners, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a performing loan for the development of 4.14 acres of land located in Las Vegas, NV, of approximately $4.3 million, of which our portion is approximately $3.9 million.  In
addition, during the three months ended March 31, 2009, this loan was modified, effectively changing the status of the loan from non-performing to performing.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during January 2009.  During March 2009, we reclassified an impairment reserve of approximately $0.5 million to the specific reserve allowance.  Our manager will continue to evaluate our position
in the loan.
  See review report of Independent Registered Public Accounting Firm.
 - 24 -
  
 WCP Warm Springs Holdings 1, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on 10 acres of vacant land located in Las Vegas, NV, of approximately $4.1 million, of which our portion is approximately $2.5 million.  This
specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during September 2008.  Our manager will continue to evaluate our position in the loan.
 
 Lohrey Investments, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on income producing property located in Gilroy, CA, of approximately $9.0 million, of which our portion is approximately $6.5 million.  This
specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during May 2009.  Our manager will continue to evaluate our position in the loan.
 
 South Bay Villas, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on a 48 unit condominium building part of the Desert Sands Condominiums Phase 2 located in Laughlin, NV, of approximately $1.2 million, of which
our portion is approximately $1.2 million.  This specific reserve allowance was based on completion costs of the property evaluated by our manager during October 2008 and updated appraisal, obtained by our manager during October 2008.  Our manager will continue to evaluate our position in the loan.
 
 Meadowlark Assisted Living Community, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance for the outstanding balance of the loan, which is a second lien position on a 74 bed Assisted Living/Memory Care residential facility, located on approximately
4.35 acres of land located in Yreka, CA, of approximately $3.8 million, of which our portion is approximately $2.2 million.  This specific reserve allowance was based on our manager’s evaluation, which included the foreclosure of the property by the first lien holder.  Our manager will continue to evaluate our position in the loan.
 
 WHM Copper Mountain Investments, LLC – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on approximately 2,330 acres lying within sections 15, 16, 21, 28 & 33 of the Copper Mountain Ranch Master Planned Community
located in Casa Grande, AZ, of approximately $4.9 million, of which our portion is approximately $4.1 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during January 2009.  Our manager will continue to evaluate our position in the loan.
 
 Casciadia Canyon, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to an non-performing loan on 12.39 acres of land plus the SUMCO North Campus and SUMCO South Campus located in Salem, OR, of approximately $10.3 million, of which our
portion is approximately $8.4 million.  This specific reserve allowance was based on the current sales price of the underlying collateral for this loan.  Our manager will continue to evaluate our position in the loan.
 
 Wolfpack Properties, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a performing loan on a 22,000 SqFt Class A Office Building "B" of Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of approximately
$1.2 million, of which our portion is approximately $1.1 million.  During the three months ended March 31, 2009, this loan was modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during
January 2009.  Our manager will continue to evaluate our position in the loan.
 
  See review report of Independent Registered Public Accounting Firm.
 - 25 -
  ExecuSuite Properties, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a performing loan on 22,000 SqFt Class A Office Building "D" of Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of approximately
$0.6 million, of which our portion is approximately $0.5 million.  During the three months ended March 31, 2009, this loan was modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during
January 2009.  Our manager will continue to evaluate our position in the loan.
 
 SE Property Investments, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a performing loan on 22,000 SqFt Class A Office Building "E" of Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of approximately
$0.4 million, of which our portion is approximately $0.4 million.  During the three months ended March 31, 2009, this loan was modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during
January 2009.  Our manager will continue to evaluate our position in the loan.
 
 Devonshire, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a performing loan on 22,000 SqFt Class A Office Building "F" of Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of approximately $1.6 million,
of which our portion is approximately $1.5 million.  During the three months ended March 31, 2009, this loan was modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly at 4.25%, beginning January 25, 2009, and accrued at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during January 2009.  Our
manager will continue to evaluate our position in the loan.
 
 Building A, LLC & Building C, LLC, – As of March 31, 2009, our manager has provided a specific reserve allowance, related to a second lien position performing loan on 3.18 acres of land lying within the Village Business Park and a 45,622 SqFt Office Building "C" of Village
Business Park located on 1.48 acres of land located in Las Vegas, NV, of $106,000, of which our portion is $90,000.  During the three months ended March 31, 2009, this loan was modified, whereby the interest rate was reduced to 8% starting in January 2009.  Interest payments are payable monthly at 3.0%, beginning January 25, 2009, and accrued at 5.0% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during January 2009.  Our manager will continue to evaluate our position in the loan.
 
 As of March 31, 2009, our manager had granted extensions on 16 loans, totaling approximately $121.4 million, of which our portion was approximately $85.9 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent.  Such extensions are generally provided on loans where the original
term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  However, our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest
and/or principal.  Subsequent to their extension, 7 of the 16 loans have become non-performing.  The loans, which became non-performing after their extension, had a total principal amount at March 31, 2009, of approximately $70.9 million, of which our portion is approximately $53.1 million.
 
 Asset Quality and Loan Reserves
 
 Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.
 
  See review report of Independent Registered Public Accounting Firm.
 - 26 -
  The conclusion that a real estate loan is uncollectible or that collectibility is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather,
all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters:
 
 ·
Prevailing economic conditions;
 
 ·
Historical experience;
 
 ·
The nature and volume of the loan portfolio;
 
 ·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
 
 ·
Evaluation of industry trends; and
 
 ·
Estimated net realizable value of any underlying collateral in relation to the loan amount.
 
 Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan losses.  The following is a breakdown of allowance for loan losses related to performing
and non-performing loans as of March 31, 2009 and December 31, 2008:
 
 As of March 31, 2009Balance


Allowance for loan losses *


Balance, net of allowanceNon-performing loans – no related allowance

$
23,353,000


$
-


$
23,353,000Non-performing loans – related allowance


83,750,000



(43,417,000
)


40,333,000Subtotal nonperforming loans


107,103,000



(43,417,000
)


63,686,000Performing loans – no related allowance


56,184,000



-



56,184,000Performing loans – related allowance


26,132,000



(7,915,000
)


18,217,000Subtotal performing loans


82,316,000



(7,915,000
)


74,401,000Total

$
189,419,000


$
(51,332,000
)

$
138,087,000
 
 *
Please refer to Specific Reserve Allowancesabove.
 
 As of December 31, 2008Balance


Allowance for loan losses


Balance, net of allowanceNon-performing loans – no related allowance

$
9,230,000


$
--


$
9,230,000Non-performing loans – related allowance


135,631,000



(71,180,000
)


64,451,000Subtotal nonperforming loans


144,861,000



(71,180,000
)


73,681,000Performing loans – no related allowance


57,666,000



--



57,666,000Performing loans – related allowance


22,515,000



(7,028,000
)


15,487,000Subtotal performing loans


80,181,000



(7,028,000
)


73,153,000Total

$
225,042,000


$
(78,208,000
)

$
146,834,000
 
  See review report of Independent Registered Public Accounting Firm.
 - 27 -
  Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal or interest.  However, such estimates could change or the value of the underlying real estate could decline.  Our
manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.
 
 NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of March 31, 2009, we owned 533,675 shares of VRM I’s common stock, representing approximately 8.09% of their total outstanding common stock.
 
 In accordance with FAS 115 and FSP FAS 115-1 and FAS 124-1, we evaluated our investment in VRM I’s common stock and determined there was an other-than-temporary impairment as of September 30, 2008.  Based on this evaluation we impaired our investment to its fair value, as of September 30, 2008, to $2.25 per share.
 
 As of March 31, 2009, our manager evaluated the near-term prospects of VRM I in relation to the severity and duration of the unrealized loss since September 30, 2008.  Based on that evaluation and our ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value,
we do not consider our investment in VRM I to be other-than-temporarily impaired at March 31, 2009.  We will continue to evaluate our investment in marketable securities on a quarterly basis.
 
 NOTE F — REAL ESTATE HELD FOR SALE
 
 At March 31, 2009, we held 15 properties with a total carrying value of approximately $32.1 million, which were acquired through foreclosure and recorded as investments in real estate held for sale.  One of these properties generated net income from rentals or other sources during the three months ended March 31, 2009 totaling
$51,000.  Expenses incurred during the three months ended March 31, 2009, related to our real estate held for sale totaled approximately $2.7 million.  These expenses included approximately $2.5 million in write downs on real estate held for sale.  The summary below includes our percentage of ownership in each of the properties.  Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value based on
appraisals and knowledge of local market conditions.  It is not our intent to invest in or own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  Set forth below is a roll-forward of investments in real estate held for sale during the three months ended March 31, 2009:
  See review report of Independent Registered Public Accounting Firm.
 - 28 -
  
 Description
Date Acquired

Percentage of Ownership


Balance at
December 31, 2008


Acquisitions


Write Downs


Net Cash Proceeds on Sales


Balance at
March 31, 2009Marshall's Vista, LTD (1)
8/3/2004


100%


$
2,760,000


$
--


$
--


$
--


$
2,760,000Rio Vista Nevada, LLC(2)
12/21/2006


86%



1,945,000



--



--



--



1,945,000Pirates Lake, LTD (3)
2/5/2008


48%



887,000



--



--



--



887,000Brawley CA 122, LLC(4)
5/1/2008


33%



308,000



--



(123,000
)


--



185,000V & M Homes at the Palms, Inc. (5)
7/15/2008


39%



455,000



--



--



--



455,000The Orleans at Mesquite Estates, LLC (6)
8/8/2008


100%



828,000



--



--



--



828,000MRPE, LLC (7)
8/11/2008


72%



4,617,000



--



--



--



4,617,000The Laurels at Mesquite Estates, LLC(8)
8/11/2008


100%



920,000



--



--



--



920,000Jeffrey's Court, LLC(9)
9/3/2008


61%



2,229,000



--



--



--



2,229,000Cliff Shadows Properties, LLC(10)
9/8/2008


95%



8,104,000



--



--



(6,739,000
)


1,365,000The Sycamore Glenn at Mesquite Estates, LLC(11)
9/8/2008


100%



1,380,000



--



--



--



1,380,000Redwood Place, LLC (12)
1/16/2009


76%



--



6,057,000



(1,525,000
)


--



4,532,000Bright Haven Builders, LLC (13)
3/6/2009


82%



--



1,173,000



--



--



1,173,000World Capital La Piazza, LLC (14)
3/30/2009


100%



--



6,164,000



--



--



6,164,000World Capital Durango Alpha (15)
3/30/2009


68%



--



3,482,000



(830,000
)


--



2,652,000Total






$
24,433,000


$
16,876,000


$
(2,478,000
)

$
(6,739,000
)

$
32,092,000
 
 (1)
Marshall's Vista, LTD – During the three months ended March 31, 2009, a former potential buyer informed us that they were not in a position to close and that they could no longer continue to make extension payments and the sale was cancelled.  The property is currently listed for
sale at approximately $3.0 million, which approximates the total book value, plus selling costs, for this property.  No write-down was necessary during the three months ended March 31, 2009.
 
 (2)
Rio Vista Nevada, LLC – During December 2006, we, VRM I and Fund III acquired through foreclosure proceedings 480 residential building lots and two single family dwellings in Rio Vista Village Subdivision in Cathedral City, CA.  During the three months ended March 31, 2009, our manager
evaluated the carrying value of real estate acquired through foreclosure located in Cathedral City, California.  Based on our manager’s evaluation and an updated appraisal obtained during February 2009, no write-down was necessary during the three months ended March 31, 2009.
 
 (3)
Pirates Lake, LTD – During February 2008, we, VRM I and Fund III acquired through foreclosure proceedings approximately 46.75 acres of land in Galveston, TX.  During the three months ended March 31, 2009, our manager has evaluated the carrying value of the property and based on an
updated appraisal obtained in October 2008 and the current sales price, no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at $1.8 million, which approximates the total book value, plus selling costs, for this property held by us, VRM I and Fund III.
 
 (4)
Brawley CA 122, LLC – During May 2008, we, VRM I, and Fund III acquired through foreclosure proceedings a 25 acre proposed 122 single-family subdivision to be known as River Drive Subdivision in Brawley, CA.  Our manager has evaluated the carrying value of the property and based on
the current sales price, the property was written down approximately $0.3 million, of which our portion was approximately $0.1 million during the three months ended March 31, 2009.  The property is currently under contract for sale at $600,000, with an estimated closing date of June 12, 2009.
  See review report of Independent Registered Public Accounting Firm.
 - 29 -
  
 (5)
V & M Homes at the Palms, Inc. – During July 2008, we, VRM I, and Fund III acquired through foreclosure proceedings an 80 acre parcel of land in Florence, AZ.  Our manager has evaluated the carrying value of the property and based on an updated appraisal obtained in February 2009,
no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at $1.5 million.
 
 (6)
The Orleans at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 21.7 gross acres of Mesquite Estates Planned Unit Development with 65 "paper" lots, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property and based
on its estimate, updated appraisal obtained in January 2009, and current sales price, no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at approximately $0.9 million, which approximates the total book value, plus selling costs, for this property.
 
 (7)
MRPE, LLC – During August 2008, we, VRM I, and Fund III acquired through foreclosure proceedings 132.03 acres of land within the Wolf Creek Estates Master Planned Community, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property and based on its analysis,
updated appraisal obtained in January 2009, and current sales price, no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at approximately $7.0 million, which approximates the total book value, plus selling costs, for this property held by us, VRM I and Fund III.
 
 (8)
The Laurels at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 26.5 gross acres of Mesquite Estates Planned Unit Development with 60 "paper" lots, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property and based
on its estimate, updated appraisal obtained in August 2008, and current sales price, no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at approximately $1.0 million, which approximates the total book value, plus selling costs, for this property.
 
 (9)
Jeffrey's Court, LLC – During September 2008, we, VRM I, and Fund III acquired through foreclosure proceedings 4.92 acres of land to be developed into 119 condominium units in Las Vegas, NV.  Our manager has evaluated the carrying value of the property and based on its analysis, updated
appraisal obtained in January 2009, and current sales price, no write-down was necessary during the three months ended March 31, 2009.
 
 (10)
Cliff Shadows Properties, LLC – During September 2008, we, VRM I, and Fund III acquired through foreclosure proceedings a 106 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las Vegas, NV.  Our manager has evaluated the carrying value of the property and based on
an updated appraisal obtained in September 2008 and the current purchase agreement, no write-down was necessary during the three months ended March 31, 2009.  During January 2009, our manager received a sales agreement to purchase the property for approximately $9.6 million, of which our portion would be approximately $9.1 million.  On March 6, 2009, we, VRM I, and Fund III completed the sale of 98 units, with the remaining units pending final escrow.
 
 (11)
The Sycamore Glenn at Mesquite Estates, LLC – During September 2008, we acquired through foreclosure proceedings 32.3 gross acres of Mesquite Estates Planned Unit Development with 180 "paper" lots, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property
and based on its estimate, no write-down was necessary during the three months ended March 31, 2009.  The property is currently listed for sale at approximately $1.5 million, which approximates the total book value, plus selling costs, for this property.
 
 (12)
Redwood Place, LLC – On January 16, 2009, we, VRM I, and Fund III, acquired through foreclosure proceedings a 186-unit apartment complex located in Phoenix, Arizona.  During the three months ended March 31, 2009, this property generated net income of $51,000.  Our manager
has evaluated the carrying value of the property and based on the current purchase agreement, the property was written down approximately $2.0 million, of which our portion was approximately $1.5 million during the three months ended March 31, 2009.
  See review report of Independent Registered Public Accounting Firm.
 - 30 -
  
 (13)
Bright Haven Builders, LLC – On March 6, 2009, we and, VRM I, acquired through foreclosure proceedings 10 single family residents (on lots 74 and 169-177), in various stages of completion, located within Cherry Meadows Subdivision located in Yelm, WA.  During April 2009, our manager
received a sales agreement to purchase one of the single family homes for $235,000.  The remaining homes are currently listed for sale.  Our manager has evaluated the carrying value of the property and based on its estimate, no write-down was necessary during the three months ended March 31, 2009.
 
 (14)
World Capital La Piazza, LLC – On March 30, 2009, we acquired through foreclosure proceedings 8.44 net acres of land located in Henderson, NV.  The property is currently under contract to sell for approximately $6.1 million, with carry back financing to be provided in the amount of
$3.1 million.  Our manager has evaluated the carrying value of the property and based on its estimate, no write-down was necessary during the three months ended March 31, 2009.
 
 (15)
World Capital Durango Alpha – On March 30, 2009, we, VRM I, and Fund III acquired through foreclosure proceedings 9.27 acres of land located in Las Vegas, NV.  The property is currently under contract to sell for approximately $4.3 million.  Our manager has evaluated the
carrying value of the property and based on its estimate, the property was written down approximately $1.2 million, of which our portion was approximately $0.8 million during the three months ended March 31, 2009.
 
 NOTE G — RELATED PARTY TRANSACTIONS
 
 From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down.  No gain or loss is recorded on these transactions, as it is not our intent
to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.
 
 Transactions with the Manager
 
 Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the three months ended March 31, 2009 and 2008, were approximately
$274,000, for each period.
 
 As of March 31, 2009, and 2008, our manager owned 92,699 of our common shares.  For the three months ended March 31, 2009, we did not declare or pay any dividends.  For the three months ended March 31, 2008, we declared $29,000 in dividends payable to our manager based on the number of shares our manager held on the
dividend record dates.
 
 On March 6, 2009, we, VRM I, and Fund III completed the sale of 98 of the 106 Cliff Shadows Properties, LLC units, to an unrelated third party, with the remaining units pending final escrow.  In accordance with our management agreement, we, VRM I and Fund III paid our manager an administrative fee of $282,000, shared pro-rata
among us, VRM I and Fund III.
 
 As of March 31, 2009, we had receivables from our manager of $47,000.  As of December 31, 2008, we owed our manager $623,000, primarily related to loan extension fees.
 
 Transactions with Other Related Parties
 
 As of March 31, 2009 and March 31, 2008, we owned 533,675 common shares of VRM I, representing approximately 8.09% and 7.76%, respectively, of their total outstanding common stock.  For the three months ended March 31, 2009 and 2008 we recognized $0 and $44,000, respectively, in dividend income from VRM I based on the number of
shares we held on the dividend record dates.
  See review report of Independent Registered Public Accounting Firm.
 - 31 -
  
 As of March 31, 2009 and March 31, 2008, VRM I owned 225,134 of our common shares, representing approximately 1.63% and 1.51%, respectively, of our total outstanding common stock.  For the three months ended March 31, 2009 and 2008, we declared $0 and $72,000, respectively, in dividends payable to VRM I based on the number of
shares VRM I held on the dividend record dates.
 
 During the three months ended March 31, 2008, we sold approximately $0.5 million in real estate loans to VRM I.  No gain or loss resulted from these transactions.  There were no similar transactions during the three months ended March 31, 2009.
 
 As of March 31, 2009, we had receivables from VRM I of $197,000.  As of December 31, 2008, we had receivables from VRM I of $92,000
 
 As of March 31, 2009 and March 31, 2008, Fund III owned 114,117 of our common shares, representing approximately 0.83% and 0.77%, respectively, of our total outstanding common stock.  For the three months ended March 31, 2009 and 2008, we declared $0 and $36,000, respectively, in dividends payable to Fund III based on the number
of shares Fund III held on the dividend record dates.
 
 As of March 31, 2009, we had receivables from Fund III of $11,000.  As of December 31, 2008, we had receivables from Fund III of $9,000.
 
 During the three months ended March 31, 2009 and 2008, we incurred $133,000 and $27,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in which Tthe Secretary of Vestin Group has an equity ownership interest in the law firm.
 
 On March 23, 2009, our board of directors authorized us to enter into a consulting agreement with the former COO of the Manager to assist us in the repurchase of the Junior Subordinated Notes.  The consulting fees paid will be up to three and half percent of the discounted amount of the repurchase.
 
 NOTE H — NOTES RECEIVABLE
 
 During October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada of which our portion of the net cash proceeds was approximately $5.8 million.  We originally sold this property under a 100% seller financing arrangement.  The borrowers then sold the property to an unrelated third party that resulted
in a payoff of the note and also allowed us to record the sale and remove the asset from real estate held for sale – seller financed.  In addition, during September 2004, we received a promissory note from the guarantors of the loan in the amount of $440,000 in exchange for a release of their personal guarantees.  Since payments on the note did not begin for 18 months from the date of the note, we discounted the face value of the note to $328,000, which is based on a discount rate of
8% as of that date.  As of March 31, 2009, we have received $104,000 in principal payments.  Payments will be recognized as income when received.  The balance of $336,000 was fully reserved as of March 31, 2009.
 
 During March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for approximately $5.5 million of which our share of the proceeds were approximately $3.8 million, which resulted in a loss of approximately $0.8 million.  In addition, during June 2005, we and VRM I entered into a settlement agreement with the guarantors
of the loan in the amount of $2.0 million in exchange for a release of their personal guarantees, of which our share was approximately $1.4 million.  The balance is secured by a second deed of trust, with a first installment of $100,000 due in July 2005 and monthly interest only payments of 5% on $1.1 million from July 2005 through July 2008, at which time the entire balance is due.  As of March 31, 2009, we have received $616,000 in principal payments.  Payments will be recognized
as income when received.  The balance of $745,000 was fully reserved as of March 31, 2009.
  See review report of Independent Registered Public Accounting Firm.
 - 32 -
  During 2006, we and VRM I entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on.  Our portion was approximately $1.3 million.  The promissory note is payable in seven annual
installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013.  As of March 31, 2009, we had received $2,000 in principal payments.  Payments will be recognized as income when received.  The balance of approximately $1.3 million was fully reserved as of March 31, 2009.
 
 NOTE I — JUNIOR SUBORDINATED NOTES
 
 On June 22, 2007, we completed the issuance of $60.1 million in unsecured trust preferred securities through the special purpose business trust, VCT I to Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding LLC.  These securities have a fixed interest rate equal to 8.75% through July 2012, and thereafter
are subject to a variable rate equal to LIBOR plus 3.5% per annum, resetting quarterly.  The securities mature on July 30, 2020 and may be called at par by us at any time.  We incurred approximately $2.3 million in financing costs relating to the notes.  These costs are being amortized to interest expense over the term of the notes.  We are obligated to pay the trust preferred securities with respect to distributions and amounts payable upon liquidation, redemption or repayment.
 
 VCT I issued $100,000 of common securities, representing 100% of the voting common stock of VCT I to us.  VCT I used the proceeds from the sale of the trust preferred securities and the common securities to purchase our Junior Subordinated Notes.  The terms of the Junior Subordinated Notes match the terms of the trust
preferred securities.  The notes are subordinated and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations.
 
 The Junior Subordinated Notes require quarterly interest distributions beginning July 30, 2007.  For the three months ended March 31, 2009 and 2008, interest expense on the Junior Subordinated Notes totaled approximately $1.2 million and $1.3 million, respectively.  As of March 31, 2009, the principal balance outstanding
was approximately $56.4 million, net of notes repurchased by us.
 
 Our interest in VCT I is accounted for using the equity method and the assets and liabilities of VCT I are not consolidated into our financial statements, in accordance with FIN 46R.  Interest on the Junior Subordinated Notes is included in interest expense on our consolidated income statement while the Junior Subordinated Notes
are presented as a separate item on our consolidated balance sheet.
 
 On November 7, 2008, we entered into an agreement (the “First Supplemental Indenture”) with Taberna Capital Management, LLC (“Taberna”), in its capacity as collateral manager for certain collateral debt obligation vehicles that are the holders of the Junior Subordinated Notes, providing for an amendment of the tangible
net worth covenant.
 
 The First Supplemental Indenture provides as follows (defined terms refer to the definitions in the indenture):
 
 •
The tangible net worth covenant was changed from not less than $225 million to not less than the lesser of $150 million or 2.5 times the then outstanding principal balance of the Junior Subordinated Notes.
 
 •
The EBITDA covenant was changed from 2.5 times Interest Expense to 1.5 times Interest Expense, provided that, for the quarter ending June 30, 2009, the requirement will be 1.2 times Interest Expense for the four quarter period ending on such date.
 
 •
The restriction on the Company redeeming notes at par prior to July 30, 2012 were removed and no redemption premium will be applied to any redemptions.
 
 •
We were required to post a $5,000,000 letter of credit that can be drawn to pay principal and interest on the Junior Subordinated Notes if an Event of Default has occurred.  The letters of credit may not be subordinated to any of our Senior Debt.  During November 2008, we posted the entire $5,000,000 letter of credit.
  See review report of Independent Registered Public Accounting Firm.
 - 33 -
  
 •
The notice and cure provisions in the indenture were changed from 30 days or 45 days to 15 days.
 
 •
Taberna was granted expanded rights to examine our books and records.
 
 •
We agreed to reimburse Taberna’s fees related to the First Supplemental Indenture in an amount not to exceed $50,000.
 
 On December 31, 2008, we were not in compliance with the revised tangible net worth covenant and the debt to tangible net worth covenant.  On March 25, 2009, we entered into a letter agreement with Taberna providing for a waiver of all financial covenants effective December 31, 2008 through June 30, 2009.  In addition,
pursuant to the letter agreement we exchanged $20 million of the Junior Subordinated Notes for certain replacement securities, which we acquired for approximately $10 million, in April 2009.  The transaction will reduce our obligation on the Junior Subordinated Notes to approximately $36.3 million, which we expect will facilitate future compliance with financial covenants.  This transaction will result in a net gain of approximately $9 million, net of transaction costs.  In addition,
we are to pay additional interest equal to $250,000 per year, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.  The replacement securities were acquired with funds consisting of $5 million from our operating and financing funds and $5 million from the letters of credit.  In addition, we are required
to pay additional interest equal to $250,000 per year on the Junior Subordinated Notes, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.
 
 NOTE J— SECURED BORROWINGS
 
 Secured borrowings provide an additional source of capital for our lending activity.  Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in.  We do not receive any fees for entering into secured borrowing arrangements; however, we
may receive revenue in any differential of the interest spread, if applicable.  Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings in accordance with Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari passu basis in certain real estate loans with us and/or VRM I and/or Fund III (collectively, the “Lead Lenders”).  In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.
 
 Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements.  In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid.  Real
estate loan financing under the Participation Agreements are also accounted for as a secured borrowing in accordance with FAS 140.  We do not receive any revenues for entering into secured borrowings arrangements.
 
 During June 2008, we, our manager, and Vestin Originations entered into an intercreditor agreement with an unrelated third party related to the funding of six real estate loans.  (See exhibit 10.11 Intercreditor Agreement  under the Exhibit Index included in Part II – Other Information, Item 6 Exhibits of this
Report Form 10-Q).  The participation interest is at 11% on the outstanding balance.  We incurred approximately $0.9 million in finance costs related to the secured borrowings, these costs are being amortized to interest expense over the term of the agreements.  As of March 31, 2009, and December 31, 2008, we had $10.6 million in funds, including approximately $0.7 million in interest reserves, used under Inter-creditor agreements.
 
  See review report of Independent Registered Public Accounting Firm.
 - 34 -
  NOTE K — NOTE PAYABLE
 
 In May 2008, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.9%.  The agreement required a down payment of $38,000 and nine monthly payments of $23,000 beginning on May 27, 2008.  As of March 31, 2009, the outstanding balance of the note was paid in full.  In
April 2009, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.9%.  The agreement required a down payment of $45,000 and nine monthly payments of $28,000 beginning on May 27, 2009.
 
 On March 25, 2009, we entered into a promissory note for $3.0 million payable on or before May 8, 2009, with an exit fee of $0.6 million due on or before May 26, 2009.  We subsequently used these funds to purchase a portion of the Junior Subordinated Notes.
 
 NOTE L — FAIR VALUE
 
 As of March 31, 2009, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs and assets and liabilities utilizing Level 3 inputs included investments in real estate loans, secured borrowings and Junior Subordinated
Notes payable.
 
 To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the
inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, FAS 157 requires that an asset or liability be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.
 
 Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing
the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.
 
 FAS 157 requires that the valuation techniques used by us be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our
Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.
 
 The following table presents the valuation of our financial assets and liabilities as of March 31, 2009, measured at fair value on a recurring basis by the input levels prescribed by FAS 157:
  See review report of Independent Registered Public Accounting Firm.
 - 35 -
  
 Quoted Prices in Active Markets For Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Balance at
3/31/2009AssetsInvestment in marketable securities - related party

$
427,000


$
--


$
--


$
427,000Investment in real estate loans

$
--


$
--


$
135,727,000


$
135,727,000Assets under secured borrowings

$
--


$
--


$
10,600,000


$
10,600,000LiabilitiesSecured borrowings

$
--


$
--


$
9,907,000


$
9,907,000Junior subordinated notes payable

$
--


$
--


$
28,600,000


$
28,600,000
 
 The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2008 to March 31, 2009:
 
 AssetsInvestment in
real estate loans


Assets under secured borrowingsBalance on December 31, 2008

$
145,959,000


$
10,600,000Change in temporary valuation adjustment included in net lossIncrease in allowance for loan losses


(2,074,000
)


--Change in impairment on restructured loans


800,000



--Purchase and additions of assetsTransfer of real estate loans to real estate held for sale


(30,987,000
)


--Transfer of allowance on real estate loans to real estate held for sale


14,111,000



--New mortgage loans and mortgage loans bought


22,734,000



--Sales, pay downs and reduction of assetsCollections of principal and sales of investment in real estate loans


(28,169,000
)


--Reduction of allowance for loan loss related to sale of investment in real estate loan


14,838,000



--Temporary change in estimated fair value based on future cash flows


(1,485,000
)


--Transfer to Level 1


--



--Transfer to Level 2


--



--Balance on March 31, 2009, net of temporary valuation adjustment

$
135,727,000


$
10,600,000
 
  See review report of Independent Registered Public Accounting Firm.
 - 36 -
  
 LiabilitiesSecured borrowings


Junior subordinated notes payableBalance on December 31, 2008

$
9,907,000


$
28,600,000Temporary change in estimated fair value


--



--Transfer to Level 1


--



--Transfer to Level 2


--



--Balance on March 31, 2009, net of temporary valuation adjustment

$
9,907,000


$
28,600,000
 
 NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"), to address challenges in estimating fair value when the volume and level of activity for an asset or liability
have significantly decreased.  This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement
date under current market conditions.  This FSP is effective for interim and annual reporting periods ending after June 15, 2009.  We have concluded that FSP FAS 157-4 will not have an impact on our consolidated financial statements upon adoption.
 
 In April 2009, the FASB issued FSP FAS 115-2 and 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP FAS 115-2 and 124-2").  This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure
of other-than-temporary impairments on debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  This FSP is effective for interim and annual reporting periods ending after June 15, 2009.  We have concluded that FSP FAS 115-2 and 124-2 will not have an impact on our disclosures upon adoption.
 
 In April 2009, the FASB issued FSP FAS 107-1 and ABP 28-1, "Interim Disclosure about Fair Value of Financial Instruments" ("FSP FAS 107-1 and ABP 28-1").  This FSP amends FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments, " to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial statements.  This FSP also amends APB Opinion No. 28, "Interim Financial Reporting," to require those disclosures in summarized financial information at interim reporting periods.  This FSP is effective for interim reporting periods ending after June 15, 2009.  We have concluded that FSP FAS 107-1 and ABP 28-1 will not have a material impact on our consolidated financial statements upon adoption.
 
 NOTE N — LEGAL MATTERS INVOLVING THE MANAGER
 
 The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I and Fund III.  We fully cooperated during the course of the investigation.  On September 27, 2006, the investigation was resolved through
the entry of an Administrative Order by the Commission (the “Order”).  Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.
 
  See review report of Independent Registered Public Accounting Firm.
 - 37 -
  In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC.  The Respondents consented to the entry of a cease and desist
order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007.  In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities.  We are not a party to the Order.
 
 On November 21, 2005, Desert Land filed a complaint in the state District Court of Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which complaint is substantially similar to a complaint previously filed by Desert Land in the United States District Court, which complaint was dismissed by the United States Court of
Appeals for the Ninth Circuit, which dismissal was upheld when the United States Supreme Court denied Desert Land’s Writ of Certiorari.  The action is based upon allegations that Del Mar Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans arranged by them in 1999, prior to the formation of Fund II.  On March 6, 2006, Desert Land amended the state court complaint to name VRM I.  Desert Land alleges that one or more of the defendants have transferred assets
to other entities without receiving reasonable value therefore; alleges plaintiffs are informed and believe that defendants have made such transfers with the actual intent to hinder, delay or defraud Desert Land; that such transfers made the transferor insolvent and that sometime between February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that purpose.
 
 The state court complaint further alleges that Desert Land is entitled to void such transfers and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to enjoin defendants from further disposition of assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and
expenses in connection with the action, and Mr. Shustek has guaranteed the indemnification.  In December 2008, this lawsuit was settled.  The settlement has no effect on us.
 
 VRM I and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who allege, among other things, that they were wrongfully denied appraisal rights in connection with the merger of Fund I into Vestin Realty Mortgage I, Inc.  The
court certified a class of all former Fund I unit holders who voted against the merger of Fund I into Vestin Realty Mortgage I, Inc.  The trial is currently scheduled to begin on June 19, 2009.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of VRM I’s management agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.
 
 VRM I, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I.  The action seeks monetary damages, punitive damages, and rescission.  The trial is currently scheduled to begin on September 6, 2010.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The
terms of VRM I’s management agreement and Fund I’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.
 
 In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities.  Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously.  Other than
the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.
 
  See review report of Independent Registered Public Accounting Firm.
 - 38 -
  NOTE O — LEGAL MATTERS INVOLVING THE COMPANY
 
 In April 2006, the lenders filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the
pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii.  The State of Hawaii responded by filing allegations against Vestin Mortgage and us alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to us.
 
 On May 9, 2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated announced that an arrangement had been reached to auction the RightStar assets.  On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale will be allocated in part to VRM I, Vestin
Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have received offers and are currently requesting, entertaining, and reviewing bids on the RightStar properties.  To
date the auction has not been successful.  Vestin and the State are in the process of negotiating a new agreement that would permit the foreclosure to proceed.  Agreements in principal have been reached; however, an agreement has not yet been signed.
 
 We and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who allege, among other things, that they were wrongfully denied appraisal rights in connection with the merger of Fund II into Vestin Realty Mortgage II, Inc.  The
court certified a class of all former Fund II unit holders who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc., and a subclass of all class members who were over the age of 60 and Nevada residents at the time of the merger.  The trial is currently scheduled to begin on June 19, 2009.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms
of our management agreement and Fund II’s Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.
 
 We, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”),in District Court for Clark County, Nevada.  The
Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II.  The action seeks monetary damages, punitive damages and rescission.  The trial is currently scheduled to begin on September 6, 2010.  The Defendants believe that the allegations are without merit and that they
have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of our management agreement and Fund II’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.  We, Vestin Mortgage, Inc. and Michael Shustek have entered into confidential settlement agreements with individual plaintiffs who collectively held approximately 10% of the
total shares at issue in the action.  In addition, four individual plaintiffs have voluntarily withdrawn their claims against us, Vestin Mortgage, Inc. and Michael Shustek with prejudice.
 
 In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities.  We believe we have meritorious defenses to each of these actions and intend to defend them vigorously.  Other than the matters described above,
we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our net income in any particular period.
 
  See review report of Independent Registered Public Accounting Firm.
 - 39 -
  NOTE P — DIVIDEND REQUIREMENT
 
 To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regards to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax,
from foreclosure property, minus (2) the sum of certain specified items of non-cash income over 5% of our REIT taxable income.  All dividends will be made at the discretion of our board of directors and will depend on our earnings, both tax and GAAP, financial condition, maintenance of REIT status and such other factors as the board of directors deems relevant.
 
 Our Board of Directors decided to suspend the payment of dividends during June 2008.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income.  Our Board of Directors will closely monitor our operating results in order to determine when dividends
should be reinstated.
 
 NOTE Q — SUBSEQUENT EVENTS
 
 During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC, a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and Fund III.  Our CFO and the Controller of our manager became employees of Strategix Solutions.  Strategix
Solutions is managed by LL Bradford and Company ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom were previously officers of our manager.  The same persons who previously provided accounting and financial reporting services to us as
employees of our manager, will continue to perform such duties as employees of Strategix Solutions.
 
 We are raising funds through the issuance of promissory notes secured by certain of our real estate owned properties.
  On May 7, 2009, we, VRM I and Fund III foreclosed on the WCP Warm Spring Holding 1, LLC loan and classified the property as real estate held for sale.
  See review report of Independent Registered Public Accounting Firm.
 - 40 -
  
 REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
   To the Board of Directors and Stockholders of Vestin Realty Mortgage II, Inc.
 
 We have reviewed the accompanying consolidated balance sheet of Vestin Realty Mortgage II, Inc. and its subsidiary as of March 31, 2009, and the related consolidated statements of operations for the three-month periods ended March 31, 2009 and 2008, the consolidated statements of equity and other comprehensive loss for the three-month period
ended March 31, 2009, and the consolidated statements of cash flows for the three-month periods ended March 31, 2009 and 2008. All information included in these consolidated financial statements is the representation of the management of Vestin Realty Mortgage II, Inc.
 
 We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less
in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole.  Accordingly, we do not express such an opinion.
 
 Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
 
 We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vestin Realty Mortgage II, Inc. as of December 31, 2008 and the related consolidated statements of operations, equity and other comprehensive income (loss) and cash flows for the
year ended December 31, 2008.  We have also audited the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2008, and in our report dated March 26, 2009, we expressed an unqualified opinion on those consolidated financial statements and an unqualified opinion on the effectiveness of internal control over financial reporting. The consolidated financial statements referred to above are not presented herein. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
 
 
 /s/ Moore Stephens Wurth Frazer and Torbet, LLP
 
 
 Orange, California
 May 7, 2009
  
  - 41 -
  ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 The following is a financial review and analysis of our financial condition and results of operations for the three months ended March 31, 2009 and 2008.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere
in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2008.
 
 FORWARD-LOOKING STATEMENTS
 
 Certain statements in this report, including, without limitation, matters discussed under this Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes,
and other detailed information included elsewhere in this report on Form 10-Q.  We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical fact are forward-looking statements.  Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,”
“intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements.  These forward-looking statements are based on
our current beliefs, intentions and expectations.  These statements are not guarantees or indicative of future performance.  Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Part II Item 1A Risk Factors of this Quarterly Report on Form 10-Q and in our other securities
filings with the Securities and Exchange Commission (“SEC”).  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties.  Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation.  As a result, such estimates are not guarantees of the future value of the
collateral.  The forward-looking statements contained in this report are made only as of the date hereof.  We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
 RESULTS OF OPERATIONS
 
 OVERVIEW
 
 Our primary business objective is to generate income while preserving principal by investing in real estate loans.  We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders.  The loan underwriting
standards utilized by our manager and Vestin Originations are less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we seek a higher interest rate
and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.
 
 Our operating results are affected primarily by: (i) the amount of capital we have to invest in real estate loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of non-performing
assets, foreclosures and related loan losses which we may experience.
 
  - 42 -
  Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets.  This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations.  As of March 31, 2009, we had 15 loans considered non-performing
(i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $63.7 million, net of allowance for loan losses of approximately $43.4 million.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.
 
 Non-performing assets, net of allowance for loan losses, totaled approximately $95.8 million or 49% of our total assets as of March 31, 2009, as compared to approximately $98.1 million or 49% of our total assets as of December 31, 2008.  At March 31, 2009, non-performing assets consisted of approximately $32.1 million of real
estate held for sale and approximately $63.7 million of non-performing loans, net of allowance for loan losses.  One of the real estate held for sale properties generated net income from rentals totaling $51,000, during the three months ended March 31, 2009.  See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Consolidated
Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 We believe that the significant increase in the level of our non-performing assets is a direct result of the deterioration of the economy and credit markets.  As the economy has weakened and credit has become more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to
complete their projects, obtain takeout financing or have been otherwise adversely impacted.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures.  Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.
 
 We expect that the weakness in the credit markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future.  This may result in a further increase in defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may
be required to restructure loans.  This increase in loan defaults has materially affected our operating results and led to the suspension of dividends to our stockholders.  For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated
FinancialStatements of this Quarterly Report on Form 10-Q.
 
 As of March 31, 2009, our loan-to-value ratio was 74.3%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional marked increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,”
will have a material adverse effect upon our financial condition and operating results.  The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.
 
 As of March 31, 2009, we have provided a specific reserve allowance for 11 non-performing loans and 7 performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note
D – Investments in Real Estate Loans in the notes to our consolidated financial statements in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans.
 
 As of March 31, 2009, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon and Texas.
 
  - 43 -
  SUMMARY OF FINANCIAL RESULTS
 
 Comparison of Operating Results for the three months ended March 31, 2009 to the three months ended March 31, 2008.
 
 For the Three Months
Ended March 31,2009


2008Total revenues

$
2,148,000


$
7,156,000Total operating expenses


5,813,000



2,103,000Non-operating income (loss)


(57,000
)


185,000Loss from real estate held for sale


(2,685,000
)


(1,965,000
)Income (loss) before provision for income taxes


(6,407,000
)


3,273,000Provision for income taxes


--



--Net income (loss)

$
(6,407,000
)

$
3,273,000Basic and diluted earnings per common share

$
(0.46
)

$
0.22Dividends declared per common share

$
--


$
0.32Weighted average common shares


13,788,859



14,872,330Weighted average term of outstanding loans, including extensions

23 months


19 months
 
 Total Revenues:  For the three months ended March 31, 2009, total revenues were approximately $2.1 million compared to approximately $7.2 million for the same period in 2008, a decrease of approximately $5.1 million or 70% compared to the same period in 2008 due in significant
part to the following factor:
 
 ·
Interest income from investments in real estate loans was approximately $2.1 million during the three months ended March 31, 2009 compared to approximately $7.1 million during the same period in 2008.  Our revenue is dependent upon the balance of our investment in real estate loans and our ability to collect the interest earned on these loans.  As
of March 31, 2009, our investment in real estate loans was approximately $189.4 million.  As of March 31, 2008, our investment in real estate loans was approximately $302.3 million.  The decline in interest income is largely attributable to the increase in non-performing assets, which has reduced the amount of cash available for investment in new loans and the increase of real estate owned properties acquired through the foreclosures of our investments in real estate loans.  As of
March 31, 2009, approximately $91.5 million of our loans were non-performing compared to approximately $58.2 million as of March 31, 2008.  For additional information on our loan portfolio, see Note D – Investment Real Estate Loans of the Notes to the Consolidated Financial Statements of this Quarterly Report Form 10-Q.
 
 Total Operating Expenses:  For the three months ended March 31, 2009, total operating expenses were approximately $5.8 million compared to approximately $2.1 million during the three months ended March 31, 2008, an increase of approximately $3.7 million or 176%.  Expenses
were primarily affected by the following factors:
 
 ·
During the three months ended March 31, 2009, we recognized a provision for loan losses totaling approximately $1.3 million, compared to none for the same period in 2007.  See “Specific Loan Allowance” in Note D – Investment Real Estate Loans of the Notes to the Financial
Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 ·
We recognized approximately $1.3 million of interest expense during the three months ended March 31, 2009 related to the Junior Subordinated Notes issued, during June 2007, in connection with the trust preferred financing, compared to approximately $1.4 million during the same period in 2008.  During the three months ended March 31, 2009, we
recognized approximately $0.4 million of interest expenses related to secured borrowings held during the period compared to none for the same period in 2008.
  - 44 -
  
 ·
Professional fees increased approximately $1.9 million during three months ended March 31, 2009 compared to the same period in 2008, primarily due to the legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion.  See Note O – Legal Matters
Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 ·
During the three months ended March 31, 2009, we recognized approximately $0.4 million in provision for doubtful accounts related to receivables from borrowers for reimbursement of property taxes, accrued interest and other related expenses in connection with our investment in real estate loans.  There were no similar transaction during the three
months ended March 31, 2008.
 
 Total Non-Operating Income (Loss):  During the three months ended March 31, 2009 total non-operating loss was $57,000 compared to non-operating income of $185,000 during the three months ended March 31, 2008, a decline of $242,000 or 131%.  This decline is primarily
due to the following factors:
 
 ·
During the three months ended March 31, 2009, we recognized approximately $19,000 of interest income from banking institutions compared to approximately $141,000 in the same period in 2008.  The decrease is due to the decrease in our average cash balance.
 
 ·
During the three months ended March 31, 2009, we recognized $76,000 in expenses related to settlement of certain legal actions.
 
 Total Loss from Real Estate Held for Sale:  For the three months ended March 31, 2009, total losses from real estate held for sale were approximately $2.7 million compared to approximately $2.0 million for the three months ended March 31, 2008, a decrease of approximately
$0.2 million or 8% due in significant part to the following factor:
 
 ·
We wrote down approximately $2.5 million on three properties held for sale during the three months ended March 31, 2009 compared to approximately $2.5 million on one property held for sale during the three months ended March 31, 2008.  These write downs resulted from declining real estate values which adversely impacted the value of the properties
we acquired through foreclosure.  For additional information see Note F – Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.  As of March 31, 2009, we held 15 properties held for sale totaling approximately $32.1 million compared to 4 properties held for sale
as of March 31, 2008 totaling approximately $32.4 million.
 
 Dividends to Stockholders; Reliance on Non-GAAP Financial Measurements:  To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our
taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income over 5% of our REIT taxable income, determined without regard to the dividends paid and our net capital gain.  Because we expect to declare dividends based on these requirements, and not based on our earnings computed in accordance with GAAP, we expect that our dividends may
at times be more or less than our reported earnings as computed in accordance with GAAP.  During the three months ended March 31, 2009, we did not declared any cash dividends.
 
  - 45 -
  Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income or cash flow from operations determined in accordance with GAAP as a measure of operating performance.  Our total taxable income represents the aggregate amount of taxable income generated
by us and our wholly owned taxable REIT subsidiary, TRS II, Inc.  REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP.  REIT taxable income excludes the undistributed taxable income of TRS II, Inc., which is not included in REIT taxable income until distributed to us.  Subject to certain TRS value limitations, there is no requirement that the TRS II, Inc. distribute their
earnings to us.  Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of dividends to our stockholders, we believe that presenting investors with the information management uses to calculate our taxable income is useful to investors in understanding the amount of the minimum dividends that we must declare to our stockholders so as to comply with the rules set forth in the Internal Revenue Code.  Because
not all companies have identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to those reported by other companies.
 
 The table below reconciles the differences between reported net income and total estimated taxable income and estimated REIT taxable income for the three months ended March 31, 2009:
  For the Three Months EndedMarch 31, 2009Net loss, as reported

$
(6,407,000
)Add (deduct):Provision for loan losses


1,274,000Write down on real estate held for sale


2,478,000Net tax loss on foreclosure of real estate loans


(15,709,000
)Tax loss on sale of real estate loan


(14,837,000
)Provision for doubtful accounts related to receivable


53,000Total taxable loss


(33,148,000
)Less : Taxable income attributable to TRS II, Inc.


31,000Estimated REIT taxable loss (prior to deductions for dividends paid)

$
(33,117,000
)
 
 CAPITAL AND LIQUIDITY
 
 Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes.  Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate loans.  Distributable cash flow generated
from such loans is paid out to our stockholders, in the form of a dividend.  We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months.  We may pay our manager an annual management fee of up to 0.25% of our aggregate capital received by Fund II and us from the sale of shares or membership units.
 
 During the three months ended March 31, 2009, net cash flows used by operating activities approximated $1.6 million.  Operating cash flows were adversely impacted by the decrease in interest income related to the decrease in our investments in real estate loans of approximately $4.7 million, during the three months ended March
31, 2009 compared to the same period in 2008.  In addition, we incurred approximately $2.5 million in write-downs on real estate held for sale and approximately $1.3 million in provision for loan losses during the three months ended March 31, 2009.  These write-downs and allowances represent the decreases in the fair value of these properties, which will affect the amount of proceeds we will receive from future sales of these assets.  Cash flows related to investing activities consisted
of cash provided by loan payoffs, sales of real estate loans and proceeds for sales of real estate held for sale of approximately $13.1 million and cash used for new investments and purchases of real estate loans totaling approximately $15.8 million.  Cash flows from financing activities consisted of a note payable of $3.0 million.  Financing activities also consisted of a purchase of treasury stock totaling $42,000 and principal payments on a note payable of $24,000.
 
  - 46 -
  At March 31, 2009, we had approximately $6.7 million in cash, $0.4 million in marketable securities – related party and approximately $199.4 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or
borrowings.  We believe we have sufficient working capital to meet our operating needs in the near term, provided that payment on the Junior Subordinated Notes discussed below is not accelerated.  In addition to the foregoing assets, as of March 31, 2009, we had approximately $5.0 million in restricted cash, in the form of letters of credit upon which Taberna is entitled to draw if we default upon our obligation to pay principal and interest on the Junior Subordinated Notes.  The
letters of credit may not be subordinated to any of our Senior Debt.  During April 2009, the $5.0 million in letter of credit was deposited in an escrow account.  Pursuant to an agreement with Taberna, such funds will be used to acquire replacement securities which will be exchanged for a portion of the outstanding trust preferred securities.  For additional information regarding the First Supplemental Indenture see Note I – Junior
Subordinated Notes of the Notes to the Consolidated Financial Statements included Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Since we comply with the REIT requirements and distribute at least ninety percent (90%) of our annual taxable income, our sources of liquidity include; repayments of outstanding loans, dividend reinvestments by our stockholders, arrangements with third parties to participate in our loans and proceeds from issuance of note payable and secured
borrowings.  We rely primarily upon repayment of outstanding loans and proceeds from sales of real estate held for sale to provide capital for investment in new loans.  The significant level of defaults on outstanding loans has reduced the funds we have available for investment in new loans.  Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds.  This has diminished our capital
resources and impaired our ability to invest in new loans.  During June 2008, our Board of Directors decided to suspend the payment of dividends.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income.
 
 Non-performing assets included loans in non-accrual status, net of allowance for loan losses, and real estate held for sale totaling approximately $63.7 million and $32.1 million, respectively, as of March 31, 2009, compared to approximately $73.7 million and $24.4 million, respectively, as of December 31, 2008.  It is possible
that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted.  Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets.  We believe that the continued weakness in real estate markets may result in additional losses on our real estate held for sale.
 
 As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession.  Problems in the sub-prime residential mortgage market
have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to
pay back our loans.  Thus, we have had to work with some of our borrowers to either: modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.  Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.
 
 We have no current plans to sell any new shares except through our dividend reinvestment program.  As of May 1, 2009, approximately 10% of our stockholders owning less than 1% our outstanding shares have elected to reinvest their dividends.  The level of dividend reinvestment in the future will depend upon our performance,
as well as the number of our stockholders who prefer to reinvest rather than receive current dividends.
 
  - 47 -
  On December 31, 2008, we were not in compliance with the revised tangible net worth covenant and the debt to tangible net worth covenant.  On March 25, 2009, we entered into a letter agreement with Taberna providing for a waiver of all financial covenants effective December 31, 2008 through June 30, 2009.  In addition,
pursuant to the letter agreement we exchanged $20 million of the Junior Subordinated Notes for certain replacement securities, which we acquired for approximately $10 million, in April 2009.  The transaction will reduce our obligation on the Junior Subordinated Notes to approximately $36.3 million, which we expect will facilitate future compliance with financial covenants.  This transaction will result in a net gain of approximately $9 million, net of transaction costs.  In addition,
we are to pay additional interest equal to $250,000 per year, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.  The replacement securities were acquired with funds consisting of $5 million from our operating and financing funds and $5 million from the letters of credit.  In addition, we are required
to pay additional interest equal to $250,000 per year on the Junior Subordinated Notes, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.  If we fail to perform our obligations under the letter agreement or if we are unable to comply with the financial covenants after July 1, 2009, then, absent another waiver from
the note holders, the lenders could declare an event of default and could seek to accelerate all amounts due under the Junior Subordinated Notes.  We might not have cash resources sufficient to pay the amounts due in the event of acceleration and we do not have in place any sources of liquidity which would enable us to meet our obligations in the event of an acceleration of the Junior Subordinated Notes.  For additional information regarding the First Supplemental Indenture see Note I – Junior
Subordinated Notes of the Notes to the Consolidated Financial Statements included Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 On March 25, 2009, we borrowed $3.0 million from an unaffiliated party pursuant to an unsecured promissory note which is payable on or before May 8, 2009, with an exit fee of $0.6 million due on or before May 26, 2009.  We intend to use these funds to purchase a portion of the Junior Subordinated Notes referred to above.  Per
the terms of the loan, all subsequent proceeds from loan repayments and sales of property will be used to pay down the note.  We are currently anticipating receipt of proceeds from the sale of properties, which will meet our on-going obligations.  No assurance can be made that these sales will be completed.
 
 We are considering various options to enhance the company’s capital resources.  Among other things, we are currently exploring the possibility of raising funds through a private placement of unsecured notes.  At this time, we do not know if any such offering would be successful, or if we will be able to enhance
our capital resources through other means.  Additionally, we are raising funds through the issuance of promissory notes secured by certain of our real estate owned properties.
 
 On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any
shares.  Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2009, we had purchased 1,198,573 shares as treasury stock through the repurchase program noted above.  These
shares are carried on our books at cost totaling approximately $5.7 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of March 31, 2009, we had a total of 1,212,323 shares of treasury stock carried on our books at cost totaling approximately $5.7
million.
 
 We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations
and for other permitted uses of working capital.
 
  - 48 -
  We may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements.  No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets we would be able to do so on commercially attractive terms.  Our
ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.
 
 Investments in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans.  The effective interest rates on all product categories range from 6% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We
had investments in 34 real estate loans, as of March 31, 2009, with a balance of approximately $189.4 million as compared to investments in 39 real estate loans, as of December 31, 2008, with a balance of approximately $225.0 million.
 
 As of March 31, 2009, we had 15 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our
books at a value of approximately $63.7 million, net of allowance for loan losses of approximately $43.4 million, which does not include the allowances of approximately $7.9 million relating to the decrease in the property value for performing loans as of March 31, 2009.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.  Our manager has evaluated these loans and, based on current estimates, believes that the value of the
underlying collateral is sufficient to protect us from loss of principal.  However, such estimates may change, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.
 
 Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan losses.  Recoveries of previously charged off amounts are credited to the allowance
for loan losses or included as income when the asset is disposed.  As of March 31, 2009, we have provided a specific reserve related to 11 non-performing loans and 7 performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager.  Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest.  Our manager will continue to evaluate these loans
in order to determine if any other allowance for loan losses should be recorded.
 
 During the three months ended March 31, 2009, we foreclosed upon four properties, totaling approximately $16.9 million, and classified them are real estate held for sale.  For additional information on our investments in real estate loans, refer to Note D – Investments In
Real Estate Loans and Note F – Real Estate Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Asset Quality and Loan Reserves
 
 Losses may occur from investing in real estate loans.  The amounts of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.
 
 The conclusion that a real estate loan is uncollectible or that collectibility is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather,
all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters:
 
 ·
Prevailing economic conditions;
 
 ·
Historical experience;
 
 ·
The nature and volume of the loan portfolio;
  - 49 -
  
 ·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
 
 ·
Evaluation of industry trends; and
 
 ·
Estimated net realizable value of any underlying collateral in relation to the real estate loan amount.
 
 Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan losses.  Recoveries of previously charged off amounts are credited to the allowance for loan
losses.  For additional information regarding the roll-forward of the allowance for loan losses for the three months ended March 31, 2009, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Investments in Real Estate Held for Sale
 
 At March 31, 2009, we held 15 properties with a total carrying value of approximately $32.1 million, which were acquired through foreclosure and recorded as investments in real estate held for sale.  Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value
based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  For additional information on our investments in real estate held for sale, refer to Note F – Real Estate Held for Sale of the Notes to
the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 OFF-BALANCE SHEET ARRANGEMENTS
 
 We do not have any interests in off-balance sheet special purpose entities, other than the interest in VCT I as discussed in Note I – Junior Subordinated Notes of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated
FinancialStatements of this Quarterly Report on Form 10-Q nor do we have any interests in non-exchange traded commodity contracts.
 
 CONTRACTUAL OBLIGATIONS
 
 The following summarizes our contractual obligations at March 31, 2009:
 
 Contractual Obligation

Total


Less Than 1 Year


1-3 Years


3-5 Years


More Than
5 YearsJunior subordinated notes payable (1)

$
56,350,000


$
--


$
--


$
--


$
56,350,000Secured borrowings (2)


9,907,000



9,907,000



--



--



--Notes payable (3)


3,000,000



3,000,000



--



--



--Total

$
69,257,000


$
12,907,000


$
--


$
--


$
56,350,000
 
 (1)
See Note I – Junior Subordinated Notes of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 (2)
See Note J – Secured Borrowings of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q
 
 (3)
See Note K – Notes Payable of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
  - 50 -
  RELATED PARTY TRANSACTIONS
 
 From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The
purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  For further information regarding related party transactions, refer to Note G – Related Party Transactions in the notes to our consolidated financial statements in Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form
10-Q.
 
 CRITICAL ACCOUNTING ESTIMATES
 
 Revenue Recognition
 
 Interest income on loans is accrued by the effective interest method.  We do not accrue interest income from loans once they are determined to be non-performing.  A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according
to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.
 
 The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at March 31, 2009, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:
 
 Changed Assumption

Increase (Decrease) in Interest IncomeWeighted average interest rate assumption increased by 1.0% or 100 basis points

$
2,548,000Weighted average interest rate assumption increased by 5.0% or 500 basis points

$
12,738,000Weighted average interest rate assumption decreased by 1.0% or 100 basis points

$
(2,548,000
)Weighted average interest rate assumption decreased by 5.0% or 500 basis points

$
(12,738,000
)
 
 The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results.  It is not intended to imply our expectation of future revenues or to estimate earnings.  We believe that the assumptions used above are appropriate to illustrate
the possible material impact on the consolidated financial statements.
 
 Allowance for Loan Losses
 
 We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may
affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Subsequent recoveries of amounts previously charged off are added back to the allowance
or included as income.
 
 The following table presents a sensitivity analysis to show the impact on our financial condition at March 31, 2009, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption

Increase (Decrease) in Allowance for Loan LossesAllowance for loan losses assumption increased by 1.0% of loan portfolio

$
1,894,000Allowance for loan losses assumption increased by 5.0% of loan portfolio

$
9,471,000Allowance for loan losses assumption decreased by 1.0% of loan portfolio

$
(1,894,000
)Allowance for loan losses assumption decreased by 5.0% of loan portfolio

$
(9,471,000
)
 
  - 51 -
  
 Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate
lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry.  We, our manager and Vestin Originations generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that may cause
significant changes in our estimated allowance include, but are not limited to:
 
 ·
Declines in real estate market conditions that can cause a decrease in expected market value;
 
 ·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
 
 ·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
 
 ·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and
 
 ·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
 
 Real Estate Held For Sale
 
 Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing
foreclosure actions, we seek to identify potential purchasers of such property.  It is not our intent to invest in or own real estate as a long-term investment.  In accordance with FAS 144 - Accounting for the Impairment or Disposal of Long Lived Assets,we seek to sell properties acquired through foreclosure as quickly as circumstances permit, subject to current
economic conditions.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
 
 Management classifies real estate held for sale when the following criteria are met:
 
 ·
Management commits to a plan to sell the properties;
 
 ·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;
 
 ·
An active program to locate a buyer and other actions required to complete a sale have been initiated;
 
 ·
The sale of the property is probable;
 
 ·
The property is being actively marketed for sale at a reasonable price; and
 
 ·
Withdrawal or significant modification of the sale is not likely.
 
  - 52 -
  ITEM 3.
QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK
 
 We are exposed to market risk, primarily from changes in interest rates.  We do not deal in any foreign currencies and do not own any options, futures or other derivative instruments.
 
 Most of our assets consisted of investments in real estate loans, which from time to time include those that are financed under Inter-creditor Agreements.  At March 31, 2009, our aggregate investment in real estate loans was approximately $139.4 million, net of allowance of approximately $51.3 million, with a weighted average
effective interest rate of 12.02%.  The weighted average interest rate of 12.02% is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of March 31, 2009, was 12.59%.  Most of the real estate loans had an initial term of 12 months.  The weighted average term of outstanding loans, including extensions, at March 31, 2009, was 23 months.  All of the outstanding
real estate loans at March 31, 2009, were fixed rate loans.  All of the real estate loans are held for investment purposes; none are held for sale.  We intend to hold such real estate loans to maturity.  As of March 31, 2009, none of our loans had a prepayment penalty, although 20 of our loans, totaling approximately $92.6 million, had an exit fee.  Out of the 20 loans with an exit fee, 6 loans, totaling approximately $23.1 million, were considered non-performing as of
March 31, 2009.
 
 Market fluctuations in interest rates generally do not affect the carrying value of our investment in real estate loans.  However, significant and sustained changes in interest rates could affect our operating results.  If interest rates decline significantly, some of the borrowers could prepay their loans with the proceeds
of a refinancing at lower interest rates.  This would reduce our earnings and funds available for dividend distribution to stockholders.  On the other hand, a significant increase in interest rates could result in a slowdown in real estate development activity that would reduce the demand for commercial real estate loans.  As a result, we might encounter greater difficulty in identifying appropriate borrowers.  We are not in a position to quantify the potential impact on
our operating results from a material change in interest rates.
 
 The following table contains information about the investment of real estate loans in our portfolio as of March 31, 2009.  The presentation aggregates the investment in real estate loans by their maturity dates for maturities occurring in each of the years 2009 through 2013 and thereafter and separately aggregates the information
for all maturities arising after 2013.  The carrying values of these assets approximate their fair value as of March 31, 2009.
 
 Interest Earning Assets
Aggregated by Maturity at March 31, 2009Interest Earning Assets

2009


2010


2011


2012


2013


Thereafter


Total(a)Investments In Real Estate Loans

$
129,821,000


$
44,492,000


$
15,106,000


$
--


$
--


$
--


$
189,419,000Weighted Average Interest Rates


12.42%



12.23%



8.00%



--%



--%



--%



12.02%
 
 (a)
Amounts include the balance of non-performing loans and loans that have been extended subsequent to March 31, 2009.
 
 At March 31, 2009, we also had approximately $7.1 million invested in cash, cash equivalents, certificates of deposit, and marketable securities – related party (VRM I).  Approximately 3% of our assets will be held in such accounts as a cash reserve; additional deposits in such accounts will be made as funds are received
from investors and repayment of loans pending the deployment of such funds in new real estate loans.  We believe that these financial assets do not give rise to significant interest rate risk due to their short-term nature.
 
 ITEM 4.
CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and Procedures
 
  - 53 -
  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.  In connection with the preparation of this Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, as of March 31, 2009, of the effectiveness of the design and operation of our disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon our evaluation, our CEO and CFO concluded that, as of March 31, 2009, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
 Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected.  Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation.  Furthermore,
because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.  Our management, including our CEO and CFO, does not expect that our controls and procedures will prevent all errors.
 
 The certifications of the our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
 
 Changes in Internal Control Over Financial Reporting
 
 As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and our CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the first fiscal quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.  Based on that evaluation, there has been no such change during the first fiscal quarter of 2009.
 
 During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC, a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and Fund III.  Our CFO and the Controller of our manager became employees of Strategix Solutions.  Strategix
Solutions is managed by LL Bradford and Company ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom were previously officers of our manager.  The same persons who previously provided accounting and financial reporting services to us as
employees of our manager, will continue to perform such duties as employees of Strategix Solutions.
 
 ITEM 4T.
CONTROLS AND PROCEDURES
 
 Not applicable.
 
 PART II – OTHER INFORMATION
 
 ITEM 1.
LEGAL PROCEEDINGS
 
 Please refer to Note N – Legal Matters Involving the Manager and Note O – Legal Matters Involving the Company in Part I, Item I Consolidated Financial Statements of
this Quarterly Report on Form 10-Q for information regarding our legal proceedings, which are incorporated herein by reference.
 
  - 54 -
  ITEM 1A.
RISK FACTORS
 
 In considering our future performance and any forward-looking statements made in this report, the material risks described below should be considered carefully.  These factors should be considered in conjunction with the other information included elsewhere in this report.
 
 RISKS RELATED TO OUR BUSINESS
 
 Defaults on our real estate loans will decrease our revenues and our dividends to shareholders.  Current economic conditions increase the risk of defaults on our loans.
 
 We are in the business of investing in real estate loans and, as such, we are subject to risk of defaults by borrowers.  Our performance will be directly impacted by any defaults on the loans in our portfolio.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards
of other financial institutional lenders, the rate of default on our loans could be higher than those generally experienced in the real estate lending industry.  Any sustained period of increased defaults could adversely affect our business, financial condition, liquidity and the results of our operations.
 
 As of March 31, 2009, our non-performing assets were approximately $95.8 million, representing approximately 77% of our stockholders’ equity.  Non-performing assets included approximately $63.7 million in non-performing loans, net of allowance for non-performing loan losses of approximately $43.4 million, and approximately
$32.1 million of real estate held for sale.  We believe that the level of non-performing assets is largely attributable to difficulties in the real estate and credit markets.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures.  At this time, we are not able to predict how long such difficult economic conditions
will continue.  At this time, we are not able to predict how long such difficult economic conditions will continue.
 
 As of March 31, 2009 and December 31, 2008, we had approximately $51.3 million and $78.2 million in allowances for loan losses, respectively, resulting in net weighted average loan-to-value ratios of 74.14% and 84.01%, respectively.  Not including allowance for loan losses, our weighted average loan-to-value ratio, as of March
31, 2009 and December 31, 2008, was 114.39% and 175.12%, respectively, primarily as a result of declining real estate values that have eroded the market value of our collateral.  As a result, we may not be able to recover the full amount of our loans if the borrower defaults.  Moreover, any failure of a borrower to pay interest on loans will reduce our revenues, the dividends we pay to stockholders and, most likely, the value of our stock.  Similarly, any failure of a borrower to
repay loans when due may reduce the capital we have available to make new loans, thereby adversely affecting our operating results.
 
 The current recession and constraints in the credit markets are adversely affecting our operating results and financial condition.
 
 As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession.  Problems in the sub-prime residential mortgage market
have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to
pay back our loans.  Thus, an extended period of illiquidity in the credit markets has resulted in a material increase in the number of our loans that are not paid back on time.  A continuation of increased delinquencies, defaults or foreclosures will have an adverse affect upon our ability to originate, purchase and securitize loans, which could significantly harm our business, financial condition, liquidity and results of operations.
 
 Our underwriting standards and procedures are more lenient than many institutional lenders, which may result in a higher level of non-performing assets and less amounts available for distribution.
 
  - 55 -
  There may be a greater risk of default by our borrowers, which may impair our ability to declare timely dividends and which may reduce the amount we have available to distribute.  Our underwriting standards and procedures are more lenient than many institutional lenders in that we will invest in loans to borrowers who may not
be required to meet the credit standards of other financial institutional real estate lenders.  This may lead to an increase in non-performing assets in our loan portfolio and create additional risks of return.  We approve real estate loans more quickly than other lenders.  We rely heavily on third-party reports and information such as appraisals and environmental reports.  Because of our accelerated due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of the information contained therein being out of date or incorrect.  Generally, we will not spend more than 20 days assessing the character and credit history of our borrowers.  Due to the nature of loan approvals, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to the borrower and the security.
 
 We depend upon our real estate security to secure our real estate loans, and we may suffer a loss if the value of the underlying property declines.  We are currently experiencing a trend of declining real estate values, which increases the risk that our collateral will prove insufficient to protect our loans.
 
 We depend upon our real estate security to protect us on the loans that we make.  We depend upon the skill of independent appraisers to value the security underlying our loans.  However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent
events.  Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower.  Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals.  Since the summer of 2007, there has been a significant decline in real estate values in many of the markets where we operate, resulting in a decline in the estimated value of the real estate securing
our loans.
 
 In addition, most of the appraisals are prepared on an as-if developed basis, which approximates the post-construction value of the collateralized property assuming such property is developed.  As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and
may include anticipated zoning changes and successful development by the purchaser upon which development is dependent on availability of financing.  As most of the appraisals will be prepared on an as-if developed basis, if the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value.  As a result, there may be less security than anticipated at the time the loan was originally made.  If there is
less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute.
 
 We typically make “balloon payment” loans, which are riskier than loans with payments of principal over an extended period of time.
 
 The loans we invest in or purchase generally require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan.  A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance.  As
of March 31, 2009, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.  Loans with balloon payments are riskier than loans with payments of principal over an extended time period such as 15 or 30 years because the borrower’s repayment depends on its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due.  The borrower’s
ability to achieve a successful sale or refinancing of the property may be adversely impacted by deteriorating economic conditions or illiquidity in the credit markets.  There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments.  Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due.  As a result, there is no assurance
that a borrower will have sufficient resources to make a balloon payment when due.
 
 An increased percentage of our loan portfolio consists of second deeds of trust which generally entail a higher degree of risk than first deeds of trust.
 
  - 56 -
  We invest in second deeds of trust and, in rare instances, wraparound, or all-inclusive, real estate loans.  Our board is required to approve our investing more than 10% of our assets in second deeds of trust.  During September 2008, the board authorized us to allow loans secured by second deeds of trust to constitute
up to 15% of our loans, due to loan restructuring and current business opportunities.  In a second deed of trust, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the first deed of trust.  In a wraparound real estate loan, our rights will be similarly subject to the rights of a first deed of trust, but the aggregate indebtedness evidenced by our loan documentation will be the first deed of trust plus the new funds we invest.  We
would receive all payments from the borrower and forward to the senior lender its portion of the payments we receive.  Because both of these types of loans are subject to the first deed of trust’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans that we will not be able to collect the full amount of our loan.  If we are unable to collect the amounts secured by second deeds of trust, our operating results will suffer and we will have
less funds available to distribute to shareholders.  As of March 31, 2009, approximately 20.46% of our loans were secured by a second deed of trust.  When funded, such loans constituted less than 15% of our loans.  The percentage of our loans in second deeds of trust have increased due to the decrease in loans secured by first deeds of trust through sales and foreclosures.
 
 Our loans are not guaranteed by any governmental agency.
 
 Our loans are not insured or guaranteed by a federally owned or guaranteed mortgage agency.  Consequently, our recourse, if there is a default, may be to foreclose upon the real property securing a loan and/or pursuing the borrower’s guarantee of the principal.  The value of the foreclosed property may have decreased
and may not be equal to the amount outstanding under the corresponding loan, resulting in a decrease of the amount available to distribute.
 
 Our real estate loans may not be marketable, and we expect no secondary market to develop.
 
 We do not expect our real estate loans to be marketable, and we do not expect a secondary market to develop for them.  As a result, we will generally bear all the risk of our investment until the loans mature.  This will limit our ability to hedge our risk in changing real estate markets and may result in reduced returns
to our investors.
 
 We may not be able to maintain compliance with all of the financial covenants contained in the indenture governing our Junior Subordinated Notes.  Failure to comply could result in acceleration of all amounts due under such notes, resulting in severe disruption of our operations.
 
 In June 2007, we completed the issuance of $60.1 million of trust preferred securities through a special purpose business trust in order to expand our capacity to invest in real estate loans.  The amount currently due on such notes is approximately $56.4 million.  The Junior Subordinated Notes sold in June 2007 in connection
with the trust preferred financing bear interest at a fixed rate of 8.75% through July 2012; thereafter the interest rate is LIBOR plus 3.5%, resetting quarterly.  The First Supplemental Indenture governing the Junior Subordinated Notes sets forth a number of financial covenants.  On December 31, 2008, we were not in compliance with the revised tangible net worth covenant and the debt to tangible net worth covenant.  On March 25, 2009, we entered into a letter agreement with Taberna
providing for a waiver of all financial covenants effective December 31, 2008 through June 30, 2009.  In addition, pursuant to the letter agreement we exchanged $20 million of the Junior Subordinated Notes for certain replacement securities, which we acquired for approximately $10 million, in April 2009.  The transaction will reduce our obligation on the Junior Subordinated Notes to approximately $36.3 million, which we expect will facilitate future compliance with financial covenants.  This
transaction will result in a net gain of approximately $9 million, net of transaction costs.  In addition, we are to pay additional interest equal to $250,000 per year, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.  The replacement securities were acquired with funds consisting of $5 million from
our operating and financing funds and $5 million from the letters of credit.  In addition, we are required to pay additional interest equal to $250,000 per year on the Junior Subordinated Notes, payable quarterly on the same payment dates as the current terms of the Junior Subordinated Notes.  We agreed to make a nonrefundable payment of $200,000 to Taberna to cover its costs related to the waiver and exchange arrangement.
 
  - 57 -
  If we fail to perform our obligations under the letter agreement or if we are unable to comply with the financial covenants after July 1, 2009, then, absent another waiver from the note holders, the lenders could declare an event of default and could seek to accelerate all amounts due under the Junior Subordinated Notes.  We might
not have cash resources sufficient to pay the amounts due in the event of acceleration.  As a result, our business operations would suffer severe disruption if the lenders sought to accelerate payment of the Junior Subordinated Notes.  In addition, an unresolved event of default under the indenture would prevent us from paying any dividends or other dividends to our shareholders.
 
 The terms of our indebtedness increase our operating risk and may reduce the amount we have available to distribute to stockholders.
 
 We may borrow up to 70% of the fair market value of our outstanding real estate loans at any time.  We currently have outstanding approximately $56.4 million of trust preferred securities bearing interest at 8.75%.  These borrowings will require us to carefully manage our cost of funds.  In order to benefit
from the trust preferred securities, we need to loan the proceeds at rates in excess of the rates payable on the Junior Subordinated Notes.  No assurance can be given that we will be successful in making loans at rates in excess of our cost of funds, particularly if non-performing loans reduce our effective rate of return on our outstanding loans or if there is a continuing decline in interest rates.
 
 In addition, the financial covenants in the indenture governing the Junior Subordinated Notes may constrain our flexibility in operating our business.  Should we breach a material covenant or if we are unable to meet our payment obligations on the Junior Subordinated Notes, the purchasers of the trust preferred securities may
declare us in default, resulting in acceleration of the principal sums due on the notes and restrictions on the payment of dividends to our stockholders.
 
 During June 2008, we, our manager, and Vestin Originations entered into an intercreditor agreement with an unrelated third party related to the funding of six real estate loans.  (See exhibit 10.11 Intercreditor Agreement  under the Exhibit Index included in Part II, Item 6 – Exhibits of
this Quarterly Report Form 10-Q).  The participation interest is at 11% on the outstanding balance.  We incurred approximately $0.9 million in finance costs related to the secured borrowings, these costs are being amortized to interest expense over the term of the agreements.  As of March 31, 2009, and December 31, 2008, we had $10.6 million in funds, including approximately $0.7 million in interest reserves, used under Inter-creditor Agreements.
 
 The terms of any additional indebtedness we incur may vary.  However, some lenders may require as a condition of making a loan to us that the lender will receive a priority on loan repayments received by us.  As a result, if we do not collect 100% on our investments, the first dollars may go to our lenders and we may
incur a loss that will result in a decrease of the amount available for distribution.  In addition, we may enter into securitization arrangements in order to raise additional funds.  Such arrangements could increase our leverage and adversely affect our cash flow and our ability to declare dividends.
 
 There is a substantial risk that we would be unable to raise additional funding if needed to meet our obligations or expand our loan portfolio.
 
 We may need cash to meet our minimum REIT distribution requirements and limit U.S. federal income taxation.  Because we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) to qualify as a REIT
and because we intend to distribute substantially all of our REIT taxable income and net capital gain, our ability to expand our loan portfolio will depend in large part on external sources of capital.  In addition, if our minimum distribution requirements to maintain our REIT status and minimize U.S. federal income taxation become large relative to our cash flow as a result of our taxable income exceeding our cash flow from operations, then we may be required to borrow funds or raise capital by selling
assets to meet those distribution requirements.
 
  - 58 -
  Our ability to borrow funds for this purpose, or to expand our loan portfolio, is doubtful in light of current market conditions.  In addition, our ability to raise funds through an equity financing would be hindered by the current price of our stock.  If we raise capital through an equity offering, this may result in
substantial dilution to our current stockholders.  Any debt financing may be expensive and might include restrictive covenants that would constrain our ability to declare dividends to our shareholders.  We may not be able to raise capital on reasonable terms, if at all, in the current market environment.
 
 We may have difficulty protecting our rights as a secured lender.
 
 We believe that our loan documents will enable us to enforce our commercial arrangements with borrowers.  However, the rights of borrowers and other secured lenders may limit our practical realization of those benefits.  For example:
 
 ·
Judicial foreclosure is subject to the delays of protracted litigation.  Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it;
 
 ·
The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property;
 
 ·
Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights;
 
 ·
The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral;
 
 ·
Required licensing and regulatory approvals may complicate our ability to foreclose or to sell a foreclosed property where our collateral includes an operating business.  See Note O – Legal Matters Involving The Company in the notes to the consolidated financial statement under Part I, Item I Consolidated
FinancialStatements of this Quarterly Report on Form 10-Q.
 
 ·
We may not be able to pursue deficiency judgments after we foreclose on collateral; and
 
 ·
State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.
 
 By becoming the owner of property, we may incur additional obligations, which may reduce the amount of funds available for distribution.
 
 We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale.  Acquiring a property at a foreclosure sale may involve significant costs.  If we foreclose on the security property, we expect to obtain the services of a real estate broker and pay the broker’s
commission in connection with the sale of the property.  We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings.  In addition, significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made on any property we own regardless of whether the property is producing any income.  See Note F – Real
Estate Held for Sale in the notes to the consolidated financial statement under Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.
 
 Under applicable environmental laws, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment.  Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person
would be able to indemnify us to the full extent of our liability.  Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.
 
  - 59 -
  Our results are subject to fluctuations in interest rates and other economic conditions.
 
 Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets.  If the economy is healthy, we expect that more people will be borrowing money to acquire, develop or renovate real property.  However, if the economy grows too fast, interest rates may increase
too much and the cost of borrowing may become too expensive.  Alternatively, if the economy enters a recession, real estate development may slow.  A slowdown in real estate lending may mean we will have fewer loans to acquire, thus reducing our revenues and dividends to stockholders.  As a result of the current economic recession, our revenues and dividends have been reduced.
 
 Interest rate fluctuations may affect our operating results as follows:
 
 ·
If interest rates rise, borrowers under loans with monthly or quarterly principal payments may be compelled to extend their loans to decrease the principal paid with each payment because the interest component has increased.  If this happens, we are likely to be at a greater risk of the borrower defaulting on the extended loan, and the increase in the interest rate on our loan may not be adequate compensation
for the increased risk.  Additionally, any fees paid to extend the loan are paid to Vestin Originations or our manager, not to us.  Our revenues and dividends will decline if we are unable to reinvest at higher rates or if an increasing number of borrowers default on their loans; and
 
 ·
If interest rates decline, the amount we can charge as interest on our loans will also likely decline.  Moreover, if a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in real estate loans earning that higher rate of interest.  In the absence of a prepayment fee, we will receive neither the anticipated
revenue stream at the higher rate nor any compensation for its loss.  As of March 31, 2009, none of our loans had a prepayment penalty, although 20 of our loans, totaling approximately $92.6 million, had an exit fee.  Out of the 20 loans with an exit fee, 6 loans, totaling approximately $23.1 million, were considered non-performing as of March 31, 2009.  However, depending upon the amount by which interest rates decline, the amount of the exit fees is generally not significant in
relation to the potential savings borrowers may realize as a result of prepaying their loans.
 
 
 Our loan portfolio may exhibit greater risk if it is not diversified geographically.
 
 As of March 31, 2009, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon and Texas, with approximately 44% of our loans in Nevada.  Depending on the market and on our company’s performance, we may expand our investments throughout the United States.  However, our manager
has limited experience outside of the Western and Southwestern United States.  Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state.
 
 Legal actions seeking damages and appraisal rights could harm our operating results and financial condition.
 
 We are a party in several legal actions seeking damages and appraisal rights in connection with the REIT conversion.  See Note N – Legal Matters Involving The Manager and Note O – Legal Matters Involving The Company in
the notes to the consolidated financial statement under Part I, Item I Consolidated FinancialStatements of this Quarterly Report on Form 10-Q.  While we believe these actions are without merit, the defense of such actions has materially increased our legal costs and may require the substantial attention of our management.  The increased legal costs have adversely impacted our operating results.  As of March 31, 2009, we have
incurred legal expenses of approximately $2.8 million related to such actions.  Moreover, any adverse outcome in such actions could result in our having to pay substantial damages, which would reduce our cash resources and harm our financial condition.
 
 We may have a lack of control over participations.
 
  - 60 -
  We will consider investing in or purchasing loans jointly with other lenders and purchasers, some of whom might be affiliates of Vestin Mortgage.  We will initially have, and will maintain a controlling interest as lead lender in participations with non-affiliates.  Although it is not our intention to lose control, there
is a risk that we will be unable to remain as the lead lender in the loans in which we participate in the future.  In the event of participation with a publicly registered affiliate, the investment objectives of the participants shall be substantially identical.  There shall be no duplicate fees.  The compensation to the sponsors must be substantially identical, and the investment of each participant must be on substantially the same terms and conditions.
 
 Each participant shall have a right of first refusal to buy the other's interest if the co-participant decides to sell its interest.  We will not participate in joint ventures or partnerships with affiliates that are not publicly registered except as permitted in the NASAA Guidelines or otherwise approved by the independent members
of our board of directors.  If our co-participant affiliate determines to sell its interest in the loan, there is no guarantee that we will have the resources to purchase such interest and we will have no control over a sale to a third party purchaser.
 
 MANAGEMENT AND CONFLICTS OF INTEREST RISKS
 
 We rely on our manager to manage our day-to-day operations and select our loans for investment.
 
 Our ability to achieve our investment objectives and to pay dividends to our shareholders depends upon our manager’s and its affiliate’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers.  Stockholders have no opportunity to
evaluate the financial information or creditworthiness of borrowers, the terms of mortgages, the real property that is our collateral or other economic or financial data concerning our loans.  We pay our manager an annual management fee of up to 0.25% of our aggregate capital received by us and Fund II from the sale of shares or membership units.  This fee is payable regardless of the performance of our loan portfolio.  Our manager’s duties to our stockholders are generally
governed by the terms of the management contract, rather than by common law principles of fiduciary duty.  Moreover, our manager is not required to devote its employees’ full time to our business and may devote time to business interests competitive to our business.
 
 Our manager’s lack of experience with certain real estate markets could impact its ability to make prudent investments on our behalf.
 
 As of March 31, 2009, our loans were in the following states:  Arizona, California, Hawaii, Nevada, Oklahoma, Oregon and Texas.  Depending on the market and on our company’s performance, we may expand our investments throughout the United States.  However, our manager has limited experience outside of
the Western and Southwestern United States.  Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state.  Our manager’s limited experience in most U.S. real estate markets may impact its ability to make prudent investment decisions on our behalf.  Accordingly, where our manager deems it necessary, it plans to utilize independent real estate advisors and local legal counsel located in markets
where it lacks experience for consultation prior to making investment decisions.  Stockholders will not have an opportunity to evaluate the qualifications of such advisors and no assurance can be given that they will render prudent advice to our manager.
 
  - 61 -
  Our success depends on certain key personnel, the loss of whom could adversely affect our operating results, and on our manager’s ability to attract and retain qualified personnel.
 
 Our success depends in part upon the continued contributions of certain key personnel of our manager, including; Michael V. Shustek (Chief Executive Officer and President) and Daniel B. Stubbs (Senior Vice President, Underwriting).  Both Mr. Shustek and Mr. Stubbs have extensive experience in our line of business, extensive market
contacts and familiarity with our company.  We also rely upon Rocio Revollo who is our Chief Financial Officer and who has extensive familiarity with the company and our accounting systems.  Ms. Revollo’s services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions, LLC.  If Mr. Shustek or Mr. Stubbs were to cease their employment with our manager, or if Ms. Revollo’s services were no longer available through
Stratgix Solutions, they might be difficult to replace and our operating results could suffer.  None of the key personnel of our manager is subject to an employment, non-competition or confidentiality agreement with our manager, or us and we do not maintain “key man” life insurance policies on any of them.  Strategix Solutions has the right to terminate its agreement with our manager on 90 days notice.  Ms. Revollo does not have an employment agreement with Strategix
Solutions.  Our future success also depends in large part upon our manager’s ability to hire and retain additional highly skilled managerial, operational and marketing personnel.  Our manager may require additional operations and marketing people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the relevant markets.  Competition for personnel is intense, and we cannot be assured that we will be successful in attracting and
retaining skilled personnel.  If our manager were unable to attract and retain key personnel, the ability of our manager to make prudent investment decisions on our behalf may be impaired.
 
 Vestin Mortgage serves as our manager pursuant to a long-term management agreement that may be difficult to terminate and does not reflect arm’s length negotiations.
 
 We have entered into a long-term management agreement with Vestin Mortgage to act as our manager.  The term of the management agreement is for the duration of our existence.  The management agreement may only be terminated upon the affirmative vote of a majority in interest of stockholders entitled to vote on the matter
or by our board of directors for cause upon 90 days’ written notice of termination.  Consequently, it may be difficult to terminate our management agreement and replace our manager in the event that our performance does not meet expectations or for other reasons unless the conditions for termination of the management agreement are satisfied.  The management agreement was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s length bargaining.
 
 Our manager will face conflicts of interest concerning the allocation of its personnel’s time.
 
 Our manager is also the manager of VRM I, Fund III and inVestin, companies with investment objectives similar to ours.  Our manager and Mr. Shustek, who indirectly owns 100% of our manager, anticipate that they may also sponsor other real estate programs having investment objectives similar to ours.  As a result, our
manager and Mr. Shustek may have conflicts of interest in allocating their time and resources between our business and other activities.  During times of intense activity in other programs and ventures, our manager and its key people will likely devote less time and resources to our business than they ordinarily would.  Our management agreement with our manager does not specify a minimum amount of time and attention that our manager and its key people are required to devote to our company.  Thus,
our manager may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives.
 
 Our manager and its affiliates will face conflicts of interest arising from our fee structure.
 
 Vestin Originations, an affiliate of our manager, will receive substantial fees from borrowers for transactions involving real estate loans.  Many of these fees are paid on an up-front basis.  In some cases, Vestin Originations or our manager may be entitled to additional fees for loan extensions or modifications and
loan assumptions, reconveyances and exit fees.  These and other fees are quantified and described in greater detail in our management agreement under “Management Agreement — Compensation.”  Vestin Originations’ compensation is based on the volume and size of the real estate loans selected for us, regardless of their performance, which could create an incentive to make or extend riskier loans.  Our interests may diverge from those of our manager, Vestin Originations
and Mr. Shustek to the extent that Vestin Originations benefits from up-front fees that are not shared with us.
  - 62 -
  
 Vestin Originations will be receiving fees from borrowers that would otherwise increase our returns.  Because Vestin Originations receives all of these fees, our interests will diverge from those of our manager, Vestin Originations and Mr. Shustek when our manager decides whether we should charge the borrower higher interest rates
or our manager’ affiliates should receive higher fees from borrowers.
 
 We paid our manager a management fee of approximately $0.3 million for the three months ended March 31, 2009.  In addition, Vestin Mortgage and Vestin Originations received a total of approximately $1.7 million and $0.2 million, respectively, in fees directly from borrowers for the three months ended March 31, 2009.  The
amounts received from borrowers represent fees earned by Vestin Mortgage and Vestin Originations for loans originated for all funds managed by Vestin Mortgage, including us, VRM I, Fund III and inVestin.  Our assets represented approximately 78% of the assets managed by Vestin Mortgage as of March 31, 2009.
 
 Our manager will face conflicts of interest relating to other investments in real estate loans.
 
 We expect to invest in real estate loans when one or more other companies managed by our manager are also investing in real estate loans.  There is a risk that our manager may select for us a real estate loan investment that provides lower returns than a real estate loan investment purchased by another program or entity managed
by our manager.  Our manager also serves as the manager for VRM I, Fund III and inVestin, which have similar investment objectives as our company.  There are no restrictions or guidelines on how our manager will determine which loans are appropriate for us and which are appropriate for VRM I, Fund III, inVestin or another company that our manager manages.  Moreover, our manager has no obligation to provide us with any particular opportunities or even a pro rata share of opportunities
afforded to other companies it manages.
 
 UNITED STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT QUALIFICATION
 
 Our failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce amounts available for distribution to our stockholders.
 
 We have elected to be taxed as a REIT under the Code.  Our qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination
of various factual matters and circumstances not entirely within our control.  We intend that our organization and method of operation will enable us to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future.  Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.
 
 If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, and we would not be allowed to deduct dividends made to our stockholders in computing our taxable income.  We may also be disqualified
from treatment as a REIT for the four taxable years following the year in which we failed to qualify.  The additional tax liability would reduce our net earnings available for investment or distribution to stockholders.  In addition, we would no longer be required to declare dividends to our stockholders.  Even if we continue to qualify as a REIT, we will continue to be subject to certain U.S. federal, state and local taxes on our income and property.
 
 Dividends from a REIT are currently taxed at a higher rate than corporate dividends.
 
 Under the Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax rate on both dividends from certain domestic and foreign corporations and net long-term capital gain for individuals was reduced to 15% until 2008.  The Tax Increase Prevention and Reconciliation Act of 2005, which signed into law on May 17,
2006, extended the 15% long-term net capital gain rate to 2010.  However, this reduced rate of tax on dividends generally will not apply to our dividends (except those dividends identified by the company as “capital gain dividends” which are taxable as long-term capital gain) and therefore such dividends generally will be taxed as ordinary income.  Ordinary income generally is subject to U.S. federal income tax rate at a rate of up to 35% for individuals.  The higher
tax rate on our dividends may cause the market to devalue our common stock relative to stock of those corporations whose dividends qualify for the lower rate of taxation.  Please note that, as a general matter, dividends from a REIT will be taxed at the same rate as stockholders’ share of Vestin Realty Mortgage II’s taxable income attributable to its realized net interest income.
  - 63 -
  
 A portion of our business is potentially subject to prohibited transactions tax.
 
 As a REIT, we are subject to a 100% tax on our net income from “prohibited transactions.”  In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business.  Sales by us of property in the course of our business will generally constitute prohibited
transactions.
 
 We intend to avoid the 100% prohibited transactions tax on property foreclosed upon by Fund II prior to the REIT conversion by holding and selling such properties through one or more wholly-owned taxable REIT subsidiaries.  However, under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities
of one or more taxable REIT subsidiaries and a taxable REIT subsidiary generally cannot operate a lodging or health care facility.
 
 As of March 31, 2009, we held 15 properties with a total carrying value of approximately $32.1 million recorded as investments in real estate held for sale and no properties in which we or an affiliate provided the financing, recorded as real estate held for sale – seller financed.  United States generally accepted accounting
principals (“GAAP”) requires us to include real estate held for sale – seller financed until the borrower has met and maintained certain requirements.  The real estate held for sale collectively constituted approximately 17% of our assets as of March 31, 2009.
 
 Taxable REIT subsidiaries are subject to corporate-level tax, which may devalue our common stock relative to other companies.
 
 Taxable REIT subsidiaries are corporations subject to corporate-level tax.  Our use of taxable REIT subsidiaries may cause the market to value its common stock lower than the stock of other publicly traded REITs which may not use taxable REIT subsidiaries and lower than the equity of mortgage pools taxable as non-publicly traded
partnerships such as Fund II’s intended qualification prior to the REIT conversion, which generally are not subject to any U.S. federal income taxation on their income and gain.
 
 Our use of taxable REIT subsidiaries may have adverse U.S. federal income tax consequences.
 
 We must comply with various tests to continue to qualify as a REIT for U.S. federal income tax purposes, and our income from and investments in taxable REIT subsidiaries generally do not constitute permissible income and investments for purposes of the REIT qualification tests.  While we will attempt to ensure that our dealings
with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot be assured that we will successfully achieve that result.  Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature.
 
 We may endanger our REIT status if the dividends we receive from our taxable REIT subsidiaries exceed applicable REIT gross income tests.
 
 The annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of dividends that we can receive from our taxable REIT subsidiaries and still maintain our REIT status.  Generally, not more than 25% of our gross income can be derived from non-real estate related sources, such as dividends
from a taxable REIT subsidiary.  If, for any taxable year, the dividends we received from our taxable REIT subsidiaries, when added to our other items of non-real estate related income, represent more than 25% of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.
 
  - 64 -
  We may lose our REIT status if we issue shares under our stockholders’ rights plan.
 
 Under Section 562(c) of the Code, a REIT generally cannot make a distribution unless the distribution is pro rata, with no preference to any share of stock as compared to other shares of the same class of stock.  A REIT that is not in compliance with this requirement may lose its REIT status.  Under our stockholders’
rights plan, upon certain events, some holders of our common stock and not others will have the right to acquire shares of Series A preferred stock.  When effective, this right could be treated as a deemed distribution to those holders of our common stock entitled to the right with no distribution to other such holders.  Thus, this right, when effective, could be treated as a distribution that is not consistent with the requirements of Section 562(c) of the Code, which could result in the
loss of our REIT qualification.
 
 RISK OF OWNERSHIP OF OUR COMMON STOCK
 
 The market price and trading volume of our common stock may be volatile.
 
 The market price of our common stock since trading commenced on May 1, 2006, to March 31, 2009, has ranged from $1.54 to $15.96 (adjusted for the 1-for-2.6 reverse stock split in December 2007).  We believe the price of our stock in the months after we were listed was affected by, among other things, selling pressure from stockholders
seeking immediate liquidity and the level of non-performing assets, which we own.  We continue to own a significant level of non-performing assets and our sector of the market has suffered from the problems encountered by sub-prime lenders.  Our stock price may continue to be highly volatile and subject to wide fluctuations.  In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur.  Our Company will be dissolved
on December 31, 2020 unless the holders of a majority of our common stock determine otherwise.  As we move closer to the dissolution date, we expect to stop making new loans and our stock price could approach our book value per share.  However, no assurance can be given that the stock price will approach book value and then prevailing market conditions may affect the price of our stock even as we near 2020.
 
 The market price of our common stock may fluctuate or decline significantly in the future.  Some of the factors, many of which are beyond our control, that could negatively affect our stock price or result in fluctuations in the price or trading volume of our common stock include:
 
 ·
Increases in loans defaulting or becoming non-performing or being written off;
 
 ·
Actual or anticipated variations in our quarterly operating results or dividends;
 
 ·
Publication of research reports about us or the real estate industry;
 
 ·
Changes in market valuations of similar companies;
 
 ·
Changes in tax laws affecting REITs;
 
 ·
Litigation;
 
 ·
Adverse market reaction to any increased indebtedness we incur in the future; and
 
 ·
General market and economic conditions.
 
 Market interest rates could have an adverse effect on our stock price.
 
 One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates.  Thus, an increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield,
a lack of which could adversely affect the market price of our common stock.
 
  - 65 -
  We are the subject of stockholder litigation, which may depress the price of our stock.
 
 A number of lawsuits have been filed against us by stockholders who claim, among other things, that they were improperly denied dissenter’s rights in connection with the conversion of Fund II into a REIT.  We believe the suits are without merit and we intend to vigorously defend against such claims.  Nonetheless,
the outcome of the lawsuits cannot be predicted at this time, nor can a meaningful evaluation be made of the potential impact upon us if the plaintiffs were to prevail in their claims.  The resulting uncertainty may depress the price of our stock.  Moreover, concerns about the costs of defense and the potential diversion of our manager’s time to deal with these lawsuits may have an adverse effect upon the price of our stock.
 
 Our charter documents and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.
 
 Our charter and bylaws and Maryland corporate law contain a number of provisions (as further described in exhibit 3.2 Bylaws of the Registrant under the Exhibit Index included in Part II, Item 6 of this Quarterly Report Form 10-Q) that could delay, defer or prevent a transaction or
a change in control of us that might involve a premium price for holders of our common stock or otherwise be in their best interests, including:
 
 ·
Ownership Limit.  Our articles of incorporation, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than a 9.8% of the number or value, whichever is more restrictive, of the
outstanding shares of our stock, unless our board of directors waives this ownership limit.  However, our board of directors may not grant a waiver of the ownership limit that would permit a person to acquire more than 15% of our stock without exception.  The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the interest of our stockholders (and even if such change in control would not reasonably jeopardize
our REIT status).
 
 ·
Staggered Board.  Our board of directors is divided into three classes, with each class serving staggered three-year terms.  This classification of our board of directors may have the effect of delaying or preventing changes in our control or management.
 
 ·
Removal of Directors.  Directors may be removed only for cause and only by the affirmative vote of stockholders holding at least a majority of the shares then outstanding and entitled to be cast for the election of directors.
 
 ·
Stockholders’ Rights Plan.  We have a stockholders’ rights plan that enables our board of directors to deter coercive or unfair takeover tactics and to prevent a person or a group from gaining control of us without offering a fair price to all stockholders.  Unless our board of directors approves the person’s or group’s
purchase, after that person gains control of us, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value.  Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person or group.  Our board of directors, however, can prevent the stockholders’ rights plan from operating in this manner.  This gives our board of directors’
significant discretion to approve or disapprove a person’s or group’s efforts to acquire a large interest in us.
 
 ·
Duties of Directors with Respect to Unsolicited Takeovers.  Under Maryland law, a director is required to perform his or her duties (a) in good faith, (b) in a manner he or she believes to be in the best interests of the corporation and (c) with the care that an ordinarily prudent person in a like position would use under similar circumstances.  Maryland
law provides protection for Maryland corporations against unsolicited takeovers by, among other things, retaining the same standard of care in the performance of the duties of directors in unsolicited takeover situations.  The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders
rights plan, (c) make a determination under Maryland Business Combination Act or Maryland Control Share Acquisition Act or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition.
  - 66 -
  
 Moreover, under Maryland law the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director.  Maryland law also contains a statutory presumption that an act of a
director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.
 
 ·
Maryland General Corporation Law.  Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market
price of such shares, including:
 
 ·
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or
more of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and
 
 ·
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control
of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
 
 ·
We have opted out of the control share provisions of the MGCL pursuant to a provision in our bylaws.  However, our board of directors may by amendment to our bylaws opt in to the control share provisions of the MGCL in the future.
 
 ·
Advance Notice of Director Nominations and Stockholder Proposals.  Our bylaws impose certain advance notice requirements that must be met for nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders.
 
 Our rights and the rights of our stockholders to take action against our directors and officers are limited.
 
 Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances.  Our charter limits the
liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
 
 ·
Actual receipt of an improper benefit or profit in money, property or services; or
 
 ·
A final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
 
 In addition, our articles of incorporation authorize us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law.  As a result, we and our stockholders may have more limited rights against our directors
and officers than might otherwise exist under common law.  Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, stockholders’ ability to recover damages from such director or officer will be limited.
 
  - 67 -
  ITEM 2.
UNREGISTERED SALESOF EQUITY AND USE OF PROCEEDS
 
 On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.
 
 We are not obligated to purchase any shares.  Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share
repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2009, we had purchased 1,198,573 shares as treasury stock through the repurchase program noted above.  These shares are carried on our books at cost totaling approximately $5.7 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares
are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of March 31, 2009, we had a total of 1,212,323 shares of treasury stock carried on our books at cost totaling approximately $5.7 million.
 
 The following is a summary of our stock purchases during the three months ended March 31, 2009, as required by Regulation S-K, Item 703.
 
 Period

(a) Total Number of Shares Purchased


(b) Average Price Paid per Share


(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs


(d) Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or ProgramsJanuary 1 - January 31, 2009


13,750


$
3.05



--


$
4,308,000February 1 - February 28, 2009


--



--



--



4,308,000March 1 - March 31, 2009


--



--



--



4,308,000Total


13,750


$
3.05



--


$
4,308,000
 
 ITEM 3.
DEFAULTS UPON SENIORSECURITIES
 
 None.
 
 ITEM 4.
SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS
 
 None.
 
 ITEM 5.
OTHER INFORMATION
 
 None.
 
  - 68 -
  ITEM 6.
EXHIBITS
 
 EXHIBIT INDEX
 
 Exhibit No.

Description of Exhibits2.1 (2)

Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant3.1 (1)

Articles of Incorporation of the Registrant3.2 (1)

Bylaws of the Registrant3.3 (1)

Form of Articles Supplementary of the Registrant3.4 (5)

Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.3.5 (5)

Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.3.6 (6)

Amended Articles of Incorporation of the Registrant4.1 (1)

Reference is made to Exhibits 3.1, 3.2 and 3.34.2 (2)

Specimen Common Stock Certificate4.3 (1)

Form of Rights Certificate4.4 (4)

Junior Subordinated Indenture4.5 (8)

Letter Agreement dated November 7, 2008 pertaining to Junior Subordinated Indenture4.6 (9)

First Supplemental Indenture dated of February 3, 2009 pertaining to Junior Subordinated Indenture4.7 (9)

Letter Agreement dated March 25, 2009 pertaining to Junior Subordinated Indenture10.1 (1)

Form of Management Agreement between Vestin Mortgage, Inc. and the Registrant10.2 (1)

Form of Rights Agreement between the Registrant and the rights agent10.9 (4)

Form of Purchase Agreement10.10 (4)

Amended and Restated Trust Agreement10.11 (7)

Intercreditor Agreement, dated June 16, 2008, by and between Vestin Originations, Inc., Vestin Mortgage, Inc., Vestin Realty Mortgage II, Inc., and Owens Mortgage Investment Fund10.12

Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.21.1 (2)

List of subsidiaries of the Registrant31.1

Section 302 Certification of Michael V. Shustek31.2

Section 302 Certification of Rocio Revollo32

Certification Pursuant to U.S.C. 18 Section 135099.2R (3)

Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics
 
 (1)

Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121).(2)

Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121).(3)

Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)(4)

Incorporated herein by reference to the Current Report on Form 8-K filed on June 27, 2007 (File No. 000-51892)(5)

Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)(6)

Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)(7)

Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892)(8)

Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on November 10, 2008 (File No. 000-51892)(9)

Incorporated herein by reference to the Annual Report on Form 10-K filed on March 26, 2009 (File No. 000-51892)
 
  - 69 -
  
 SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 Vestin Realty Mortgage II, Inc.By:
/s/ Michael V. ShustekMichael V. ShustekPresident and Chief Executive OfficerDate:
September 15, 2009
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 Signature

Capacity

Date/s/ Michael V. Shustek

President and Chief Executive Officer and Director

September 15, 2009Michael V. Shustek

(Principal Executive Officer)/s/ Rocio Revollo

Chief Financial Officer and Director

September 15, 2009Rocio Revollo

(Principal Financial and Accounting Officer)/s/ John E. Dawson

Director

September 15, 2009John E. Dawson/s/ Robert J. Aalberts

Director

September 15, 2009Robert J. Aalberts/s/ Fredrick J. Zaffarese Leavitt

Director

September 15, 2009Fredrick J. Zaffarese Leavitt/s/ Roland M. Sansone

Director

September 15, 2009Roland M. Sansone
 
 
  - 70 -