UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (MARK
ONE)
 
 [X]  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
quarterly period ended June 30,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 Transition
Period From _______ To ________
 
 COMMISSION
FILE NUMBER 333-125121
 
 VESTIN
      REALTY MORTGAGE II, INC.(Exact
      name of registrant as specified in its
charter)
 
 
 MARYLAND
              
              61-1502451(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
 
 6149
SOUTH RAINBOW BOULEVARD, LAS VEGAS, NEVADA 89118
 (Address
of Principal Executive Offices)(Zip
Code)
 
 Registrant’s
Telephone Number: 702.227.0965
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes  [X]    No   [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer [   ]
              Accelerated
      filer [X]Non-accelerated
      filer [   ]
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company
[   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes  [   ]    No   [X]
 
 As of
August 1, 2008, there were 14,887,729 shares of the Company’s Common Stock
outstanding.
 
  Table of Contents
  TABLE
OF CONTENTS
 
 PagePart I
              FINANCIAL INFORMATIONItem 1.
              Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2008 (unaudited) and
      December 31, 2007
              1Consolidated Statements of Operations (unaudited) for the Three
      and Six Months Ended June 30, 2008 and 2007
              2Consolidated Statements of Equity and Other Comprehensive Loss
      (unaudited) for the Six Months Ended June 30, 2008
              3Consolidated Statements of Cash Flows (unaudited) for the Six
      Months Ended June 30, 2008 and 2007
              4Notes to Consolidated Financial Statements
      (unaudited)
              6Report of Independent Registered Public Accounting
      Firm
              34Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              35Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              46Item 4.
              Controls and Procedures
              48Item 4T
              Controls and Procedures
              48Part II
              OTHER INFORMATIONItem 1.
              Legal Proceedings
              48Item 1A.
              Risk Factors
              48Item 2.
              Unregistered Sales of Equity – Securities and Use of
      Proceeds
              60Item 3.
              Defaults Upon Senior Securities
              60Item 4.
              Submission of Matters to a Vote of Security
      Holders
              60Item 5.
              Other Information
              60Item 6.
              Exhibits
              61SIGNATURES
              62Exhibit 31.1Exhibit 31.2Exhibit 32
 
 
  Table of Contents
  PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              CONSOLIDATED
      FINANCIALSTATEMENTS
 
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      BALANCE SHEETSASSETSJune
      30, 2008
              
              
              December
      31, 2007(Unaudited)AssetsCash
              
              $
              14,300,000
              
              
              $
              20,241,000Certificates
      of deposit
              
              
              --
              
              
              
              102,000Investment
      in marketable securities - related party
              
              
              952,000
              
              
              
              2,460,000Interest
      and other receivables, net of allowance of $160,000 at June 30, 2008 and
      December 31, 2007
              
              
              2,121,000
              
              
              
              4,162,000Notes
      receivable, net of allowance of $2,427,000 at June 30, 2008 and $2,619,000
      at December 31, 2007
              
              
              --
              
              
              
              --Real
      estate held for sale
              
              
              21,677,000
              
              
              
              28,563,000Investment
      in real estate loans, net of allowance for loan losses of $34,457,000 at
      June 30, 2008 and $12,873,000 at December 31, 2007
              
              
              253,096,000
              
              
              
              278,190,000Due
      from related parties
              
              
              48,000
              
              
              
              --Investment
      in equity affiliate
              
              
              100,000
              
              
              
              100,000Assets
      under secured borrowings
              
              
              21,000,000
              
              
              
              --Deferred
      financing costs
              
              
              2,797,000
              
              
              
              2,213,000Other
      assets
              
              
              226,000
              
              
              
              137,000Total
      assets
              
              $
              316,317,000
              
              
              $
              336,168,000LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
              
              $
              2,115,000
              
              
              $
              2,641,000Due
      to related parties
              
              
              --
              
              
              
              122,000Secured
      borrowings
              
              
              19,845,000
              
              
              
              --Junior
      subordinated notes payable
              
              
              56,350,000
              
              
              
              60,100,000Note
      payable
              
              
              163,000
              
              
              
              --Dividend
      payable
              
              
              --
              
              
              
              1,546,000Total
      liabilities
              
              
              78,473,000
              
              
              
              64,409,000Commitments
      and ContingenciesStockholders'
      equityPreferred
      stock, $0.0001 par value; 1,000,000 shares authorized; none
      issued
              
              
              --
              
              
              
              --Treasury
      stock, at cost (109,634 shares)
              
              
              (1,440,000
              )
              
              
              (1,440,000
              )Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 14,887,729 shares
      issued and outstanding at June 30, 2008 and 14,866,219 shares issued and
      outstanding at December 31, 2007
              
              
              1,000
              
              
              
              1,000Additional
      paid in capital
              
              
              278,550,000
              
              
              
              278,367,000Accumulated
      deficit
              
              
              (36,788,000
              )
              
              
              (4,198,000
              )Accumulated
      other comprehensive loss
              
              
              (2,479,000
              )
              
              
              (971,000
              )Total
      stockholders' equity
              
              
              237,844,000
              
              
              
              271,759,000Total
      liabilities and stockholders' equity
              
              $
              316,317,000
              
              
              $
              336,168,000
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 1
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(UNAUDITED)For
      The Three
                Months
      Ended
              
              
              For
      The Six
                Months
      Ended6/30/2008
              
              
              6/30/2007
              
              
              6/30/2008
              
              
              6/30/2007RevenuesInterest
      income from investment in real estate loans
              
              $
              5,392,000
              
              
              $
              6,666,000
              
              
              $
              12,479,000
              
              
              $
              13,079,000Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
              
              
              --
              
              
              
              1,044,000
              
              
              
              --
              
              
              
              1,044,000Other
      income
              
              
              524,000
              
              
              
              559,000
              
              
              
              593,000
              
              
              
              799,000Total
      revenues
              
              
              5,916,000
              
              
              
              8,269,000
              
              
              
              13,072,000
              
              
              
              14,922,000Operating
      expensesManagement
      fees - related party
              
              
              275,000
              
              
              
              274,000
              
              
              
              549,000
              
              
              
              548,000Provision
      for loan loss
              
              
              22,287,000
              
              
              
              --
              
              
              
              22,287,000
              
              
              
              --Interest
      expense
              
              
              1,569,000
              
              
              
              312,000
              
              
              
              2,928,000
              
              
              
              646,000Professional
      fees
              
              
              405,000
              
              
              
              597,000
              
              
              
              595,000
              
              
              
              897,000Professional
      fees - related party
              
              
              33,000
              
              
              
              38,000
              
              
              
              63,000
              
              
              
              76,000Other
              
              
              298,000
              
              
              
              240,000
              
              
              
              548,000
              
              
              
              452,000Total
      operating expenses
              
              
              24,867,000
              
              
              
              1,461,000
              
              
              
              26,970,000
              
              
              
              2,619,000Income
      (loss) from operations
              
              
              (18,951,000
              )
              
              
              6,808,000
              
              
              
              (13,898,000
              )
              
              
              12,303,000Non-operating
      incomeGain
      on purchase of debt
              
              
              1,556,000
              
              
              
              --
              
              
              
              1,556,000
              
              
              
              --Dividend
      income - related party
              
              
              43,000
              
              
              
              101,000
              
              
              
              86,000
              
              
              
              127,000Interest
      income from banking institutions
              
              
              40,000
              
              
              
              212,000
              
              
              
              182,000
              
              
              
              368,000Total
      other non-operating income
              
              
              1,639,000
              
              
              
              313,000
              
              
              
              1,824,000
              
              
              
              495,000Loss
      from real estate held for saleRevenue
      related to real estate held for sale
              
              
              --
              
              
              
              7,000
              
              
              
              --
              
              
              
              9,000Gain
      on sale of real estate held for sale - seller financed
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              808,000Expenses
      related to real estate held for sale
              
              
              (303,000
              )
              
              
              (1,708,000
              )
              
              
              (476,000
              )
              
              
              (1,812,000
              )Write
      downs on real estate held for sale
              
              
              (10,988,000
              )
              
              
              (1,028,000
              )
              
              
              (12,780,000
              )
              
              
              (1,028,000
              )Total
      loss from real estate held for sale
              
              
              (11,291,000
              )
              
              
              (2,729,000
              )
              
              
              (13,256,000
              )
              
              
              (2,023,000
              )Income
      (loss) before provision for income taxes
              
              
              (28,603,000
              )
              
              
              4,392,000
              
              
              
              (25,330,000
              )
              
              
              10,775,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --NET
      INCOME (LOSS)
              
              $
              (28,603,000
              )
              
              $
              4,392,000
              
              
              $
              (25,330,000
              )
              
              $
              10,775,000Basic
      and diluted earnings (loss) per weighted average common
    share
              
              $
              (1.92
              )
              
              $
              0.29
              
              
              $
              (1.70
              )
              
              $
              0.72Dividends
      declared per common share
              
              $
              0.17
              
              
              $
              0.41
              
              
              $
              0.49
              
              
              $
              0.80Weighted
      average common shares
              
              
              14,881,563
              
              
              
              14,940,865
              
              
              
              14,878,568
              
              
              
              14,942,304
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 2
-
 Table of Contents
  
 VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF EQUITY AND OTHERCOMPREHENSIVE
      LOSSFOR
      THE SIX MONTHS ENDED JUNE 30, 2008(UNAUDITED)Treasury
      Stock
              
              
              Common
      StockNumber
      of Shares
              
              
              Amount
              
              
              Number
      of Shares
              
              
              Amount
              
              
              Additional
      Paid-in-Capital
              
              
              Accumulated
      deficit
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              TotalStockholders'
      Equity at
                December
      31, 2007
              
              
              109,634
              
              
              $
              (1,440,000
              )
              
              
              14,866,219
              
              
              $
              1,000
              
              
              $
              278,367,000
              
              
              $
              (4,198,000
              )
              
              $
              (971,000
              )
              
              $
              271,759,000Comprehensive
      Loss:Net
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (25,330,000
              )
              
              
              
              
              
              
              (25,330,000
              )Unrealized
      Loss on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,508,000
              )
              
              
              (1,508,000
              )Comprehensive
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (26,838,000
              )Dividends
      Declared to Stockholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,260,000
              )
              
              
              
              
              
              
              (7,260,000
              )Reinvestment
      of Dividends
              
              
              
              
              
              
              
              
              
              
              21,510
              
              
              
              --
              
              
              
              183,000
              
              
              
              
              
              
              
              
              
              
              
              183,000Stockholders'
      Equity at
                June
      30, 2008 (Unaudited)
              
              
              109,634
              
              
              $
              (1,440,000
              )
              
              
              14,887,729
              
              
              $
              1,000
              
              
              $
              278,550,000
              
              
              $
              (36,788,000
              )
              
              $
              (2,479,000
              )
              
              $
              237,844,000
 
 
 
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 3
-
 Table of Contents
  VESTIN
      REALTY MORTGAGEII, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Six
                  Months
      Ended6/30/2008
                
                
                6/30/2007Cash
      flows from operating activities:Net
      income
                
                $
                (25,330,000
                )
                
                $
                10,775,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Write
      downs on real estate held for sale
                
                
                12,780,000
                
                
                
                1,028,000Gain
      on sale of real estate held for sale - seller financed
                
                
                --
                
                
                
                (808,000
                )Gain
      on debt extinguishment
                
                
                (1,556,000
                )
                
                
                --Recovery
      of allowance for doubtful notes receivable, included in other
      income
                
                
                (8,000
                )
                
                
                (558,000
                )Provision
      for loan losses
                
                
                22,287,000
                
                
                
                --Gain
      related to pay off of real estate loan, including recovery of allowance
      for loan loss
                
                
                --
                
                
                
                (1,044,000
                )Amortized
      interest income
                
                
                (35,000
                )
                
                
                (1,323,000
                )Amortized
      financing costs, included in interest expense
                
                
                314,000
                
                
                
                --Change
      in operating assets and liabilities:Interest
      and other receivables
                
                
                2,041,000
                
                
                
                (532,000
                )Due
      to/from related parties
                
                
                (170,000
                )
                
                
                21,000Other
      assets
                
                
                78,000
                
                
                
                329,000Accounts
      payable and accrued liabilities
                
                
                (485,000
                )
                
                
                1,819,000Net
      cash provided by operating activities
                
                
                9,916,000
                
                
                
                9,707,000Cash
      flows from investing activities:Investments
      in real estate loans
                
                $
                (58,739,000
                )
                
                
                (60,581,000
                )Purchase
      of investments in real estate loans from:
                
                
                --VRM
      I
                
                
                (1,800,000
                )
                
                
                --Fund
      III
                
                
                --
                
                
                
                (1,300,000
                )Third
      parties
                
                
                --
                
                
                
                (14,246,000
                )Proceeds
      from loan payoffs
                
                
                35,602,000
                
                
                
                51,284,000Sale
      of investments in real estate loans to:
                
                
                --VRM
      I
                
                
                500,000
                
                
                
                --Third
      parties
                
                
                19,845,000
                
                
                
                --Proceeds
      related to investment in real estate held for sale
                
                
                385,000
                
                
                
                100,000Principal
      payments on real estate held for sale-seller financed
                
                
                --
                
                
                
                3,651,000Legal
      expenses paid and applied against loan allowance
                
                
                --
                
                
                
                (94,000
                )Proceeds
      from note receivable
                
                
                8,000
                
                
                
                582,000Purchase
      of marketable securities - related parties
                
                
                --
                
                
                
                (606,000
                )Purchase
      of investments in certificates of deposit
                
                
                (2,000
                )
                
                
                (1,021,000
                )Proceeds
      from investments in certificates of deposit
                
                
                104,000
                
                
                
                250,000Deposit
      liability
                
                
                --
                
                
                
                440,000Net
      cash used in investing activities
                
                $
                (4,097,000
                )
                
                $
                (21,541,000
                )
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 4
-
 Table of Contents
  VESTIN
      REALTY MORTGAGE II, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(UNAUDITED)For
      The Six
                  Months
      Ended6/30/2008
                
                
                6/30/2007Cash
      flows from financing activities:Principal
      payments on notes payable
                
                $
                (45,000
                )
                
                $
                (74,000
                )Proceeds
      from issuance of notes payable
                
                
                --
                
                
                
                --Proceeds
      from issuance of debt
                
                
                --
                
                
                
                60,000,000Cash
      used for debt extinguishment
                
                
                (2,194,000
                )
                
                
                --Deferred
      financing costs
                
                
                (898,000
                )
                
                
                (2,272,000
                )Dividends
      paid to stockholders, net of reinvestments
                
                
                (8,367,000
                )
                
                
                (13,347,000
                )Dividends
      paid to stockholders - related party
                
                
                (256,000
                )
                
                
                (295,000
                )Purchase
      of treasury stock at cost
                
                
                --
                
                
                
                (432,000
                )Net
      cash provided by in financing activities
                
                
                (11,760,000
                )
                
                
                43,580,000NET
      CHANGE IN CASH
                
                
                (5,941,000
                )
                
                
                31,746,000Cash,
      beginning of period
                
                
                20,241,000
                
                
                
                16,841,000Cash,
      end of period
                
                $
                14,300,000
                
                
                $
                48,587,000Supplemental
      disclosures of cash flows information:Interest
      paid
                
                $
                2,928,000
                
                
                $
                646,000Non-cash
      investing and financing activities:Dividend
      payable
                
                $
                --
                
                
                $
                2,077,000Reinvestment
      of dividends
                
                $
                183,000
                
                
                $
                285,000Loan
      payoffs of loans funded through secured borrowings
                
                $
                --
                
                
                $
                13,796,000Loans
      funded through secured borrowing
                
                $
                19,845,000
                
                
                $
                --Interest
      reserves related to secured borrowings
                
                $
                1,155,000
                
                
                $
                --Note
      payable relating to prepaid E & O insurance
                
                $
                208,000
                
                
                $
                227,000Real
      estate held for sale acquired through foreclosure
                
                $
                6,280,000
                
                
                $
                --Loan
      rewritten with same or similar collateral
                
                $
                1,690,000
                
                
                $
                2,544,000Purchase
      of equity investment related to junior subordinated notes
      payable
                
                $
                --
                
                
                
                100,000Unearned
      revenue from loans rewritten with same or similar property as
      collateral
                
                $
                --
                
                
                $
                454,000Decrease
      in deposit liability related to pay off of real estate held for sale -
      seller financed
                
                $
                --
                
                
                $
                4,507,000Adjustment
      to note receivable and related allowance
                
                $
                184,000
                
                
                $
                978,000Prepaid
      amount applied to accounts payable
                
                $
                41,000
                
                
                $
                --Unrealized
      gain (loss) on marketable securities - related party
                
                $
                (1,508,000
                )
                
                $
                184,000
  See
review report of Independent Registered Public Accounting Firm.
 The
accompanying notes are an integral part of these consolidated
statements.
 - 5
-
 Table of Contents
  
 VESTIN
REALTY MORTGAGEII, INC
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
30, 2008
 
 (UNAUDITED)
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
liability company for the purpose of investing in commercial real estate loans
(hereafter referred to as “real estate loans”).  Vestin Realty
Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
corporation for the sole purpose of effecting a merger with Fund
II.  On March 31, 2006, Fund II merged into VRM II and the members of
Fund II received one share of VRM II’s common stock for each membership unit of
Fund II.  References in this report to the “Company”, “we”, “us” or
“our” refer to Fund II with respect to the period prior to April 1, 2006 and to
VRM II with respect to the period commencing on April 1,
2006.  Because we were a limited liability company (“LLC”) during the
prior periods reflected in this report, we make reference to Fund II’s “members”
rather than “stockholders” in reporting our financial results.
 
 We invest
in loans secured by real estate through deeds of trust or mortgages (hereafter
referred to collectively as “deeds of trust” and as defined in our Management
Agreement as “Mortgage Assets”).  We commenced operations in June
2001.
 
 We
operate as a real estate investment trust (“REIT”).  We are not a
mutual fund or an investment company within the meaning of the Investment
Company Act of 1940, nor are we subject to any regulation
thereunder.  As a REIT, we are required to have a December 31 fiscal
year end.
 
 Our
manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
Group”), a Delaware corporation.  Michael Shustek, the CEO and
director of our manager and CEO, President and a director of us, wholly owns
Vestin Group, which is engaged in asset management, real estate lending and
other financial services through its subsidiaries.  Our manager, prior
to June 30, 2006, also operated as a licensed Nevada mortgage broker and was
generally engaged in the business of brokerage, placement and servicing of
commercial loans secured by real property.  On July 1, 2006, a
mortgage broker license was issued to an affiliated company, Vestin
Originations, Inc. (“Vestin Originations”) that has continued the business of
brokerage, placement and servicing of real estate loans.  Vestin
Originations is a wholly owned subsidiary of Vestin Group.  On
September 1, 2007, the servicing of real estate loans was assumed by our
manager.
 
 Pursuant
to our management agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us, and provides similar
services to our subsidiaries.  Without limiting the foregoing, our
manager performs other services as may be required from time to time for
management and other activities relating to our assets, as our manager shall
deem appropriate.  Consequently, our operating results are dependent
upon our manager’s ability and performance in managing our operations and
servicing our assets.
 
 Vestin
Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the
successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III, LLC
(“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned by
our manager’s CEO.  These entities also invest in real estate
loans.
 
 The
consolidated financial statements include the accounts of us and our wholly
owned taxable REIT subsidiary, TRS II, Inc.  All significant
inter-company transactions and balances have been eliminated in
consolidation.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 6
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 Table of Contents
  On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through Vestin II Capital Trust I (“VCT I”), a special
purpose business trust.  VCT I, is a Delaware statutory
trust.  Our interest in VCT I is accounted for using the equity method
and the assets and liabilities are not consolidated into our financial
statements due to our determination that VCT I is a variable interest entity in
which we are not the primary beneficiary under Financial Accounting Standards
Board Interpretation No. 46R (“FIN 46R”).
 
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
financial statements of the Company have been prepared in accordance with the
accounting principles generally accepted in the United States of America
(“GAAP”).  Management has included all normal recurring adjustments
considered necessary to give a fair presentation of operating results for the
periods presented.  Interim results are not necessarily indicative of
results for a full year.  The information included in this Form 10-Q
should be read in conjunction with information included in the 2007 annual
report filed on Form 10-K and our quarterly report filed on Form 10-Q for the
three months ended March 31, 2008.
 
 Management
Estimates
 
 The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 Revenue
Recognition
 
 Interest
is recognized as revenue when earned according to the terms of the loans, using
the effective interest method.  We do not accrue interest income on
loans once they are determined to be impaired.  A loan is impaired
when based on current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement or when the payment of interest is 90 days past due.  Cash
receipts will be allocated to interest income, except when such payments are
specifically designated by the terms of the loan as principal reduction or when
management does not believe our investment in the loan is fully
recoverable.
 
 Investments in Real Estate
Loans
 
 We may
from time to time acquire or sell investments in real estate loans from or to
our manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  The primary purpose is to either free up
capital to provide liquidity for various reasons, such as loan diversification,
or place excess capital in investments to maximize the use of our
capital.  Selling or buying loans allows us to diversify our loan
portfolio within these parameters.  Due to the short-term nature of
the loans we make and the similarity of interest rates in loans we normally
would invest in, the fair value of a loan typically approximates its carrying
value.  Accordingly, discounts or premiums typically do not apply upon
sales of loans and therefore, generally no gain or loss is recorded on these
transactions, regardless of whether to a related or unrelated
party.
 
 Investments
in real estate loans are secured by deeds of trust or
mortgages.  Generally, our real estate loans require interest only
payments with a balloon payment of the principal at maturity.  We have
both the intent and ability to hold real estate loans until maturity and
therefore, real estate loans are classified and accounted for as held for
investment and are carried at amortized cost.  Loans sold to or
purchased from affiliates are accounted for at the principal balance and no gain
or loss is recognized by us or any affiliate.
  See
review report of Independent Registered Public Accounting Firm.
 - 7
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  Loan-to-value
ratios are initially based on appraisals obtained at the time of loan
origination and are updated, when new appraisals are received, to reflect
subsequent changes in value estimates.  Such appraisals are generally
dated within 12 months of the date of loan origination and may be commissioned
by the borrower.
 
 Allowance for Loan
Losses
 
 We
maintain an allowance for loan losses on our investments in real estate loans
for estimated credit impairment.  Our manager’s estimate of losses is
based on a number of factors including the types and dollar amounts of loans in
the portfolio, adverse situations that may affect the borrower’s ability to
repay, prevailing economic conditions and the underlying collateral securing the
loan.  Additions to the allowance are provided through a charge to
earnings and are based on an assessment of certain factors, which may indicate
estimated losses on the loans.  Actual losses on loans are recorded as
a charge-off or a reduction to the allowance for loan
losses.  Generally, subsequent recoveries of amounts previously
charged off are added back to the allowance and included as income.
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the real estate lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 Additional
facts and circumstances may be discovered as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions, which can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
 Real Estate Held For
Sale
 
 Real
estate held for sale includes real estate acquired through foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or
Disposal of Long Lived Assets(“FAS 144”),we seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  The carrying values of real estate held for sale are assessed
on a regular basis from updated appraisals, comparable sales values or purchase
offers.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 8
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  Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
initial and continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sales agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sales
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sales agreements are recorded under the deposit method or cost recovery method
as defined in FAS 66.  Under the deposit method, no profit is
recognized and any cash received from the buyer is reported as a deposit
liability on the balance sheet.  Under the cost recovery method, no
profit is recognized until payments by the buyer exceed the carrying basis of
the property sold.  Principal payments received will reduce the
related receivable, and interest collections will be recorded as unrecognized
gross profit on the balance sheet.  The carrying values of these
properties are included in real estate held for sale on the accompanying
consolidated balance sheets.
 
 In cases
where the investment by the buyer is significant (generally 20% or more) and the
buyer has an adequate continuing investment, the purchase money debt is not
subject to future subordination, and a full transfer of risks and rewards has
occurred, we will use the full accrual method.  Under the full accrual
method, a sale is recorded and the balance remaining to be paid is recorded as a
normal note.  Interest is recorded as income when
received.
 
 Classification of Operating
Results from Real Estate Held for Sale
 
 FAS 144 –
Accounting for the Impairment
or Disposal of Long-Lived Assets ("FAS 144'') generally requires
operating results from long lived assets held for sale to be classified as
discontinued operations as a separately stated component of net
income.  Our operations related to real estate held for sale are
separately identified in the accompanying consolidated statements of
income.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 9
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  Secured
Borrowings
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue for any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).
 
 The
Inter-creditor Agreements provide us additional funding sources for real estate
loans whereby an unaffiliated investor (the “Investor”) may participate on a
non-pari passu basis in certain real estate loans with us and/or VRM I and/or
Fund III (collectively, the “Lead Lenders”).  In the event of borrower
non- performance, the Inter-creditor Agreements generally provide that the Lead
Lenders must repay the Investor’s loan amount either by (i) continuing to remit
to the Investor the interest due on the participated loan amount; (ii)
substituting an alternative loan acceptable to the Investor; or (iii)
repurchasing the participation from the Investor for the outstanding balance
plus accrued interest.
 
 Additionally,
an Investor may participate in certain loans with the Lead Lenders through
Participation Agreements.  In the event of borrower non-performance,
the Participation Agreement may allow the Investor to be repaid up to the amount
of the Investor’s investment prior to the Lead Lender being
repaid.  Real estate loan financing under the Participation Agreements
are also accounted for as a secured borrowing in accordance with FAS
140.  We do not receive any revenues for entering into secured
borrowing arrangements.
 
 Investment in Marketable
Securities – Related Party
 
 Investment
in marketable securities – related party consists of stock in VRM
I.  The securities are stated at fair value as determined by the
market price as of June 30, 2008.  All securities are classified as
available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities.
  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 requires 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.
 
 While the
available-for-sale investment has continued to decline in fair value, we believe
the change continues to be temporary.  Since we have the ability and
intent to hold the securities to recovery, we have concluded that the unrealized
loss is appropriate as of June 30, 2008.  We will continue to evaluate
the investment in marketable securities on a quarterly basis.
 Fair Value
Disclosures
 
 FAS 107 –
Disclosures about Fair Value
of Financial Instruments (“FAS 107”), requires the determination of fair
value of our financial assets.  The following methods and assumptions
were used to estimate the fair value of financial instruments included in the
following categories:
 
 (a)
              Cash:  The
      carrying value of cash approximates fair
value.
 
 (b)
              Certificate
      of Deposits:  The carrying amounts of these instruments
      approximate fair value due to their short-term
  nature.
 
 (c)
              Investment
      in Marketable Securities – Related Party:  The carrying amounts
      of these investment securities are classified as available-for-sale and
      are recorded at their fair values.  Fair values are determined
      by the quoted market price of the
investment.
 
 (d)
              Interest
      and Other Receivables:  The carrying amount of these instruments
      approximate fair value due to their short-term
  nature.
 
 (e)
              Investment
      in Real Estate Loans:  The fair value estimates for investments
      in real estate loans are generally based upon the present value of
      expected cash flows discounted at rates currently available for similar
      loans.  Fair value estimates are made at a specific point in
      time; based on relevant market information; are subjective in nature; and
      involve uncertainties and matters of significant judgment.  Fair
      values for loans, which are collaterally dependant, and/or are delinquent
      and/or in foreclosure are determined their by underlying collateral
      securing the loans.
  See
review report of Independent Registered Public Accounting Firm.
 - 10
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 Table of Contents
  
 (f)
              Assets
      under Secured Borrowing:  The carrying amount of these
      instruments approximate fair value.  The fair value is estimated
      based upon projected cash flows discounted at the estimated current
      interest rates at which similar loans would be
  made.
 
 (g)
              Accounts
      Payable and Accrued Liabilities:  The carrying amount of these
      instruments approximate fair value due to their short-term
      nature.
 
 (h)
              Junior
      Subordinated Notes Payable:  Due to the current economic credit
      environment there are no comparable instruments to estimate the current
      fair value of the junior subordinated notes payable, accordingly the
      estimated current fair value approximate the carrying value of the notes
      payable.
 
 At June
30, 2008 and December 31, 2007, the estimated fair values of the real estate
loans were approximately $251.8 million and $278.0 million,
respectively.  These estimates were based upon the present value of
expected cash flows discounted at rates currently available for similar
loans.  Fair value estimates are made at a specific point in time;
based on relevant market information; are subjective in nature; and involve
uncertainties and matters of significant judgment.  Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
would be collected upon maturity or disposition of the loans.
 
 On
January 1, 2008, we adopted FAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB statement No.
115 (FAS 159) but we did not make any fair value elections with respect
to any of our eligible assets or liabilities as permitted under the provisions
of FAS 159 as of June 30, 2008.  In conjunction with the adoption of
FAS 159, we also adopted FAS 157, Fair Value Measures, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements  In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access.  Fair values determined by Level 2 inputs utilize inputs other
than quoted prices included in Level 1 that are observable for the asset or
liability, such as interest rates and yield curves that are observable at
commonly quoted intervals.  Level 3 inputs are unobservable inputs for
the asset or liability, and include situations where there is little, if any,
market activity for the asset or liability.  In instances in which the
inputs used to measure fair value may fall into different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the fair
value measurement in its entirety has been determined is based on the lowest
level input that is significant to the fair value measurement in its
entirety.
 
 At June
30, 2008, the only asset measured at fair value on a recurring basis is the
investment in marketable securities – related party totaling approximately $1.0
million, which was estimated using Level 1 inputs, or quoted prices in active
markets, as described above.
 
 Basic and Diluted Earnings
Per Common Share
 
 Basic
earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share (“FAS
128”), by dividing net income available to common stockholders by the weighted
average number of common shares outstanding.  Diluted EPS is similar
to basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
exercised.  We had no outstanding common share equivalents during the
three and six months ended June 30, 2008 and 2007.  The following is a
computation of the EPS data for the three and six months ended June 30, 2008 and
2007:
  See
review report of Independent Registered Public Accounting Firm.
 - 11
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 Table of Contents
  
 For
      the Three Months
                Ended
      June 30,
              
              
              For
      the Six Months
                Ended
      June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income available to common stockholders
              
              $
              (28,603,000
              )
              
              $
              4,392,000
              
              
              $
              (25,330,000
              )
              
              $
              10,775,000Weighted
      average number of common shares outstanding during the
    period
              
              
              14,881,563
              
              
              
              14,940,865
              
              
              
              14,878,568
              
              
              
              14,942,304Basic
      and diluted earnings per weighted average common share
              
              $
              (1.92
              )
              
              $
              0.29
              
              
              $
              (1.70
              )
              
              $
              0.72
 
 Common Stock
Dividends
 
 During
the three and six months ended June 30, 2008, cash dividends declared totaled
approximately $0.17 and $0.49, respectively, per common share, representing
ordinary income.
 
 During
June 2008, our Board of Directors decided to temporarily suspend the payment of
dividends.  We will continue to comply with the REIT requirements and
will distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 Treasury
Stock
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws, including
SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.  As of June 30, 2008, we had purchased
109,634 shares of treasury stock through the repurchase program noted
above.  These shares are carried on our books at a cost totaling
approximately $1.4 million.
 
 Segments
 
 We
operate as one business segment.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary.  All significant intercompany balances and transactions
have been eliminated in consolidation.  Our interest in VCT I (see
Note I – Junior Subordinated Notes) is accounted for using the equity method and
the assets and liabilities are not consolidated into our financial statements
due to our determination that VCT I is a variable interest entity in which we
are not the primary beneficiary under FIN 46R.
 
 Income
Taxes
 
 We are
organized and conduct our operations to qualify as a real estate investment
trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the “Code”) and to comply with the provisions of the Internal
Revenue Code with respect thereto.  A REIT is generally not subject to
federal income tax on that portion of its REIT taxable income (“Taxable Income”)
which is distributed to its stockholders, provided that at least 90% of Taxable
Income is distributed and provided that certain other requirements are
met.
  See
review report of Independent Registered Public Accounting Firm.
 - 12
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  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 six months ended June 30, 2008, was approximately
zero.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ consolidated financial
statements to conform to the current period presentation.
 
 NOTE
C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
 
 Financial
instruments with concentration of credit and market risk include cash and loans
secured by deeds of trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits based on management review of these financial
institutions.  As of June 30, 2008 and December 31, 2007, we had
approximately $14.1 million and $19.7 million, respectively, in excess of the
federally insured limits.
 
 As of
June 30, 2008, 38%, 20%, 16% and 14% of our loans were in Nevada, Arizona,
Oregon and California, respectively, compared to 45%, 15%, 16% and 7%, at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, a downturn in the local real estate
markets in these states could have a material adverse effect on us.
 
 At June
30, 2008, the aggregate amount of loans to our three largest borrowers
represented approximately 23% of our total investment in real estate
loans.  These real estate loans consisted of commercial loans, located
in California and Oregon with first lien positions, interest rates between 10.5%
and 14%, with an aggregate outstanding balance of approximately $68.9 million
and maturing through March 2009.  At December 31, 2007, the aggregate
amount of loans to our three largest borrowers represented approximately 22% of
our total investment in real estate loans.  These real estate loans
consisted of commercial loans, located in Hawaii and Oregon with first lien
positions, interest rates between 10.5% and 14.0%, with an aggregate outstanding
balance of approximately $63.9 million.  The loans in Hawaii described
above referred to the RightStar loans discussed in Note D – Investments in Real Estate
Loans.  As of June 30, 2008, one of our three largest loans,
approximating $25.7 million, was considered delinquent.  Our manager
is negotiating with the borrower to modify the terms of the loan.  Our
manager anticipates we will be able to collect amounts due according to the
contractual terms of the loan.  On July 15, 2008, one of our largest
loans was sold to a third party and we were paid the full amount outstanding on
the loan, approximately $22.3 million.  As of
June 30, 2008, in addition to non-performing loans, we have three loans,
totaling approximately $29.3 million, which are considered
delinquent.  These three loans share a common
guarantor.  Our manager is negotiating with the borrowers to modify
the terms of the loans and anticipates we will be able to collect all amounts
due.We have a significant concentration of credit
risk with our largest borrowers.  Any additional defaults by such
borrowers could have a material adverse effect on us.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  As
the economy weakens and credit becomes more difficult to obtain, many of our
borrowers who develop and sell commercial real estate projects have been unable
to complete their projects, obtain takeout financing or have been otherwise
adversely impacted.  In addition, an increase in interest rates over
the loan rate applicable at origination of the loan may have an adverse effect
on our borrower’s ability to refinance.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
June 30, 2008, all of our loans provided for payments of interest only with a
“balloon” payment of principal payable in full at the end of the
term.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 13
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  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 June 30, 2008, we had approximately $63.6 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 $94.6
million.  These loans had interest reserves of approximately $7.5
million, of which our portion was approximately $6.0 million.  As of
June 30, 2008, approximately $12.4 million of these investments in real estate
loans that had interest reserves were considered
non-performing.  These loans’ interest reserves, totaling $214,000,
have been suspended as of June 30, 2008.  At December 31, 2007, we had
approximately $108.8 million in investments in real estate loans that had
interest reserves where the total outstanding principal due to our co-lenders
and us was approximately $128.6 million.  These loans had interest
reserves of approximately $10.4 million, of which our portion was approximately
$8.8 million.
 
 As of
June 30, 2008, we had five real estate loan products consisting of commercial,
construction, acquisition and development, land and residential.  The
effective interest rates on all product categories range from 6.0% to
15.0%.  Revenue by product will fluctuate based upon relative balances
during the period.
 
 Investments
in real estate loans as of June 30, 2008, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value (1)
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              3
              
              
              $
              17,584,000
              
              
              
              12.89%
              
              
              
              6.12%
              
              
              
              58.72%
              
              
              
              44.13%Commercial
              
              
              19
              
              
              
              150,058,000
              
              
              
              12.41%
              
              
              
              52.18%
              
              
              
              82.40%
              
              
              
              69.71%Construction
              
              
              8
              
              
              
              32,505,000
              
              
              
              11.31%
              
              
              
              11.30%
              
              
              
              76.54%
              
              
              
              76.54%Land
              
              
              13
              
              
              
              87,406,000
              
              
              
              12.17%
              
              
              
              30.40%
              
              
              
              108.86%
              
              
              
              70.71%43
              
              
              $
              287,553,000
              
              
              
              12.24%
              
              
              
              100.00%
              
              
              
              88.33%
              
              
              
              69.20%
 
 Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
              
              Number
      Of Loans
              
              
              Balance
      (2)
              
              
              Weighted
      Average Interest Rate
              
              
              Portfolio
      Percentage
              
              
              Current
      Weighted Average Loan-To-Value (1)
              
              
              Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.30%
              
              
              
              49.42%
              
              
              
              46.75%Commercial
              
              
              19
              
              
              
              131,257,000
              
              
              
              12.12%
              
              
              
              45.10%
              
              
              
              81.43%
              
              
              
              74.57%Construction
              
              
              9
              
              
              
              45,883,000
              
              
              
              11.04%
              
              
              
              15.76%
              
              
              
              73.84%
              
              
              
              73.84%Land
              
              
              14
              
              
              
              95,585,000
              
              
              
              12.12%
              
              
              
              32.84%
              
              
              
              64.43%
              
              
              
              62.41%46
              
              
              $
              291,063,000
              
              
              
              12.00%
              
              
              
              100.00%
              
              
              
              72.64%
              
              
              
              68.52%
 
 (1)
              Loan-to-value
      ratios are based on the most recent appraisals and may not reflect
      subsequent changes in value and are prior to allowances for loan
      losses.  Subsequent recognition of allowance for loan losses
      will result in a maximum loan-to-value ratio of 100% per
      loan.  Such appraisals, which may be commissioned by the
      borrower, are generally dated no greater than 12 months prior to the date
      of loan origination.  The appraisals may be for the current
      estimate of the “as-if developed” value of the property, which
      approximates the post-construction value of the collateralized property
      assuming that such property is developed.  “As-if developed”
      values on raw land loans or acquisition and development loans often
      dramatically exceed the immediate sales value and may include anticipated
      zoning changes, and successful development by the purchaser; upon which
      development is dependent on availability of
  financing.
  See
review report of Independent Registered Public Accounting Firm.
 - 14
-
 Table of Contents
  As most
of the appraisals will be prepared on an “as-if developed” basis, if a loan goes
into default prior to completion of the development of the project, the market
value of the property may be substantially less than the appraised
value.  As a result, there may be less security than anticipated at
the time the loan was originally made.  If there is less security and
a default occurs, we may not recover the full amount of the loan.
 
 (2)
              The
      following table reconciles the balance of the loan portfolio to the amount
      shown on the accompanying Consolidated Balance
  Sheets.
 
 June
      30, 2008
                Balance
      (a)
              
              
              December
      31, 2007 BalanceBalance
      per loan portfolio
              
              $
              287,553,000
              
              
              $
              291,063,000Less:Allowance
      for loan losses **
              
              
              (34,457,000
              )
              
              
              (12,873,000
              )Balance
      per consolidated balance sheet
              
              $
              253,096,000
              
              
              $
              278,190,000
 
 (a)
              We
      recognized an impairment cost of approximately $0.6 million, which was
      applied to the loan balance, related to the restructuring of a loan,
      whereby the interest rate was reduced from 12% to 6% starting in May
      2008.  In addition, we recognized an allowance for loan loss of
      approximately $1.6 million, related to this
  loan.
 
 The
following is a schedule of priority of real estate loans as of June 30, 2008 and
December 31, 2007:
 
 Loan
      Type
              
              Number
      of Loans
              
              
              June
      30, 2008 Balance*
              
              
              Portfolio
                Percentage
              
              
              Number
      of Loans
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
                PercentageFirst
      deeds of trust
              
              
              39
              
              
              $
              262,549,000
              
              
              
              91.30%
              
              
              
              44
              
              
              $
              288,665,000
              
              
              
              99.18%Second
      deeds of trust
              
              
              4
              
              
              
              25,004,000
              
              
              
              8.70%
              
              
              
              2
              
              
              
              2,398,000
              
              
              
              0.82%43
              
              
              $
              287,553,000
              
              
              
              100.00%
              
              
              
              46
              
              
              $
              291,063,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 **  Please
refer to (3) Specific Reserve
Allowance below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of June 30, 2008:
 
 Non-performing
      and past due loans (a)
              
              $
              150,326,000July
      2008 - September 2008 (b)
              
              
              62,115,000October
      2008 - December 2008
              
              
              7,791,000January
      2009 – March 2009 (c)
              
              
              32,269,000April
      2009 - June 2009
              
              
              12,600,000Thereafter
              
              
              22,452,000Total
              
              $
              287,553,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to June 30,
2008.
 
 (b)
              During
      July 2008, we, VRM I and Fund III received a principal payment of
      approximately $5.9 million, of which our portion was approximately $4.9
      million, plus accrued interest on a delinquent loan scheduled to mature
      during July 2008.  The interest rate on the loan was increased
      from 10.5% to 12%, of which 6% will be accrued and due at the new maturity
      date in February 2009.
 
 (c)
              On
      July 15, 2008, one of our largest loans with a maturity date in March
      2009, was sold to a third party and we were paid the full amount
      outstanding on the loan, approximately $22.3
  million.
  See
review report of Independent Registered Public Accounting Firm.
 - 15
-
 Table of Contents
  The
following is a schedule by geographic location of investments in real estate
loans as of June 30, 2008 and December 31, 2007:
 
 June
      30, 2008 Balance*
              
              
              Portfolio
      Percentage
              
              
              December
      31, 2007 Balance*
              
              
              Portfolio
      PercentageArizona
              
              $
              58,596,000
              
              
              
              20.38%
              
              
              $
              43,865,000
              
              
              
              15.07%California
              
              
              41,732,000
              
              
              
              14.51%
              
              
              
              19,673,000
              
              
              
              6.76%Hawaii
              
              
              17,291,000
              
              
              
              6.01%
              
              
              
              17,291,000
              
              
              
              5.94%Nevada
              
              
              108,159,000
              
              
              
              37.62%
              
              
              
              132,000,000
              
              
              
              45.35%New
      York
              
              
              --
              
              
              
              --%
              
              
              
              16,981,000
              
              
              
              5.83%Oklahoma
              
              
              2,155,000
              
              
              
              0.75%
              
              
              
              5,051,000
              
              
              
              1.74%Oregon
              
              
              46,619,000
              
              
              
              16.21%
              
              
              
              46,620,000
              
              
              
              16.02%Texas
              
              
              11,200,000
              
              
              
              3.89%
              
              
              
              7,924,000
              
              
              
              2.72%Washington
              
              
              1,801,000
              
              
              
              0.63%
              
              
              
              1,658,000
              
              
              
              0.57%Total
              
              $
              287,553,000
              
              
              
              100.00%
              
              
              $
              291,063,000
              
              
              
              100.00%
 
 *  Please
see (2) above
 
 As of
June 30, 2008, we had 17 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 $92.1 million, net of allowance
for loan losses of approximately $29.9 million, which does not include the
allowances of approximately $4.6 million relating to the decrease in the
property value for performing loans as of June 30, 2008.  These loans
have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  At June 30, 2008, the following
loans were non-performing:
 
 ·
              RightStar,
      Inc. (Part I & Part II), are loans secured by a lien on the business
      and virtually all of the property of RightStar, which includes 4
      cemeteries and 8 mortuaries in Hawaii with an outstanding balance of
      approximately $32.3 million of which our portion is approximately $17.3
      million ($8.2 million for Part I and $9.1 million for Part
      II).  The lenders have commenced a judicial foreclosure on the
      loans, Part I and Part II.
 
 ·
              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 June 30, 2008, this loan has been considered
      non-performing for the last twenty-two months.  Our manager
      brought foreclosure and other legal proceedings to protect our interest in
      the collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of legal
      actions commenced on our behalf with respect to other collateral securing
      the non-performing loan.  We are vigorously contesting their
      position; however, we cannot determine at this time the outcome of these
      legal proceedings.  As of June 30, 2008, based on our manager’s
      evaluation, our manager has provided a specific allowance of approximately
      $2.8 million, of which our portion is approximately $1.4
      million.
 
 ·
              Jeffrey's
      Court, LLC, is a loan to provide financing for the development of 4.92
      acres of land into 119 condominium units in Las Vegas, NV, with an
      outstanding balance of approximately $5.1 million of which our portion is
      $3.1 million and is secured by a first lien on the property and guaranteed
      by the borrower.  As of June 30, 2008, this loan has been
      considered non-performing for the last eleven months.  Our
      manager commenced foreclosure proceedings, and on December 6, 2007, the
      borrower filed for protection under Chapter 11 of the Bankruptcy Code in
      the United States Bankruptcy Court for the District of
      Nevada.  On March 14, 2008, a motion to approve an adequate
      protection agreement (the “Agreement”) was filed with the
      Court.  The motion was subsequently approved.  The
      Agreement provides for us to receive monthly payments until August 31,
      2008, when the entire loan balance shall be due and payable.  As
      of June 30, 2008, the borrower has made $163,000 in payments as part of
      the agreement, of which our portion is $99,000.  In addition,
      the automatic stay from foreclosure has been
  vacated.
  See
review report of Independent Registered Public Accounting Firm.
 - 16
-
 Table of Contents
  In the
event of a default under the Agreement, our manager may immediately proceed with
foreclosure.  In addition, we have filed a complaint in State Court,
against the guarantors of the loan, in order to enforce the personal
guarantees.  Our manager has evaluated this loan and concluded that
the current value of the underlying collateral should be sufficient to protect
us from loss of principal.  No specific allowance was deemed necessary
as of June 30, 2008.
 
 ·
              V
      & M Homes at the Palms, Inc., is a loan, with a variable interest
      rate, to provide acquisition financing for an 80 acre parcel of land in
      Florence, AZ, with an outstanding balance of approximately $3.9 million of
      which our portion is approximately $1.5 million and is secured by a first
      lien on the property and guaranteed by the principals of the
      borrower.  As of June 30, 2008, this loan has been considered
      non-performing for the last ten months.  Our manager commenced
      foreclosure proceedings, and on December 24, 2007, the borrower filed for
      protection under Chapter 11 of the Bankruptcy Code in the United States
      Bankruptcy Court for the District of Arizona. On July 2, 2008, we, VRM I
      and Fund III were granted a default judgment against the guarantors of
      this loan.  We will seek to attach the assets of the guarantors,
      however, it is uncertain the amount, if any, that we will be successful in
      collecting.  On July 15, 2008, we, VRM I and Fund III foreclosed
      upon V & M Homes at the Palms, Inc. and classified it as real estate
      held for sale.  As of June 30, 2008, based on our manager’s
      evaluation and updated appraisals, our manager has provided a specific
      allowance of approximately $2.4 million, of which our portion is
      approximately $0.9 million.
 
 ·
              Cliff
      Shadows Properties, LLC is a loan to provide construction financing for a
      174 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las
      Vegas, NV, with an outstanding balance of approximately $17.0 million of
      which our portion is approximately $16.1 million and is secured by a first
      lien on the property and guaranteed by the borrower.  As of June
      30, 2008, this loan has been considered non-performing for the last five
      months.  Our manager has commenced both foreclosure proceedings
      and litigation against the personal guarantors in order to enforce the
      personal guarantees.  In addition, our motion was granted for
      the appointment of a receiver to oversee the day to day operations of the
      borrower.  Our manager has evaluated this loan and concluded
      that the value of the underlying collateral is sufficient to protect us
      from loss of principal.  No specific allowance was deemed
      necessary as of June 30, 2008.
 
 ·
              MRPE,
      LLC is a loan to provide financing for the development of 132.03 acres of
      land within the Wolf Creek Estates Master Planned Community, located in
      Mesquite, NV, with an outstanding balance of $17.0 million of which our
      portion is approximately $12.2 million and is secured by a first lien on
      the property and guaranteed by the principals of the
      borrower.  As of June 30, 2008, this loan has been considered
      non-performing for the last five months.  Our manager has
      commenced both foreclosure proceedings and litigation against the personal
      guarantors in order to enforce the personal guarantees.  As of
      June 30, 2008, based on our manager’s evaluation and updated appraisals,
      our manager has provided a specific allowance of approximately $2.9
      million, of which our portion is approximately $2.1
      million.  The foreclosure sale on this property is scheduled for
      August 11, 2008.  Upon foreclosure, we would classify it as real
      estate held for sale.
 
 ·
              The
      Orleans at Mesquite Estates, LLC is a loan to provide financing for the
      development of 21.7 gross acres of Mesquite Estates Planned Unit
      Development with 65 "paper" lots, located in Mesquite, NV, with an
      outstanding balance of $2.3 million and is secured by a first lien on the
      property and guaranteed by the principals of the borrower.  As
      of June 30, 2008, this loan has been considered non-performing for the
      last four months.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  As of June 30, 2008, based on
      our manager’s evaluation and updated appraisals, our manager has provided
      a specific allowance of approximately $0.4 million.  On August
      8, 2008, we foreclosed upon the Orleans at Mesquite Estate, LLC and
      classified it as real estate held for
sale.
 
 ·
              The
      Laurels at Mesquite Estates, LLC is a loan to provide financing for the
      development of 26.5 gross acres of Mesquite Estates Planned Unit
      Development with 60 "paper" lots, located in Mesquite, NV, with an
      outstanding balance of $2.8 million and is secured by a first lien on the
      property and guaranteed by the principals of the borrower.  As
      of June 30, 2008, this loan has been considered non-performing for the
      last four months.
  See
review report of Independent Registered Public Accounting Firm.
 - 17
-
 Table of Contents
  Our
manager has commenced both foreclosure proceedings and litigation against the
personal guarantors in order to enforce the personal guarantees.  As
of June 30, 2008, based on our manager’s evaluation and updated appraisals, our
manager has provided a specific allowance of approximately $0.4
million.  The foreclosure sale on this property is scheduled for
August 11, 2008.  Upon foreclosure, we would classify it as real
estate held for sale.
 
 ·
              Sycamore
      Glenn at Mesquite Estates, LLC is a loan to provide financing for the
      development of 32.3 gross acres of Mesquite Estates Planned Unit
      Development with 180 "paper" lots, located in Mesquite, NV, with an
      outstanding balance of $4.4 million and is secured by a first lien on the
      property and guaranteed by the principals of the borrower.  As
      of June 30, 2008, this loan has been considered non-performing for the
      last three months.  Our manager has commenced both foreclosure
      proceedings and litigation against the personal guarantors in order to
      enforce the personal guarantees.  Based on our manager’s
      evaluation and updated appraisals, our manager concluded that the value of
      the underlying collateral is sufficient to protect us from loss of
      principal.
 
 ·
              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
      $4.7 million, of which our portion is approximately $3.3
      million.  On April 5, 2008, this loan was considered to be in
      default due to the default of the Redwood Place, LLC loan, as a result of
      cross-default provisions.  As of June 30, 2008, this loan has
      been considered non-performing for the last two months.  Our
      manager has commenced foreclosure, and is proceeding with legal action to
      enforce the personal guarantees.  As of June 30, 2008, based on
      our manager’s evaluation and updated appraisals, our manager has provided
      a specific allowance of approximately $3.3
  million.
 
 ·
              World
      Capital La Piazza, LLC, is a loan to provide financing for the development
      of 8.44 net acres of land located in Henderson, NV.  The loan is
      secured by a first lien on the property, and is guaranteed by principals
      of the borrower.  The outstanding balance on the loan is
      approximately $13.0 million.  As of June 30, 2008, this loan has
      been considered non-performing for the last two months.  The
      loan matured on June 29, 2008, and the borrower neglected to either payoff
      the loan or extend the term.  Our manager has commenced
      foreclosure proceedings, and is proceeding with legal action to enforce
      the personal guarantees.  Based on our manager’s evaluation and
      updated appraisals, our manager has concluded that the current value of
      the underlying collateral should be sufficient to protect us from loss of
      principal.  No specific allowance was deemed necessary as of
      June 30, 2008.
 
 ·
              World
      Capital Durango Alpha, is a loan to provide financing for the development
      of 9.27 acres of land located in Las Vegas, NV with an outstanding balance
      of approximately $7.1 million of which our portion is approximately $4.8
      million and is secured by a first lien on the property and guaranteed by
      the principals of the borrower.  As of June 30, 2008, this loan
      has been considered non-performing for the last two months.  Our
      manager has commenced both foreclosure proceedings and litigation against
      the personal guarantors in order to enforce the personal
      guarantees.  As of June 30, 2008, based on our manager’s
      evaluation and updated appraisals, our manager has concluded that the
      value of the underlying collateral is sufficient to protect us from loss
      of principal.
 
 ·
              Peoria
      180, LLC, is a loan, with a variable interest rate, to provide financing
      for the development of 171 acres located in Glendale, Arizona with an
      outstanding balance of $18.0 million of which our portion is approximately
      $14.8 million and is secured by a first lien on the property and
      guaranteed by the principals of the borrower.  As of June 30,
      2008, this loan has been considered non-performing for the last two
      months.  Our manager has commenced both foreclosure proceedings
      and litigation against the personal guarantors in order to enforce the
      personal guarantees.  As of June 30, 2008, based on our
      manager’s evaluation and updated appraisals, our manager has provided a
      specific allowance of approximately $9.9 million, of which our portion is
      approximately $8.2 million.
  See
review report of Independent Registered Public Accounting Firm.
 - 18
-
 Table of Contents
  
 ·
              Redwood
      Place, LLC, is a loan that provided for the acquisition and conversion to
      condominiums of a 186-unit apartment complex located in Phoenix,
      Arizona.  The loan is secured by a first lien on the property,
      and is guaranteed by principals of the borrower.  The
      outstanding balance on the loan is approximately $15.0 million, of which
      our portion is approximately $11.4 million.  The loan matured on
      April 5, 2008, and the borrower neglected to either payoff the loan or
      extend the term.  As of June 30, 2008, this loan has been
      considered non-performing for the last two months.  Our manager
      has commenced both foreclosure proceedings and litigation against the
      personal guarantors in order to enforce the personal
      guarantees.  As of June 30, 2008, based on our manager’s
      evaluation and updated appraisals, our manager has provided a specific
      allowance of approximately $4.7 million, of which our portion is
      approximately $3.6 million.
 
 ·
              WCP
      Warm Springs Holdings 1, LLC, is a loan to provide financing for 10 acres
      of vacant land located in Las Vegas, NV.  The loan is secured by
      a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $8.5 million,
      of which our portion is approximately $5.1 million.  As of June
      30, 2008, this loan has been considered non-performing for the last
      month.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  Our manager has evaluated this loan and has
      concluded the value of the underlying collateral is sufficient to protect
      us from loss of principal.
 
 ·
              Babuski,
      LLC, is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $7.7 million.  As of June 30, 2008, this loan has been
      considered non-performing for the last month.  Our manager has
      commenced foreclosure proceedings, and is proceeding with legal action to
      enforce the personal guarantees.  Based on our manager’s
      evaluation and updated appraisals, our manager has concluded that the
      current value of the underlying collateral should be sufficient to protect
      us from loss of principal.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 19
-
 Table of Contents
  The
following schedule summarizes the non-performing loans as of June 30,
2008:
 
 Description
      of Collateral
              
              Balance
      at
                June
      30, 2008
              
              Maturity
      Date
              
              Number
      of Months Non-Performing
              
              Percentage
      of Total Loan Balance4
      cemeteries and 8 mortuaries in Hawaii Part I***
              $
              8,183,000
              
              3/31/2004
              
              51
              
              45%4
      cemeteries and 8 mortuaries in Hawaii Part II***
              
              9,108,000
              
              3/31/2004
              
              51
              
              65%248-unit
      apartment complex in Oklahoma City, OK
              
              2,155,000
              
              9/1/2006
              
              22
              
              49%4.92
      acres of land in Las Vegas, NV
              
              3,073,000
              
              7/17/2007
              
              11
              
              61%80
      acre parcel of land in Florence, AZ
              
              1,510,000
              
              8/16/2007
              
              10
              
              39%174
      Unit Townhouse Project known as Cliff Shadows Townhomes located in, Las
      Vegas, NV
              
              16,117,000
              
              3/16/2008
              
              5
              
              95%132.03
      acres of Land within the Wolf Creek Estates Master Planned Community,
      located in Mesquite, NV
              
              12,186,000
              
              2/27/2008
              
              5
              
              72%21.7
      gross acres of Mesquite Estates Planned Unit Development with 65 "paper"
      lots, located in Mesquite, NV
              
              2,326,000
              
              9/28/2008
              
              4
              
              100%26.5
      gross acres of Mesquite Estates Planned Unit Development 60 "paper" lots,
      located in Mesquite, NV
              
              2,790,000
              
              9/28/2008
              
              4
              
              100%32.3
      gross acres of Mesquite Estates Planned Unit Development 180 "paper" lots,
      located in Mesquite, NV
              
              4,369,000
              
              9/28/2008
              
              3
              
              100%7.66
      acres known as Michael's Plaza Retail Center located in Tempe,
      AZ
              
              3,276,000
              
              6/10/2008
              
              2
              
              100%8.44  net
      acres of Land located in Henderson, NV
              
              13,000,000
              
              6/29/2008
              
              2
              
              100%9.27
      acres of land located in Las Vegas, NV
              
              4,846,000
              
              5/16/2008
              
              2
              
              68%171  acres
      located in Glendale, Arizona
              
              14,806,000
              
              6/30/2008
              
              2
              
              82%Acquisition
      and Rehabilitation of Fountain Creek Apartments, located in Phoenix,
      AZ
              
              11,388,000
              
              4/5/2008
              
              2
              
              76%10
      acres of vacant land located in Las Vegas, NV
              
              5,114,000
              
              5/10/2008
              
              1
              
              60%9.23
      acres of land in Las Vegas, NV
              
              7,707,000
              
              6/17/2008
              
              1
              
              81%$
              121,954,000
 
 **  Please
refer to (3) Specific Reserve
Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of June 30, 2008, we have
provided specific reserves, related to ten non-performing loans and three
performing loans, of approximately $34.5 million.  Our manager
evaluated the loans and concluded that the remaining underlying collateral was
sufficient to protect us against further losses of principal.  Our
manager will continue to evaluate these loans in order to determine if any other
allowance for loan losses should be recorded in future periods.
 
 Because
any decision regarding the allowance for loan losses reflects a judgment about
the probability of future events, there is an inherent risk that such judgments
will prove incorrect.  In such event, actual losses may exceed (or be
less than) the amount of any reserve.  To the extent that we
experience losses greater than the amount of our reserves, we may incur a charge
to our earnings that will adversely affect our operating results and the amount
of any distributions payable to our stockholders.
  See
review report of Independent Registered Public Accounting Firm.
 - 20
-
 Table of Contents
  The
following is a roll-forward of the allowance for loan losses for the six months
ended June 30, 2008:
 
 Description
              
              Balance
      at
                December
      31, 2007
              
              
              Specific
      Reserve Allocation
              
              
              Transferred
      to REO
              
              
              Balance
      at
                June
      30, 2008RightStar,
      Inc. (Part I & Part II)
              
              $
              9,757,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              9,757,000Monterrey
      Associates, L.P.
              
              
              1,174,000
              
              
              
              196,000
              
              
              
              --
              
              
              
              1,370,000Brawley
      CA 122, LLC
              
              
              256,000
              
              
              
              --
              
              
              
              (256,000
              )
              
              
              --Peoria
      180, LLC
              
              
              1,309,000
              
              
              
              6,867,000
              
              
              
              --
              
              
              
              8,176,000Terravita,
      LLC
              
              
              377,000
              
              
              
              --
              
              
              
              --
              
              
              
              377,000V
      & M Homes at the Palms, Inc.
              
              
              --
              
              
              
              913,000
              
              
              
              --
              
              
              
              913,000Redwood
      Place, LLC
              
              
              --
              
              
              
              3,586,000
              
              
              
              --
              
              
              
              3,586,000The
      Laurels at Mesquite Estates, LLC
              
              
              --
              
              
              
              358,000
              
              
              
              --
              
              
              
              358,0002503
      Panorama, LLC
              
              
              --
              
              
              
              1,595,000
              
              
              
              --
              
              
              
              1,595,0003900,
      LLC
              
              
              --
              
              
              
              3,276,000
              
              
              
              --
              
              
              
              3,276,000MRPE,
      LLC
              
              
              --
              
              
              
              2,086,000
              
              
              
              --
              
              
              
              2,086,000VBP,
      LLC
              
              
              --
              
              
              
              2,583,000
              
              
              
              --
              
              
              
              2,583,000The
      Orleans at Mesquite Estates, LLC
              
              
              --
              
              
              
              380,000
              
              
              
              --
              
              
              
              380,000Total
      (3)
              
              $
              12,873,000
              
              
              $
              21,840,000
              
              
              $
              (256,000
              )
              
              $
              34,457,000
 
 (3)
              Specific
      Reserve Allowances
 
 RightStar Loan Allowance –
RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of
2004.  The lenders commenced a judicial foreclosure on the loans, part
I and part II, which is secured by a lien on the business and virtually all of
the property of RightStar, which includes 4 cemeteries and 8 mortuaries in
Hawaii.  The aggregate principal balance of the loan is approximately
$32.3 million.  The loans, part I and part II, are owned as
follows:
 
 Senior
      Principal Amount (Part II)
              
              
              Junior
      Principal Amount (Part I)
              
              
              TotalVRM
      I
              
              $
              4,892,000
              
              
              $
              4,415,000
              
              
              $
              9,307,000VRM
      II
              
              
              9,108,000
              
              
              
              8,183,000
              
              
              
              17,291,000Vestin
      Mortgage
              
              
              --
              
              
              
              5,657,000
              
              
              
              5,657,000Total
              
              $
              14,000,000
              
              
              $
              18,255,000
              
              
              $
              32,255,000
 
 The loans
are subject to an inter-creditor agreement which states the order of priority
for any payments received are disbursed as follows:
 
 ·
              First
      to reimburse collection and foreclosure expenses advanced by the
      lenders;
 
 ·
              Second
      to pay past due interest on the Senior Principal Amount (Part II)
      (including default rate interest);
 
 ·
              Third
      to pay past due interest on the Junior Principal Amount (Part I)
      (including default rate interest);
 
 ·
              Fourth
      to pay Senior Principal; and
 
 ·
              Fifth
      to pay Junior Principal.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 21
-
 Table of Contents
  We and
VRM I acquired the senior portion of the loan on July 14, 2005 for approximately
$15.5 million of which our portion was approximately $10.1 million (including
accrued interest of approximately $1.0 million).  We and VRM I
acquired this balance to expedite the foreclosure process and remove the prior
senior lender from its priority position, which had the potential to impair the
value we may receive at the time the property is sold.  In exchange
for assistance in expediting the foreclosure process, the lenders jointly agreed
to release the guarantors from their guaranty of the loan.  In March
2007, Vestin Mortgage purchased the junior principal amount owned by the
unrelated third party for $500,000.  Vestin Mortgage has agreed that
any monies it receives as a result of payment of the notes or proceeds from a
foreclosure sale are limited to its $500,000 investment in the notes plus
expenses.
 
 In early
2006, the State of Hawaii notified the lenders of a potential statutory trust
fund deficiency, estimated to be between $20 million and $30 million and claimed
that this balance has priority over all lenders.  The State of Hawaii
is pursuing approximately $30 million in recoveries from the former trustees,
prior owners of the property and other parties.  The proceeds from
these recoveries, if any, will be used to fund the potential deficiency in the
statutory trust.  The lenders dispute the amount and priority of this
deficit.
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The outcome of this auction cannot be determined at this
time.
 
 During
December 2007, we, VRM I, and the statutory trust fund received a settlement
totaling $2.8 million, of which approximately $2.0 million was applied against
outstanding trust obligations.  Approximately $0.8 million, of which
our portion totaling approximately $0.5 million, was applied towards the
allowance for doubtful accounts on this loan and was recorded as a reimbursement
of legal fees totaling approximately $0.4 million.
 
 In June
2008, the State of Hawaii allowed us and the other lenders to put in place a new
management team that replaced the previous receiver.
 
 We have
evaluated the estimated value of the underlying collateral and the expected cost
and length of litigation.  Based on this estimate we have maintained
our total specific reserve allowance for loss.  The reserve allowance
includes approximately $1.0 million for estimated litigation fees and expenses
that we have incurred in enforcing our rights against the underlying collateral,
which were fully consumed as of December 31, 2007.  We will continue
to evaluate our position in the RightStar loan as the situation
progresses.  As of June 30, 2008, our specific reserve allowance on
the RightStar loans totaled approximately $9.8 million.
 
 Monterrey Associates, L.P. –
As of June 30, 2008, our manager has provided a specific reserve allowance,
related to a non-performing commercial loan on a 248-unit apartment complex in
Oklahoma City, OK, of approximately $2.8 million, of which our portion was
approximately $1.4 million.  This specific reserve allowance was based
on 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.
  See
review report of Independent Registered Public Accounting Firm.
 - 22
-
 Table of Contents
  
 Peoria 180, LLC Loan
Allowance – As of June 30, 2008, our manager has provided a specific
reserve allowance, related to a land loan on property located in Glendale, AZ,
of approximately $9.9 million, of which our portion was approximately $8.2
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan and evaluation of the
borrower, obtained by our manager during July 2008.  As of June 30,
2008, the loan was considered non-performing.  Our manager will
continue to evaluate our position in the loan.
 
 Terravita, LLC – During the
year ended December 31, 2007, our manager provided a specific reserve allowance,
related to a commercial loan on a 100 unit condominium/apartment project in
North Las Vegas, NV, totaling approximately $0.7 million, of which our portion
was approximately $0.4 million.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which include a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $1.7
million.  The terms of the rewritten loan remain the same as those of
the original loans and was performing as required as of June 30,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 V & M Homes at the Palms,
Inc. – As of June 30, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on 80 acre parcel of land in
Florence, AZ, of approximately $2.4 million, of which our portion was
approximately $0.9 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.  On July 15, 2008, we, VRM I and Fund
III foreclosed upon V & M Homes at the Palms, Inc. and classified it as real
estate held for sale.
 
 Redwood Place, LLC – As of
June 30, 2008, our manager has provided a specific reserve allowance, related to
a non-performing loan for the acquisition and conversion to condominiums of a
186-unit apartment complex located in Phoenix, Arizona, of approximately $4.7
million, of which our portion was approximately $3.6 million.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during July
2008.  Our manager will continue to evaluate our position in the
loan.
 
 The Laurels at Mesquite Estates,
LLC – As of June 30, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan to provide financing for the
development of 26.5 gross acres of Mesquite Estates Planned Unit Development
with 60 "paper" lots, located in Mesquite, NV, of approximately $0.4
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan. The foreclosure sale on this property is scheduled for August 11,
2008.  Upon foreclosure, we would classify it as real estate held for
sale.
 
 2503 Panorama, LLC – As of
June 30, 2008, our manager has provided a specific reserve allowance, related to
a performing loan for a 5,700 square foot penthouse located on the 25th floor of
Panorama Towers I in Las Vegas, NV, of approximately $2.1 million dollars, of
which our portion is approximately $1.6 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during July 2008.  In addition,
we recognized an impairment cost of approximately $0.6 million, which was
applied to the loan balance, related to the restructuring of a loan, whereby the
interest rate was reduced from 12% to 6% starting in May 2008.
 
 3900, LLC – As of June 30,
2008, our manager has provided a specific reserve allowance, related to a
non-performing loan on 7.66 acre neighborhood retail center, located in Tempe,
AZ, of approximately $3.3 million.  This specific reserve allowance
was based on an updated appraisal of the underlying collateral for this loan,
obtained by our manager during July 2008.  Our manager will continue
to evaluate our position in the loan.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 23
-
 Table of Contents
  MRPE, LLC – As of June 30,
2008, our manager has provided a specific reserve allowance, related a
non-performing loan for the development of 132.03 acres of land within the Wolf
Creek Estates Master Planned Community, located in Mesquite, NV, of
approximately $2.9 million dollars, of which our portion is approximately $2.1
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.  The foreclosure sale on this property is scheduled for
August 11, 2008.  Upon foreclosure, we would classify it as real
estate held for sale.
 
 VBP, LLC – As of June 30,
2008, our manager has provided a specific reserve allowance, related to a
performing loan for the development of 4.14 acres of land Las Vegas, NV, of
approximately $2.8 million dollars, of which our portion is approximately $2.6
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  Our manager will continue to evaluate our position
in the loan.
 
 The Orleans at Mesquite Estates,
LLC – As of June 30, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan to provide financing for the
development of 21.7 gross acres of Mesquite Estates Planned Unit Development
with 65 "paper" lots, located in Mesquite, NV, of approximately $0.4
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during July 2008.  On August 8, 2008, we foreclosed upon the Orleans
at Mesquite Estate, LLC and classified it as real estate held for
sale.
 
 In
addition, as of June 30, 2008, our manager had granted extensions on 18 loans,
totaling approximately $192.9 million of which our portion was approximately
$155.0 million, pursuant to the terms of the original loan agreements, which
permit extensions by mutual consent.  Such extensions are generally
provided on loans where the original term was 12 months or less and where a
borrower requires additional time to complete a construction project or
negotiate take-out financing.  However, our manager generally grants
extensions when a borrower is in compliance with the material terms of the loan,
including, but not limited to the borrower’s obligation to make interest
payments on the loan.  Subsequent to their extension, 9 of the 18
loans have become non-performing.  The loans, which became
non-performing after their extension, had a total principal amount at June 30,
2008 of approximately $100.5 million, of which our portion is approximately
$75.8 million.  Our manager concluded that no allowance for loan loss
was necessary with respect to the 18 loans, except for the Peoria 180, LLC,
Monterrey Associates, LP, V & M Homes at the Palms, Inc., Redwood Place LLC,
2503 Panorama, LLC and MRPE, LLC loans referred to above, as of June 30,
2008.
 
 Asset Quality and Loan
Reserves
 
 Losses
may occur from investing in real estate loans.  The amount of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
  See
review report of Independent Registered Public Accounting Firm.
 - 24
-
 Table of Contents
  
 ·
              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 June 30, 2008 and December
31, 2007:
 
 As
      of June 30, 2008Balance
              
              
              Allowance
      for loan losses (3)
              
              
              Balance,
      net of allowanceNonperforming
      loans – no related allowance
              
              $
              56,552,000
              
              
              $
              --
              
              
              $
              56,552,000Nonperforming
      loans – related allowance
              
              
              65,402,000
              
              
              
              (29,902,000
              )
              
              
              35,500,000Subtotal
      nonperforming loans
              
              
              121,954,000
              
              
              
              (29,902,000
              )
              
              
              92,052,000Performing
      loans – no related allowance
              
              
              154,579,000
              
              
              
              --
              
              
              
              154,579,000Performing
      loans – related allowance
              
              
              11,020,000
              
              
              
              (4,555,000
              )
              
              
              6,465,000Subtotal
      performing loans
              
              
              165,599,000
              
              
              
              (4,555,000
              )
              
              
              161,044,000Total
              
              $
              287,553,000
              
              
              $
              (34,457,000
              )
              
              $
              253,096,000
 
 As
      of December 31, 2007Balance
              
              
              Allowance
      for loan losses
              
              
              Balance,
      net of allowanceNonperforming
      loans – no related allowance
              
              $
              10,364,000
              
              
              $
              --
              
              
              $
              10,364,000Nonperforming
      loans – related allowance
              
              
              20,201,000
              
              
              
              (11,187,000
              )
              
              
              9,014,000Subtotal
      nonperforming loans
              
              
              30,565,000
              
              
              
              (11,187,000
              )
              
              
              19,378,000Performing
      loans – no related allowance
              
              
              240,603,000
              
              
              
              --
              
              
              
              240,603,000Performing
      loans – related allowance
              
              
              19,895,000
              
              
              
              (1,686,000
              )
              
              
              18,209,000Subtotal
      performing loans
              
              
              260,498,000
              
              
              
              (1,686,000
              )
              
              
              258,812,000Total
              
              $
              291,063,000
              
              
              $
              (12,873,000
              )
              
              $
              278,190,000
 
 Our
manager evaluated our loans and concluded that the underlying collateral was
sufficient to protect us against further losses of principal or
interest.  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
June 30, 2008, we owned 533,675 shares of VRM I’s common stock, representing
approximately 7.76% of their total outstanding common stock.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At June
30, 2008, we held five properties with a total carrying value of approximately
$21.7 million, which were acquired through foreclosure and recorded as
investments in real estate held for sale.  The summary below includes
our percentage of ownership in each of the properties.  Our
investments in real estate held for sale are accounted for at the lower of cost
or fair value less costs to sell with fair value based on appraisals and
knowledge of local market conditions.  It is not our intent to invest
in or own real estate as a long-term investment.
  See
review report of Independent Registered Public Accounting Firm.
 - 25
-
 Table of Contents
  We seek
to sell properties acquired through foreclosure as quickly as circumstances
permit.  The following is a roll-forward of investments in real estate
held for sale during the six months ended June 30, 2008:
 
 Description
              Date
      Acquired
              
              Percentage
      of Ownership
              
              
              Balance
      at December 31, 2007
              
              
              Acquisitions
              
              
              Write
      Downs
              
              
              Cash
      Reductions
              
              
              Balance
      at June 30, 2008Partially
      completed golf course on 570 acres of land near Austin, TX (1)
              8/3/2004
              
              
              100%
              
              
              $
              4,438,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              (300,000
              )
              
              $
              4,138,000480
      residential building lots & 2 single family dwellings in Rio Vista
      Village Subdivision in Cathedral City, CA (2)
              12/21/2006
              
              
              86%
              
              
              
              24,125,000
              
              
              
              --
              
              
              
              (9,872,000
              )
              
              
              --
              
              
              
              14,253,00046.75
      acres of land located in Galveston, TX(3)
              2/5/2008
              
              
              48%
              
              
              
              --
              
              
              
              4,100,000
              
              
              
              (2,325,000
              )
              
              
              (86,000
              )
              
              
              1,689,0002
      single family residences and 4 lots in Mt. Charleston, NV (4)
              3/7/2008
              
              
              64%
              
              
              
              --
              
              
              
              1,681,000
              
              
              
              (497,000
              )
              
              
              --
              
              
              
              1,184,00025
      acres for proposed 122 single-family subdivision in Brawley, CA (5)
              5/1/2008
              
              
              33%
              
              
              
              --
              
              
              
              499,000
              
              
              
              (86,000
              )
              
              
              --
              
              
              
              413,000$
              28,563,000
              
              
              $
              6,280,000
              
              
              $
              (12,780,000
              )
              
              $
              (386,000
              )
              
              $
              21,677,000
 
 (1)
              During
      the year ended December 31, 2007, we entered into a sales contract for the
      sale of a partially completed golf course near Austin, Texas at a price
      that would not result in a material gain or loss.  The sales
      contract required that the buyer complete the purchase on or before June
      29, 2007; however, the buyer chose to extend the closing date multiple
      times by paying a non-refundable extension fee that was applied to the
      property value recorded on our books.  The first extension was
      in June 2007, at which time we received a $100,000 non-refundable
      extension fee from the buyer to extend the closing date to October
      2007.  Since then the buyer has elected to extend the closing
      date to July 2008, by paying a non-refundable extension fee of $50,000
      every 30 days until closing.  As of June 30, 2008, we had
      received a total of $550,000 in extension fees.  Subsequently,
      the buyer paid $50,000 in July 2008 to extend the closing date an extra 30
      days  There can be no assurance that the sale will be
      completed.
 
 (2)
              During
      December 2006, we, VRM I and Fund III acquired through foreclosure
      proceedings 480 residential building lots and two single family dwellings
      in Rio Vista Village Subdivision in Cathedral City, CA.  During
      the year ended December 31, 2007, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s evaluation and an updated
      appraisal obtained during July 2008, the property was written down
      approximately $11.5 million, of which our portion was approximately $9.9
      million.
 
 (3)
              During
      February 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings approximately 46.75 acres of land in Galveston,
      TX.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in April 2008, the
      property was written down approximately $4.8 million, of which our portion
      was approximately $2.3 million.  During June 2008, we received a
      deposit refund totaling
$86,000.
  See
review report of Independent Registered Public Accounting Firm.
 - 26
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 (4)
              During
      March 2008, we, VRM I and Fund III acquired through foreclosure
      proceedings two 4,000 square foot single family residences, together with
      the four remaining lots in a subdivision, located on Mt. Charleston,
      NV.  Our manager has evaluated the carrying value of the
      property and based on that evaluation the property was written down
      approximately $773,000, of which our portion was
  $497,000.
 
 (5)
              During
      May 2008, we, VRM I, and Fund III acquired through foreclosure proceedings
      a 25 acre proposed 122 single-family subdivision to be known as River
      Drive Subdivision in Brawley, CA.  Our manager has evaluated the
      carrying value of the property and based on an updated appraisal obtained
      in May 2008, the property was written down approximately $256,000, of
      which our portion was $86,000.
  During
July 2008, we, VRM I and Fund III foreclosed upon V & M Homes at the Palms,
Inc. and classified it as real estate held for sale.
 
 On August
8, 2008, we foreclosed upon the Orleans at Mesquite Estate, LLC and classified
it as real estate held for sale.
 NOTE
G — RELATED PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us an annual management fee of up to 0.25%
of our aggregate capital contributions received by us and Fund II from the sale
of shares or membership units, paid monthly.  The amount of management
fees paid to our manager for the three and six months ended June 30, 2008, were
$275,000 and $549,000, respectively.  The amount of management fees
paid to our manager for the three and six months ended June 30, 2007, were
$274,000 and $548,000, respectively.
 
 As of
June 30, 2008, our manager owned 92,699 of our common shares.  For the
three and six months ended June 30, 2008, we declared $16,000 and $45,000,
respectively, in dividends payable to our manager based on the number of shares
our manager held on the dividend record dates.  For the three and six
months ended June 30, 2007, we declared $38,000 and $74,000, respectively, in
dividends payable to our manager based on the number of shares our manager held
on the dividend record dates.
 
 As of
June 30, 2008, we did not have a balance due to or due from our
manager.  As of December 31, 2007, we had receivables from our manager
of $1,000.
 
 Transactions with Other
Related Parties
 
 As of
June 30, 2008, we owned 533,675 common shares of VRM I, representing
approximately 7.76% of their total outstanding common stock.  For the
three and six months ended June 30, 2008, we recognized $43,000 and $86,000,
respectively, in dividend income from VRM I based on the number of shares we
held on the dividend record dates.  For the three and six months ended
June 30, 2007, we recognized $101,000 and $127,000, respectively, in dividend
income from VRM I based on the number of shares we held on the dividend record
dates.
 
 As of
June 30, 2008, VRM I owned 225,134 of our common shares, representing
approximately 1.51% of our total outstanding common stock.  For the
three and six months ended June 30, 2008, we declared $38,000 and $110,000,
respectively, in dividends payable to VRM I based on the number of shares VRM I
held on the dividend record dates.  For the three and six months ended
June 30, 2007, we declared $80,000 and $136,000, respectively, in dividends
payable to VRM I based on the number of shares VRM I held on the dividend record
dates.
 
 During
the six months ended June 30, 2008, we sold approximately $0.5 million in real
estate loans to VRM I and purchased $1.8 million in real estate loans from VRM
I.  No gain or loss resulted from these transactions.  No
similar transactions occurred during the six months ended June 30,
2007.
 
 As of
June 30, 2008, we had receivables from VRM I of $35,000.  As of
December 31, 2007, we owed VRM I $123,000.
  See
review report of Independent Registered Public Accounting Firm.
 - 27
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 Table of Contents
  As of
June 30, 2008, Fund III owned 114,117 of our common shares, representing
approximately 0.77% of our total outstanding common stock.  For the
three and six months ended June 30, 2008, we declared $19,000 and $56,000,
respectively, in dividends payable to Fund III based on the number of shares
Fund III held on the dividend record dates.  For the three and six
months ended June 30, 2007, we declared $40,000 and $63,000, respectively, in
dividends payable to Fund III based on the number of shares Fund III held on the
dividend record dates.
 
 During
the six months ended June 30, 2007, we purchased $1.3 million in real estate
loans from Fund III.  No gain or loss resulted from this
transaction.  No similar transactions occurred during the six months
ended June 30, 2008.
 
 As of
June 30, 2008, we had receivables from Fund III of $13,000.  As of
December 31, 2007, we did not have a balance due to or due from Fund
III.
 
 During
the three and six months ended June 30, 2008, we incurred $33,000 and $63,000,
respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
which the Secretary of Vestin Group has an equity ownership interest in the law
firm.  During the three and six months ended June 30, 2007, we
incurred $38,000 and $76,000, respectively, for legal fees to the law firm of
Levine, Garfinkel & Katz.
 
 NOTE
H — NOTES RECEIVABLE
 
 During
October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada
of which our portion of the net cash proceeds was approximately $5.8
million.  We originally sold this property under a 100% seller
financing arrangement.  The borrowers then sold the property to an
unrelated third party that resulted in a payoff of the note and also allowed us
to record the sale and remove the asset from real estate held for sale – seller
financed.  In addition, during September 2004, we received a
promissory note from the guarantors of the loan in the amount of $440,000 in
exchange for a release of their personal guarantees.  Since payments
on the note did not begin for 18 months from the date of the note, we discounted
the face value of the note to $328,000, which is based on a discount rate of 8%
as of that date.  As of June 30, 2008, we have received $99,000 in
principal payments.  Payments will be recognized as income when
received.  The balance of $341,000 was fully reserved as of June 30,
2008.
 
 During
March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
$5,473,000 of which our share of the proceeds were approximately $3.8 million,
which resulted in a loss of $829,000.  In addition, during June 2005,
we and VRM I entered into a settlement agreement with the guarantors of the loan
in the amount of $2,000,000 in exchange for a release of their personal
guarantees, of which our share was $1,350,000.  The balance is secured
by a second deed of trust, with a first installment of $100,000 due in July 2005
and monthly interest only payments of 5% on $1,100,000 from July 2005 through
July 2008, at which time the entire balance is due.  As of June 30,
2008, we have received $616,000 in principal payments.  Payments will
be recognized as income when received.  The balance of $745,000 was
fully reserved as of June 30, 2008.
 
 During
November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa,
Arizona of which our portion of the consideration received totaled
$6,043,000.  We and VRM I received a promissory note from the original
guarantor in the amount of $478,000 of which our portion was
$409,000.  The promissory note is payable in interest only payments of
8% on the principal balance outstanding.  From June 25, 2005 through
May 25, 2006, monthly payments increased to $15,000 and were applied to
principal and accrued interest.  From June 25, 2006 through May 25,
2009, payments increase to $20,000 monthly.  As of December 31, 2007,
we received $234,000 in principal payments and the balance of $184,000 was fully
reserved.  Due to the uncertainty of collectability, the balance for
the entire remaining balance of the promissory note was fully
reserved.  On August 7, 2007, we and VRM I filed a complaint against
the guarantor in the U.S. District Court of the District of Nevada, seeking to
recover the amounts due pursuant to the promissory note.  The
guarantor did not answer or otherwise respond to the lawsuit.  We and
VRM I were granted a default judgment for all the amounts
due.  However, due to the current financial position of the guarantor,
our Manager has determined that we would not be able to recover any amounts due
from the guarantor.  As of March 31, 2008, the note was fully written
off.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 28
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 Table of Contents
  During
December 2005, we and VRM I sold the 460 acre residential subdivision in Lake
Travis, TX for approximately $5.5 million, of which our portion was
approximately $3.5 million.  The purchase price included cash proceeds
of $5 million and a $500,000 note receivable, with an imputed interest rate of
8% in July 2006.  A net gain of $71,000 resulted from this
transaction, of which our portion was $47,000.  The purchaser
defaulted on the note and our manager pursued litigation.  During the
year ended December 31, 2007, we and VRM I entered into a settlement agreement,
which reduced the note to $175,000, of which our portion is
$115,000.  As of June 30, 2008, we had received $33,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of $82,000 was fully reserved as of June 30,
2008.  On July 1, 2008, we and VRM I received a $113,000 payment, of
which our portion was $74,000.  The payment represented full
settlement of the note and the remaining balance of $8,000 was written
off.
 
 During
2006, we and VRM I entered into a settlement agreement in the amount of $1.5
million with the guarantors of a loan collateralized by a 126 unit (207 bed)
assisted living facility in Phoenix, AZ, which we had foreclosed
on.  Our portion was approximately $1.3 million.  The
promissory note is payable in seven annual installments of $100,000 with an
accruing interest rate of 7%, with the remaining note balance due in April
2013.  As of June 30, 2008, we had received $2,000 in principal
payments.  Payments will be recognized as income when
received.  The balance of approximately $1.3 million was fully
reserved as of June 30, 2008.
 
 NOTE
I — JUNIOR SUBORDINATED NOTES
 
 On June
22, 2007, we completed the issuance of $60.1 million in unsecured trust
preferred securities through the special purpose business trust, VCT I to
Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly.  The securities mature on
July 30, 2020 and may be called at par by us any time after July 30,
2012.  We incurred approximately $2.3 million in financing costs
relating to the notes.  These costs are being amortized to interest
expense over the term of the notes.  We are obligated to pay the trust
preferred securities with respect to distributions and amounts payable upon
liquidation, redemption or repayment.
 
 VCT I
issued $100,000 of common securities, representing 100% of the voting common
stock of VCT I to us.  VCT I used the proceeds from the sale of the
trust preferred securities and the common securities to purchase our junior
subordinated notes.  The terms of the junior subordinated notes
matches the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
junior subordinated notes require quarterly interest distributions beginning
July 31, 2007.  For the three and six months ended June 30, 2008,
interest expense on the junior subordinated notes totaled approximately $1.3
million and $2.6 million, respectively.  As of June 30, 2008, the
balance outstanding was approximately $56.4 million.
 
 Our
interest in VCT I is accounted for using the equity method and the assets and
liabilities of VCT I are not consolidated into our financial statements, in
accordance with FIN 46R.  Interest on the junior subordinated notes is
included in interest expense on our consolidated income statement while the
junior subordinated notes are presented as a separate item on our consolidated
balance sheet.  We were in compliance with all debt covenants related
to the junior subordinated notes as of June 30, 2008.
 During
the six months ended June 30, 2008, we acquired debt securities resulting in a
gain on extinguishment of debt totaling approximately $1.6
million.
 NOTE
J— SECURED BORROWINGS
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue in any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).  The Inter-creditor Agreements provide us additional funding
sources for real estate loans whereby an unaffiliated investor (the “Investor”)
may participate on a non-pari passu basis in certain real estate loans with us
and/or VRM I and/or Fund III (collectively, the “Lead
Lenders”).
  See
review report of Independent Registered Public Accounting Firm.
 - 29
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 Table of Contents
  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 June 30, 2008, we had $21.0 million in funds,
including approximately $1.2 million in interest reserves, used under
Inter-creditor Agreements as compared to none as of December 31,
2007.  During August 2008, we paid down approximately $6.2 million of
the $21.0 million in funds used under Inter-creditor Agreements.
 
 NOTE
K — NOTE PAYABLE
 
 In May
2008, we financed a 12-month insurance policy for Directors and Officers
liability, with an annual interest rate of 4.9%.  The agreement
required a down payment of $38,000 and nine monthly payments of $23,000
beginning on May 27, 2008.  As of June 30, 2008, the outstanding
balance of the note was approximately $163,000.
 
 NOTE
L — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In May
2008, The FASB issued FAS 163 – Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60(“FAS
163”).  This standard requires that an insurance enterprise recognize
a claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation.  This Statement also clarifies how Statement 60 applies to
financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and claim
liabilities.  Those clarifications will increase comparability in
financial reporting of financial guarantee insurance contracts by insurance
enterprises.  This Statement requires expanded disclosures about
financial guarantee insurance contracts.  The accounting and
disclosure requirements of the Statement will improve the quality of information
provided to users of financial statements.  FAS 163 will be effective
for financial statements issued for fiscal years beginning after December 15,
2008.  We do not expect the adoption of FAS 163 will have a material
impact on our financial condition or results of operation.
 
 In May
2008, the FASB issued FAS 162 – The Hierarchy of Generally Accepted
Accounting Principles (“FAS 162”).  This standard is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with generally accepted accounting
principles in the United States for non-governmental entities.  FAS
162 is effective 60 days following approval by the U.S. Securities and Exchange
Commission(“SEC”) of the Public Company Accounting Oversight Board’s amendments to
AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.  We do not expect FAS 162 to have a
material impact on the preparation of our consolidated financial
statements.
 
 In May
2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1 –Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which clarifies that convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14 – Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.  Additionally, this
FSP specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods.
  See
review report of Independent Registered Public Accounting Firm.
 - 30
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 Table of Contents
  This FSP
is effective for us at the beginning of fiscal year 2009 and will be applied
retrospectively to all periods presented.  We are currently evaluating
the impact of the adoption on our financial statements.
 
 NOTE
M — LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and Fund III.  We fully cooperated during the course of the
investigation.  On September 27, 2006, the investigation was resolved
through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
the findings therein.
 
 In the
Order, the Commission found that the Respondents violated Sections 17(a)(2) and
17(a)(3) of the Securities Act of 1933 through the use of certain slide
presentations in connection with the sale of units in Fund III and in our
predecessor, Vestin Fund II, LLC.  The Respondents consented to the
entry of a cease and desist order, the payment by Mr. Shustek of a fine of
$100,000 and Mr. Shustek’s suspension from association with any broker or dealer
for a period of six months, which expired in March 2007.  In addition,
the Respondents agreed to implement certain undertakings with respect to future
sales of securities.  We are not a party to the Order and we do not
expect that the sanctions imposed upon the Respondents will have any material
affect upon our operations.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
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.  The
Defendants believe that the allegations are without merit and that they have
adequate defenses.  The Defendants intend to undertake a vigorous
defense.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
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 Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby,
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages and a
rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.
  See
review report of Independent Registered Public Accounting Firm.
 - 31
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 Table of Contents
  The terms
of VRM I’s management agreement and Fund I’s operating agreement contain
indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may be
eligible for indemnification by VRM I with respect to the above
actions.
 
 In
addition to the matters described above, our manager is involved in a number of
other legal proceedings concerning matters arising in connection with the
conduct of its business activities.  Our manager believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously.  Other than the matters described above, our manager
believes that it is not a party to any pending legal or arbitration proceedings
that would have a material adverse effect on our manager’s financial condition
or results of operations or cash flows, although it is possible that the outcome
of any such proceedings could have a material impact on our manager’s net income
in any particular period.
 
 NOTE
N — LEGAL MATTERS INVOLVING THE COMPANY
 
 In April
2006, the lenders filed suit against the State of Hawaii listing 26 causes of
action, including allegations that the State of Hawaii has illegally blocked the
lender’s right to foreclose and take title to its collateral by inappropriately
attaching conditions to the granting of licenses needed to operate the business,
the pre-need trust funds and the perpetual care trust funds and that the State
of Hawaii has attempted to force the lenders to accept liability for any
statutory trust fund deficits while no such lender liability exists under the
laws of the State of Hawaii.  The State of Hawaii responded by filing
allegations against Vestin Mortgage and us alleging that these Vestin entities
improperly influenced the former RightStar trustees to transfer trust funds to
us.
 
 On May 9,
2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
announced that an arrangement had been reached to auction the RightStar
assets.  On June 12, 2007, the court approved the resolution
agreement, which provides that the proceeds of the foreclosure sale will be
allocated in part to VRM I, Vestin Mortgage and us and in part to fund the
trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the
State of Hawaii and Comerica have pledged to cooperate to recover additional
amounts owed to the trusts and the creditors from others, while mutually
releasing each other and RightStar from all claims.  We, VRM I, Vestin
Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The outcome of this auction cannot be determined at this
time.
 
 We and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
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 Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of our management agreement and Fund II’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by us with respect to the
above actions.
 
 We,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 separate plaintiffs (“Plaintiffs”) in District Court
for Clark County, Nevada.  The Plaintiffs allege, among other things,
that Defendants: breached certain alleged contractual obligations owed to
Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
a rescission of the REIT conversion.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of our management agreement and Fund II’s
operating agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by us with respect to the
above actions.
 
  See
review report of Independent Registered Public Accounting Firm.
 - 32
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 Table of Contents
  In
addition to the matters described above, we are involved in a number of other
legal proceedings concerning matters arising in the ordinary course of our
business activities.  We believe we have meritorious defenses to each
of these actions and intend to defend them vigorously.  Other than the
matters described above, we believe that we are not a party to any pending legal
or arbitration proceedings that would have a material adverse effect on our
financial condition or results of operations or cash flows, although it is
possible that the outcome of any such proceedings could have a material impact
on our net income in any particular period.
 
 NOTE
O — DIVIDEND REQUIREMENT
 
 To
maintain our status as a REIT, we are required to make dividend distributions,
other than capital gain dividends, to our stockholders each year in an amount at
least equal to (1) the sum of (a) 90% of our taxable income, computed without
regards to the dividends paid deduction and our net capital gain, and (b) 90% of
the net income, after tax, from foreclosure property, minus (2) the sum of
certain specified items of non-cash income over 5% of our REIT taxable
income.  All dividend distributions will be made at the discretion of
our board of directors and will depend on our earnings, both tax and GAAP,
financial condition, maintenance of REIT status and such other factors as the
board of directors deems relevant.
 
 Our Board
of Directors decided to temporarily suspend the payment of dividends during June
2008.  We will continue to comply with the REIT requirements and will
distribute at least ninety percent (90%) of our annual taxable
income.  Our Board of Directors will closely monitor our operating
results in order to determine when dividends should be reinstated.
 
 NOTE
P — SUBSEQUENT EVENTS
 
 During
July 2008, we, VRM I and Fund III foreclosed upon V & M Homes at the Palms,
Inc. and classified it as real estate held for sale.
 
 During
July 2008, we, VRM I and Fund III received a principal payment of approximately
$5.9 million, of which our portion was approximately $4.9 million, plus accrued
interest on a delinquent loan scheduled to mature during July
2008.  The interest rate on the loan was increased from 10.5% to 12%,
of which 6% will be accrued and due at the new maturity date in February
2009.  The amount due to us on this loan as of June 30, 2008 is
approximately $20.9 million.
 
 On July
15, 2008, we received payment in full on one of our largest loans, in the amount
of $22.3 million.
 
 During
August 2008, we paid down approximately $6.2 million of the $21.0 million in
funds used under Inter-creditor Agreements.
 
 On August
8, 2008, we foreclosed upon the Orleans at Mesquite Estate, LLC and classified
it as real estate held for sale.
 
  See
review report of Independent Registered Public Accounting Firm.
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 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 June 30, 2008, and the related consolidated
statements of operations for the three and six month periods ended June 30, 2008
and 2007, the consolidated statement of equity and other comprehensive loss for
the six-month period ended June 30, 2008 and the consolidated statements of cash
flows for the six month periods ended June 30, 2008 and 2007. All information
included in these consolidated financial statements is the representation of the
management of Vestin Realty Mortgage II, Inc.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated financial statements referred to above for them
to be in conformity with accounting principles generally accepted in the United
States of America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Vestin Realty Mortgage II, Inc. as of December 31, 2007 and the related
consolidated statements of operations, equity and other comprehensive income and
cash flows for the year ended December 31, 2007.  We have also audited
the effectiveness of the Company’s internal controls over financial reporting as
of December 31, 2007, and in our report dated March 13, 2008, we expressed an
unqualified opinion on those consolidated financial statements and an
unqualified opinion on the effectiveness of internal control over financial
reporting. The consolidated financial statements referred to above are not
presented herein. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2007, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
 
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 August
11, 2008
 
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  ITEM
      2.
              MANAGEMENT’S
      DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 The
following is a financial review and analysis of our financial condition and
results of operations for the three and six months ended June 30, 2008 and
2007.  This discussion should be read in conjunction with our
consolidated financial statements and accompanying notes and other detailed
information regarding us appearing elsewhere in this report on Form 10-Q and our
report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis
of Financial Conditions and Results of Operations for the year ended
December 31, 2007and
our quarterly report filed on Form 10-Q for the three months ended March 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.  The forward-looking statements contained in this
report are made only as of the date hereof.  We undertake no
obligation to update or revise information contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.
 
 Our
recent operating results have been adversely affected by increases in allowances
for loan losses and increases in non-performing assets.  This negative
trend accelerated sharply during the three months ended June 30,
2008.  As of June 30, 2008, we had 17 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 $92.1
million, net of allowance for loan losses of approximately $29.9
million.  These loans have been placed on non-accrual of interest
status and are the subject of pending foreclosure proceedings.
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  For
additional information, see Note F – Real Estate Held for Sale and
“Specific Loan Allowance” in Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statements of this report Form 10-Q.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $113.7 million
or 36% of our total assets as of June 30, 2008, as compared to approximately
$48.0 million or 14% of our total assets as of December 31, 2007.  At
June 30, 2008, non-performing assets consisted of approximately $21.7 million of
real estate held for sale and approximately $92.1 million of non-performing
loans, net of allowance for loan losses.  During the year ended
December 31, 2007, we entered into a sales contract for the sale of a partially
completed golf course near Austin, Texas at a price that would not result in a
material gain or loss.  The sales contract required that the buyer
complete the purchase on or before June 29, 2007; however, the buyer has chosen
to extend the closing date multiple times by paying a non-refundable extension
fee that has been applied to the value recorded for such loan on our
books.  The first extension was in June 2007, at which time we
received a $100,000 non-refundable extension fee from the buyer to extend the
closing date to October 2007.  Since then the buyer has elected to
extend the closing date to July 2008, by paying a non-refundable extension fee
of $50,000 every 30 days until closing.  As of June 30, 2008, we had
received a total of $550,000 in extension fees.  Subsequently, the
buyer paid $50,000 in July 2008 to extend the closing date an extra 30
days.  There can be no assurance that the sale will be
completed.
 
 We
believe that the significant increase in the level of our non-performing assets
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 near
future.  This may continue to 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 resulted in a reduction in
the funds we have available to pay distributions to our
stockholders.
 
 As of
June 30, 2008, our loan-to-value ratio was 88.33%, prior to allowances for loan
losses, on a weighted average basis generally using appraisals prepared on an
“as-if developed basis” in connection with the loan
origination.  However, additional marked increases in loan defaults
accompanied by a rapid decline in real estate values, as evidenced by updated
appraisals generally
prepared on an “as-is basis,”will have a material adverse effect upon
our financial condition and operating results.
 
 As of
June 30, 2008, we have provided a specific reserve allowance for ten
non-performing loans and three performing loans based on updated appraisals of
the underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager during the year ended December 31, 2007, and the six
months ended June 30, 2008.  For further information regarding
allowance for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our consolidated financials statements in Part I,
Item 1 Consolidated Financial
Statements of this report Form 10-Q.
 
 Our
capital, subject to a 3% reserve, will constitute the bulk of the funds we have
available for investment in real estate loans.  We do not have any
arrangements in place, except for the funds we received pursuant to the VCT I
closing and through our secured borrowing agreements, to materially increase the
funds we will have available to invest from any other sources.  See
discussion under – “Capital and Liquidity.”
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial
Statements of this report Form 10-Q.
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  As of
June 30, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington.  The weighted
average term of our outstanding loans, including extensions, was 17 months and
19 months as of June 30, 2008 and December 31, 2007, respectively.
 
 Comparison
of Operating Results for the three and six months ended June 30, 2008 to the
three and six months ended June 30, 2007.
 
 For
      the Three Months
                Ended
      June 30,
              
              
              For
      the Six Months
                Ended
      June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Total
      revenues
              
              $
              5,916,000
              
              
              $
              8,269,000
              
              
              $
              13,072,000
              
              
              $
              14,922,000Total
      operating expenses
              
              
              24,867,000
              
              
              
              1,461,000
              
              
              
              26,970,000
              
              
              
              2,619,000Non-operating
      income
              
              
              1,639,000
              
              
              
              313,000
              
              
              
              1,824,000
              
              
              
              495,000Loss
      from real estate held for sale
              
              
              (11,291,000
              )
              
              
              (2,729,000
              )
              
              
              (13,256,000
              )
              
              
              (2,023,000
              )Income
      (loss) before provision for income taxes
              
              
              (28,603,000
              )
              
              
              4,392,000
              
              
              
              (25,330,000
              )
              
              
              10,775,000Provision
      for income taxes
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Net
      income (loss)
              
              $
              (28,603,000
              )
              
              $
              4,392,000
              
              
              $
              (25,330,000
              )
              
              $
              10,775,000Basic
      and diluted earnings (loss) per common share
              
              $
              (1.92
              )
              
              $
              0.29
              
              
              $
              (1.70
              )
              
              $
              0.72Dividends
      declared per common share
              
              $
              0.17
              
              
              $
              0.41
              
              
              $
              0.49
              
              
              $
              0.80Weighted
      average common shares
              
              
              14,881,563
              
              
              
              14,940,865
              
              
              
              14,878,568
              
              
              
              14,942,304Weighted
      average term of outstanding loans, including extensions
              
              17
      months
              
              
              17
      months
              
              
              17
      months
              
              
              17
      months
 
 Comparison
of Operating Results for the three months ended June 30, 2008 to the three
months ended June 30, 2007.
 
 Total
Revenues:  For the three months ended June 30, 2008, total
revenues were approximately $5.9 million compared to approximately $8.3 million
during the three months ended June 30, 2007, a decrease of approximately $2.4
million or 28% due in significant part to the following factors:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $5.4 million during the three months ended June 30, 2008, compared to
      approximately $6.7 million during the same period in 2007, primarily due
      to the increase in non-performing loans during the three months ended June
      30, 2008.  As of June 30, 2008, approximately $122.0 million of
      our loans were non-performing compared to approximately $25.2 million as
      of June 30, 2007.  For additional information on our loan
      portfolio, see Note D – Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements of this
      Interim Report Form 10-Q.
 
 ·
              During
      the three months ended June 30, 2007, we recognized a gain of
      approximately $1.0 million related an impaired real estate loan, which was
      paid in full.  Included in this amount was a recovery of
      allowance for loan loss of $0.5 million.  No comparable gain was
      recognized in 2008.
 
 ·
              Included
      in other income during the three months ended June 30, 2008, we recognized
      approximately $0.3 million from a settlement with a prior
      borrower.  During the same period in 2007, we recognized
      approximately $0.3 million in other income from principal payments on
      notes receivable that were fully
reserved.
 
 Total Operating
Expenses:  For the three months ended June 30, 2008, total
operating expenses were approximately $24.9 million compared to approximately
$1.5 million during the three months ended June 30, 2007, an increase of
approximately $23.4 million or 1,602% due in significant part to the following
factors:
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 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the three months ended June 30, 2008,
      we recognized provisions for loan loss related to eight non-performing
      loan and two performing loans totaling approximately $21.8
      million.  See “Specific Loan Allowance “ in Note D Investment Real Estate
      Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statements of this Interim Report Form 10-Q.  In
      addition, we recognized a loan restructuring expense of approximately $0.4
      million, related to the restructuring of a loan, whereby the interest rate
      was reduced from 12% to 6% starting in May 2008.  There was no
      comparable loan loss provision or loan restructuring expenses during the
      three months ended June 30, 2007.  During July 2008, we, VRM I
      and Fund III foreclosed upon V & M Homes at the Palms, Inc. and
      classified it as real estate held for sale.  On August 8, 2008,
      we foreclosed upon the Orleans at Mesquite Estate, LLC and classified it
      as real estate held for sale.  See “Specific Loan Allowance “ in
      Note D Investment Real
      Estate Loans of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 ·
              We
      recognized approximately $1.3 million of interest expense during the three
      months ended June 30, 2008 related to the junior subordinated notes issued
      in connection with the trust preferred financing in June
      2007.  We recognized approximately $0.1 million of interest
      expense during the three months ended June 30, 2007 related to these
      notes.  In addition, we recognized approximately $0.2 million of
      interest expense for the three months ended June 30, 2008 and 2007 related
      to secured borrowings held during the
period.
 
 ·
              During
      the three months ended June 30, 2008, we incurred professional fees of
      approximately $0.4 million primarily due to legal actions that have been
      filed against us in connection with the REIT conversion and foreclosure
      costs on non-performing loans, compared to approximately $0.6 million for
      the three months ended June 30, 2007.  See Note N – Legal Matters Involving The
      Company of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q
 
 Total Non-Operating
Income:  For the three months ended June 30, 2008, total
non-operating income was approximately $1.6 million compared to approximately
$0.3 million during the three months ended June 30, 2007, an increase of
approximately $1.3 million or 424%.  This increase is mainly due to a
gain of approximately $1.6 million, relating to the purchase of outstanding debt
at a discount to the face amount of such debt.  No assurances can be
given that any additional purchases of debt at a discount will occur in future
periods.
 
 Total Loss from Real Estate Held for
Sale:  For the three months ended June 30, 2008, total losses
from real estate held for sale were approximately $11.3 million compared to
approximately $2.7 million during the three months ended June 30, 2007, an
decrease of approximately $8.6 million or 314% due in significant part to the
following factors:
 
 ·
              During
      the three months ended June 30, 2008, we, VRM I and Fund III acquired
      through foreclosure proceedings a 25 acre parcel in Brawley,
      CA.  Our manager evaluated the carrying value of the acquired
      property and estimated the net realizable value of the asset totaled
      approximately $1.2 million of which our portion totaled approximately $0.4
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $0.1 million during the three
      months ended June 30, 2008.
 
 ·
              During
      the three months ended June 30, 2008, our manager evaluated the carrying
      value of a property located on Mt. Charleston, NV, and estimated the net
      realizable value of the asset totaled approximately $1.8 million of which
      our portion totaled approximately $1.2 million.  Based on this
      estimate, our write down on this real estate held for sale totaled
      approximately $0.5 million.  In addition, our manager evaluated
      the carrying value of 46.75 acres of land located in Galveston, TX and
      estimated the net realizable value of the asset totaled approximately $3.7
      million of which our portion totaled approximately $1.8
      million.  Based on this estimate, our write down on this real
      estate held for sale totaled approximately $2.3 million for the three
      months ended June 30, 2008.
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 ·
              During
      the three months ended June 30, 2008, our manager reviewed the carrying
      value of the acquired property located in Cathedral City, CA and related
      liabilities.  As of June 30, 2007, our manager estimated the net
      realizable value of the asset totaled approximately $18.1 million, of
      which our portion totaled approximately $14.3 million.  Based on
      these estimates,
      updated appraisals and our managers evalutaiton, our write down on
      real estate held for sale for this property totaled approximately $9.9
      million for the three months ended June 30, 2008.  As of June
      30, 2007, our manager estimated the net realizable value of this property
      totaled approximately $28.5 million, of which our portion totaled
      approximately $24.4 million.  Based on these estimates, our
      write down on real estate held for sale for this property totaled
      approximately $1.0 million and approximately $1.5 million in estimated
      liabilities for the three months ended June 30,
  2007.
 
 Comparison
of Operating Results for the six months ended June 30, 2008 to the six months
ended June 30, 2007
 
 Total
Revenues:  For the six months ended June 30, 2008, total
revenues were approximately $13.1 million compared to approximately $14.9
million during the six months ended June 30, 2007, a decrease of approximately
$1.8 million or 12%.  Revenues were primarily affected by the
following factors:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $12.5 million during the six months ended June 30, 2008, compared to
      approximately $13.1 million during the same period in 2007, primarily due
      to the increase in non-performing loans referred to above.  Our
      revenue is also dependent upon the balance of our investment in real
      estate loans and the interest earned on these loans.  As of June
      30, 2008, our investment in real estate loans was approximately $287.6
      million compared to our investment in real estate loans, including loans
      related to seller financed real estate held for sale, of approximately
      $264.9 million as of June 30, 2007.  For additional information
      see Note D- Investment
      Real Estate Loans of the Notes to the Consolidated Financial
      Statements included in Part I, Item 1Consolidated Financial
      Statementsof this Interim Report Form
  10-Q
 
 ·
              During
      the six months ended June 30, 2007, we recognized a gain of approximately
      $1.0 million related to an impaired real estate loan that was paid in
      full.
 
 ·
              During
      the six months ended June 30, 2007, we earned $561,000 in other income
      from principal payments on notes receivable that were fully reserved,
      compared to $7,000 during the same period in
  2008.
 
 Total Operating
Expenses:  For the six months ended June 30, 2008, total
operating expenses were approximately $27.0 million compared to approximately
$2.6 million during the six months ended June 30, 2007, an increase of
approximately $24.4 million or 930%.  Expenses were primarily affected
by the following factors in addition to the factors discussed above in Total Operating Expenses for
the three months ended June 30, 2008:
 
 ·
              We
      recognized approximately $2.6 million of interest expense during the six
      months ended June 30, 2008 related to the junior subordinated notes issued
      in connection with the trust preferred financing, compared to
      approximately $0.1 million in June
2007.
 
 Total Non-Operating
Income:  For the six months ended June 30, 2008, total
non-operating income was approximately $1.8 million compared to approximately
$0.5 million during the six months ended June 30, 2007, an increase of
approximately $1.3 million or 268%.  This increase is mainly due to
the purchase of debt noted above.
 
 Total Loss from Real Estate Held for
Sale:  For the six months ended June 30, 2008, total losses
from real estate held for sale were approximately $13.3 million compared to
approximately $2.0 million during the six months ended June 30, 2007, an
increase of approximately $11.2 million or 555% due in significant part to the
following factors:
 
 ·
              In
      addition to the write downs discussed above in Total Loss from Real Estate
      Held for Salefor the three months ended June 30, 2008, we, VRM I
      and Fund III acquired through foreclosure proceedings approximately 46.75
      acres of land in Galveston, TX, during the six months ended June 30,
      2008.  Our manager evaluated the carrying value of the property
      concluded that a write down of approximately $4.8 million, of which our
      portion was approximately $2.3 million, was
  appropriate.
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 ·
              We
      recorded a gain on sale of real estate held for sale related to seller
      financed loans of approximately $0.8 million during the six months ended
      June 30, 2007, as a result of a seller financed loan on the 74 unit (90
      bed) assisted living facility in San Bernardino, CA being paid in
      full.  As of June 30, 2007, we had approximately $7.4 million,
      in real estate held for sale – seller financed.  Upon the sale
      of real estate held for sale where we provide the financing, GAAP requires
      the new borrower to have a certain percentage equity ownership (ranging
      from 10% to 25%) to allow us to record the sale of property.  In
      addition, the borrower must maintain a minimum commitment in the property
      on a continuing basis.  Therefore, until the borrower meets
      these requirements, the proceeds received from the borrower are recorded
      as a deposit liability or applied to the balance of the real estate held
      for sale - seller financed, depending on the guidelines established by
      GAAP.  Our revenues will continue to be impacted until we are
      able to convert these assets into investment in real estate loans or the
      loans are paid in full and we reinvest the proceeds into new
      loans.  We have no real estate held for sale – seller financed
      as of June 30, 2008 and no related income during the six months ended June
      30, 2008.
 
 Dividends to Stockholders; Reliance
on Non-GAAP Financial Measurements:  To maintain our status as
a REIT, we are required to make distributions, other than capital gain
dividends, to our stockholders each year in an amount at least equal to (1) the
sum of (a) 90% of our taxable income, computed without regard to the dividends
paid deduction and our net capital gain, and (b) 90% of the net income, after
tax, from foreclosure property, minus (2) the sum of certain specified items of
noncash income over 5% of our REIT taxable income, determined without regard to
the dividends paid and our net capital gain.  Because we expect to
make distributions based on these requirements, and not based on our earnings
computed in accordance with GAAP, we expect that our distributions may at times
be more or less than our reported earnings as computed in accordance with
GAAP.
 
 Total
taxable income and REIT taxable income are non-GAAP financial measurements, and
do not purport to be an alternative to reported net income or cash flow from
operations determined in accordance with GAAP as a measure of operating
performance.  Our total taxable income represents the aggregate amount
of taxable income generated by us and our wholly owned taxable REIT subsidiary,
TRS II, Inc.  REIT taxable income is calculated under U.S. federal tax
laws in a manner that, in certain respects, differs from the calculation of net
income pursuant to GAAP.  REIT taxable income excludes the
undistributed taxable income of TRS II, Inc., which is not included in REIT
taxable income until distributed to us.  Subject to certain TRS value
limitations, there is no requirement that the TRS II, Inc. distribute their
earnings to us.  Since we are structured as a REIT and the Internal
Revenue Code requires that we distribute substantially all of our net taxable
income in the form of distributions to our stockholders, we believe that
presenting investors with the information management uses to calculate our
taxable income is useful to investors in understanding the amount of the minimum
distributions that we must make to our stockholders so as to comply with the
rules set forth in the Internal Revenue Code.  Because not all
companies have identical calculations, this presentation of total taxable income
and REIT taxable income may not be comparable to those reported by other
companies.
 
 In
addition to satisfying the 90% taxable income distribution rule referred to
above, the amount of distribution we make is ultimately based on distributing
100% of the REIT taxable income in order to limit any tax
liability.  The distribution of this additional 10% of REIT taxable
income is typically made in the following tax year as IRC section 858 allows us
to carryback distributions made, for example, in 2008 to 2007, for the purposes
of zeroing out our 2007 REIT taxable income.  As a result, included in
the distributions of approximately $7.2 million declared during the six months
ended June 30, 2008 is approximately $0.4 million that was used to reduce our
estimated 2007 REIT taxable income to zero.
 
 The table
below reconciles the differences between reported net income and total estimated
taxable income and estimated REIT taxable income for the six months ended June
30, 2008:
  - 40
-
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 For
      the Six
                Months
      EndedJune
      30, 2008Net
      loss, as reported
              
              $
              (25,330,000
              )Add
      (deduct):Provision
      for loan losses
              
              
              22,287,000Write
      down on real estate held for sale
              
              
              12,780,000Loss
      on foreclosure of real estate loan
              
              
              (2,134,000
              )Recovery
      of allowance for doubtful notes receivable
              
              
              (7,000
              )Payment
      on accrued legal expenses
              
              
              (1,049,000
              )Total
      taxable income
              
              
              6,547,000Add:
      Taxable loss attributable to TRS II, Inc.
              
              
              63,000Estimated
      REIT taxable income (prior to deductions for dividends
    paid)
              
              $
              6,610,000
 
 CAPITAL
AND LIQUIDITY
 
 Liquidity
is a measure of a company’s ability to meet potential cash requirements,
including ongoing commitments to fund lending activities and general operating
purposes.  Subject to a 3% reserve, we generally seek to use all of
our available funds to invest in real estate loans.  Distributable
cash flow generated from such loans is paid out to our stockholders, in the form
of a dividend.  We do not anticipate the need for hiring any
employees, acquiring fixed assets such as office equipment or furniture, or
incurring material office expenses during the next twelve months because our
manager will manage our affairs.  We may pay our manager an annual
management fee of up to 0.25% of our aggregate capital received by us and Fund
II from the sale of shares or membership units.
 
 During
the six months ended June 30, 2008, net cash flows provided by operating
activities approximated $9.9 million.  Operating cash flows were
adversely impacted by the payment of approximately $1.0 million in legal fees
relating to legal actions that have been filed against us in connection with the
REIT conversion and RightStar.  In addition, we incurred approximately
$12.8 million in write-downs on real estate held for sale and approximately
$22.3 million in provisions for loan losses, during the six months ended June
30, 2008.  Cash flows related to investing activities consisted of
cash provided by loan payoffs and sales of real estate loans of approximately
$55.9 million and cash used for new investments and purchases of real estate
loans totaled approximately $60.5 million.  Cash flows used for
financing activities consisted of dividends to stockholders, net of
reinvestment, of approximately $8.6 million and the purchase of debt totaled
approximately $2.2 million.
  At June
30, 2008, we had approximately $14.3 million in cash, $1.0 million in marketable
securities – related party and approximately $316.3 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales and/or
borrowings.  We believe we have sufficient working capital to meet our
operating needs in the near term.
 
 Since we
distribute most or all of our distributable cash generated by operations, our
sources of liquidity include  repayments of outstanding loans,
dividend reinvestments by our stockholders, arrangements with third parties to
participate in our loans and proceeds from issuance of note payable and secured
borrowings.  We rely primarily upon repayment of outstanding loans to
provide capital for investment in new loans.  The significant level of
defaults on outstanding loans has reduced the funds we have available for
investment in new loans.  Resulting foreclosure proceedings may not
generate full repayment of our loans and may result in significant delays in the
return of invested funds.  This has diminished our capital resources
and impaired our ability to invest in new loans.
 
 Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale not sold through seller financing, totaling
approximately $92.1 million and $21.7 million, respectively, as of June 30,
2008, compared to approximately $19.4 million and $28.6 million, respectively,
as of December 31, 2007.  It is possible that no earnings will be
recognized from these assets until they are disposed of, or that no earnings
will be recognized at all, and the time it will take to dispose of these assets
cannot be predicted.  Our manager believes that these non-performing
assets have increased in significant part as a result of conditions in the real
estate and credit markets.
  - 41
-
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  Because
of the estimated value of the underlying properties, we do not currently believe
that any losses beyond those already recognized should be incurred from these
assets upon final disposition.  However, it is possible that we will
not be able to realize the full estimated carrying values upon
disposition.
 
 We have
no current plans to sell any new shares except through our dividend reinvestment
program.  As of August 1, 2008, approximately 10% of our stockholders
owning less than 1% our outstanding shares have elected to reinvest their
dividends.  The level of dividend reinvestment in the future will
depend upon our performance, as well as the number of our stockholders who
prefer to reinvest rather than receive current dividends.
 
 On June
22, 2007 we completed the issuance of $60.1 million in unsecured trust preferred
securities through the special purpose business trust, VCT I to Merrill Lynch
International, Bear Stearns & Co. Inc. and Taberna Funding
LLC.  These securities have a fixed interest rate equal to 8.75%
through July 2012, and thereafter are subject to a variable rate equal to LIBOR
plus 3.5% per annum, resetting quarterly. VCT I used the proceeds from the sale
of the trust preferred securities and the common securities to purchase our
junior subordinated notes.  The terms of the junior subordinated notes
match the terms of the trust preferred securities.  The notes are
subordinated and junior in right of payment to all present and future senior
indebtedness and certain other of our financial obligations.
 
 The
indenture governing the notes includes a number of covenants including the
following financial covenants:  (i) we must maintain a Tangible Net
Worth of not less than $225 million, (ii) our trailing twelve months EBITDA must
not be less than 2.5 times our Interest Expense and (iii) our ratio of Total
Debt to Tangible Net Worth must not exceed 0.5 to 1.00.  All defined
terms are set forth in the indenture.  As of June 30, 2008, we were in
compliance with all financial covenants included in the indenture.
 
 On March
21, 2007, our board of directors authorized the repurchase of up to $10 million
worth of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.  We are not obligated to
purchase any shares.  Subject to applicable securities laws, including
SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.  As of June 30, 2008, we had purchased
109,634 shares as treasury stock through the repurchase program noted
above.  These shares are carried on our books at cost totaling
approximately $1.4 million.  There were no stock purchases made during
the six months ended June 30, 2008.
 
 We
maintain working capital reserves of approximately 3% in cash and cash
equivalents, certificates of deposits and short-term investments or liquid
marketable securities.  This reserve is available to pay expenses in
excess of revenues, satisfy obligations of underlying properties, expend money
to satisfy our unforeseen obligations and for other permitted uses of working
capital.
 
 We may
seek to expand our capital resources through borrowings from institutional
lenders or through securitization of our loan portfolio or similar
arrangements.  No assurance can be given that, if we should seek to
borrow additional funds or to securitize our assets we would be able to do so on
commercially attractive terms.  Our ability to expand our capital
resources in this manner is subject to many factors, some of which are beyond
our control, including the state of the economy, the state of the capital
markets and the perceived quality of our loan portfolio.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 6.0% to
15.0%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 43 real estate loans, as of
June 30, 2008, with a balance of approximately $287.4 million as compared to
investments in 46 real estate loans as of December 31, 2007, with a balance of
approximately $291.1 million.
 
 As of
June 30, 2008, we had 17 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 $92.1 million, net of allowance
for loan losses of approximately $29.9 million, which does not include the
allowances of approximately $4.6 million relating to the decrease in the
property value for performing loans as of June 30, 2008.
  - 42
-
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  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and concluded that the value of the underlying collateral is sufficient to
protect us from loss of principal.
 
 During
March 2007, our manager extended the Mid-State Raceway loan from March 31, 2007
to March 31, 2008.  As of March 31, 2008, this loan had a balance of
approximately $19.8 million, of which our portion was approximately $17.0
million.  This loan was paid in full on April 10, 2008.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Additions to the allowance for loan losses are made by
charges to the provision for loan losses.  Recoveries of previously
charged off amounts are credited to the allowance for loan losses or included as
income when the asset is disposed.  As of June 30, 2008, we have
provided a specific reserve related to ten non-performing loans and three
performing loans, based on updated appraisals and evaluation of the borrower
obtained by our manager during the year ended December 31, 2007, and the six
month ended June 30, 2008.  Our manager evaluated these loans and
concluded that the remaining underlying collateral was sufficient to protect us
against further losses of principal or interest.  Our manager will
continue to evaluate these loans in order to determine if any other allowance
for loan losses should be recorded.  For additional information on our
investments in real estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 Asset
Quality and Loan Reserves
 
 Losses
may occur from investing in real estate loans.  The amounts of losses
will vary as the loan portfolio is affected by changing economic conditions and
the financial condition of borrowers.
 
 The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the real
      estate loan amount.
 
 Based
upon this evaluation, a determination is made as to whether the allowance for
loan losses is adequate to cover any potential losses.  Additions to
the allowance for loan losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses.  For additional information regarding
the roll-forward of the allowance for loan losses for the six months ended June
30, 2008, refer to Note D – Investments In Real Estate
Loans of the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.
 
 Investments
in Real Estate Held for Sale
 
 At June
30, 2008, we held five properties with a total carrying value of approximately
$21.7 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.
  - 43
-
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  We seek
to sell properties acquired through foreclosure as quickly as circumstances
permit.  For additional information on our investments in real estate
held for sale, refer to Note F – Real Estate Held for Sale of
the Notes to the Consolidated Financial Statements included in Part I, Item
1 Consolidated Financial
Statementsof this Interim Report Form 10-Q.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities, other than the
interest in VCT I as discussed in Note I – Junior Subordinated Notes of
the Notes to the Consolidated Financial Statements included in Part I, Item
1 Consolidated Financial
Statementsof this Interim Report Form 10-Q. nor do we have any interests
in non-exchange traded commodity contracts.
 
 CONTRACTUAL
OBLIGATIONS
 
 The
following summarizes our contractual obligations at June 30, 2008:
 
 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)
              
              
              21,000,000
              
              
              
              21,000,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Notes
      payable (3)
              
              
              163,000
              
              
              
              163,000
              
              
              
              --
              
              
              
              --
              
              
              
              --Total
              
              $
              77,513,000
              
              
              $
              21,163,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              56,350,000
 
 (1)
              See
      Note I – Junior
      Subordinated Notes of the Notes to the Consolidated Financial
      Statements included in Part I, Item 1 Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 (2)
              See
      Note J – Secured
      Borrowings of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 (3)
              See
      Note K – Notes
      Payable of the Notes to the Consolidated Financial Statements
      included in Part I, Item 1 Consolidated Financial
      Statementsof this Interim Report Form
  10-Q.
 
 CRITICAL
ACCOUNTING ESTIMATES
 
 Revenue
Recognition
 
 Interest
income on loans is accrued by the effective interest method.  We do
not accrue interest income from loans once they are determined to be
impaired.  A loan is impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement or when the payment of
interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at June 30, 2008, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
              
              $
              2,763,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
              
              $
              13,816,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
              
              $
              (2,763,000
              )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
              
              $
              (13,816,000
              )
 
  - 44
-
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  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 June 30, 2008, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption
              
              Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
              
              $
              2,876,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
              
              $
              14,378,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
              
              $
              (2,876,000
              )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
              
              $
              (14,378,000
              )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approves loans more quickly than other real estate
lenders and, due to our expedited underwriting process, there is a risk that the
credit inquiry we perform will not reveal all material facts pertaining to a
borrower and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
  - 45
-
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  Real Estate Held For
Sale
 
 Real
estate held for sale includes real estate acquired through foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
FAS 144 - Accounting for the
Impairment or Disposal of Long Lived Assets,we seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  The
carrying values of real estate held for sale are assessed on a regular basis
from updated appraisals, comparable sales values or purchase
offers.
 
 Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Real Estate Held For Sale –
Seller Financed
 
 We
occasionally finance sales of foreclosed properties to independent third
parties.  In order to record a sale of real estate when the seller is
providing continued financing, FAS 66 – Accounting for Sales of Real
Estate ("FAS 66'') requires the buyer of the real estate to make minimum
initial and continuing investments.  Minimum initial investments as
defined by FAS 66 range from 10% to 25% based on the type of real estate
sold.  In addition, FAS 66 limits commitments and contingent
obligations incurred by a seller in order to record a sale.
 
 Because
we occasionally foreclose on loans with raw land or developments in progress,
available financing for such properties is often limited and we frequently
provide financing up to 100% of the selling price on these
properties.  In addition, we may make additional loans to the buyer to
continue development of a property.  Although sales agreements are
consummated at closing, they lack adequate initial investment by the buyer to
qualify as a sales transaction as defined in FAS 66.  These sales
agreements are not recorded as a sale until the requirements of FAS 66 are
met.
 
 These
sales agreements are recorded under the deposit method or cost recovery method
as defined in FAS 66.  Under the deposit method, no profit is
recognized and any cash received from the buyer is reported as a deposit
liability on the balance sheet.  Under the cost recovery method, no
profit is recognized until payments by the buyer exceed the carrying basis of
the property sold.  Principal payments received will reduce the
related receivable, and interest collections will be recorded as unrecognized
gross profit on the balance sheet.  The carrying values of these
properties are included in real estate held for sale on the accompanying
consolidated balance sheets.
 
 ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURESABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.
 
 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 June 30, 2008, our aggregate investment in real estate
loans was approximately $253.1 million, net of allowance of approximately $34.5
million, with a weighted average effective interest rate of
12.24%.  Most of the real estate loans had an initial term of 12
months.  The weighted average term of outstanding loans, including
extensions, at June 30, 2008, was 17 months.
  - 46
-
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  All but
two of the outstanding real estate loans at June 30, 2008, were fixed rate
loans.  Both variable interest rate loans were non-performing as of
June 30, 2008, see Note D – Investments in Real Estate
Loans in the Notes to the Consolidated Financial Statements included in
Part I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.  All of
the real estate loans are held for investment purposes; none are held for
sale.  We intend to hold such real estate loans to
maturity.  None of the real estate loans had prepayment penalties and
28 loans, totaling approximately $187.3 million, had an exit fee.  Out
of the 28 loans with an exit fee, 11 loans, totaling approximately $86.5
million, were considered non-performing as of June 30, 2008.
 
 Market
fluctuations in interest rates generally do not affect the carrying value of our
investment in real estate loans.  However, significant and sustained
changes in interest rates could affect our operating results.  If
interest rates decline significantly, some of the borrowers could prepay their
loans with the proceeds of a refinancing at lower interest
rates.  This would reduce our earnings and funds available for
dividend distribution to stockholders.  On the other hand, a
significant increase in interest rates could result in a slowdown in real estate
development activity that would reduce the demand for commercial real estate
loans.  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 June 30, 2008.  The presentation aggregates the
investment in real estate loans by their maturity dates for maturities occurring
in each of the years 2008 through 2012 and thereafter and separately aggregates
the information for all maturities arising after 2012.  The carrying
values of these assets approximate their fair value as of June 30,
2008.
 
 Interest
      Earning Assets
                Aggregated
      by Maturity at June 30, 2008Interest
      Earning Assets
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              Total(a)Investments
      In Real Estate Loans
              
              $
              220,232,000
              
              
              $
              59,884,000
              
              
              $
              7,437,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              287,553,000Weighted
      Average Interest Rates
              
              
              12.12%
              
              
              
              12.35%
              
              
              
              15.00%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              12.24%
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to June 30,
2008.
 
 At June
30, 2008, we also had approximately $15.3 million invested in cash, certificates
of deposit, and marketable securities – related party (VRM
I).  Approximately 3% of our assets will be held in such accounts as a
cash reserve; additional deposits in such accounts will be made as funds are
received from investors and repayment of loans pending the deployment of such
funds in new real estate loans.  We believe that these financial
assets do not give rise to significant interest rate risk due to their
short-term nature.
 
  - 47
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 Table of Contents
  ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
regarding required financial disclosure.  In connection with the
preparation of this Report on Form 10-Q, our management carried out an
evaluation, under the supervision and with the participation of our management,
including the CEO and CFO, as of June 30, 2008, of the effectiveness of the
design and operation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Exchange Act.  Based upon our
evaluation, our CEO and CFO concluded that, as of June 30, 2008, our disclosure
controls and procedures are designed at a reasonable assurance level and are
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure.
 
 Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within our company have
been or will be detected.  Even effective internal control over
financial reporting can only provide reasonable assurance with respect to
financial statement preparation.  Furthermore, because of changes in
conditions, the effectiveness of internal control over financial reporting may
vary over time.  Our management, including our CEO and CFO, does not
expect that our controls and procedures will prevent all errors.
 
 The
certifications of the our CEO and CFO required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this
report.
 
 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 second fiscal quarter of 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  Based on that
evaluation, there has been no such change during the second fiscal quarter of
2008.
 
 ITEM
      4T.
              CONTROLS
      AND PROCEDURES
 
 Not
applicable
 
 PART
II – OTHER INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note M – Legal
Matters Involving the Manager and Note N – Legal Matters Involving the
Company in Part I, Item 1 Consolidated Financial
Statements of this Form 10-Q for information regarding our legal
proceedings, which are incorporated herein by reference.
 
 ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
  - 48
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  RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and
distributions.  Current economic conditions increase the risk of
defaults on our loans.
 
 We are in
the business of investing in real estate loans and, as such, we are subject to
risk of defaults by borrowers.  Our performance will be directly
impacted by any defaults on the loans in our portfolio.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the rate
of default on our loans could be higher than those generally experienced in the
real estate lending industry.  Any sustained period of increased
defaults could adversely affect our business, financial condition, liquidity and
the results of our operations.
 
 As of
June 30, 2008, we had in our portfolio approximately $92.1 million in
non-performing loans, net of allowance for loan losses of approximately $29.9
million, which does not include allowances of approximately $4.6 million for
performing loans, and approximately $21.7 million of real estate held for sale
for a total of approximately $113.7 million in non-performing assets, which
represented approximately 60% of our stockholders’ equity.  We believe
this is largely attributable to difficulties in the real estate and credit
markets.  At this time, we are not able to predict how long such
difficult economic conditions will continue.
 
 We seek
to mitigate the risk by estimating the value of the underlying collateral and
insisting on adequate loan-to-value ratios.  However, we cannot be
assured that these efforts will fully protect us against losses on defaulted
loans.  Our appraisals are generally dated within 12 months of the
date of loan origination and may not reflect a decrease in the value of the real
estate due to events subsequent to the date of the appraisals.  Any
subsequent decline in real estate values on defaulted loans could result in less
security than anticipated at the time the loan was originally made, which may
result in our not recovering the full amount of the loan.  Our
weighted average loan-to-value ratio, not including allowance for loan losses,
as of June 30, 2008, was 88.33%, as compared to 72.64% as of December 31,
2007.  Any failure of a borrower to pay interest on loans will reduce
our revenues, the distributions we pay to stockholders and, most likely, the
value of common stock.  Similarly, any failure of a borrower to repay
loans when due may reduce the capital we have available to make new loans,
thereby adversely affecting our operating results.
 
 A
prolonged economic slowdown, lengthy or severe recession or significant increase
in interest rates could harm our business.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the six month ended June 30,
2008, we, conducted updated appraisals on 24 of properties securing our loans,
representing approximately 42% of our total loan portfolio value, and concluded
that the estimated value of such properties should be reduced by approximately
$49.4 million, which negatively impacted our weighted average loan to value
ratio.  As a commercial real estate lender willing to invest in
riskier loans, rates of delinquencies, foreclosures and losses on our loans
could be higher than those generally experienced in the commercial mortgage
lending industry during periods of economic slowdown or recession.  We
are of the opinion that problems in the sub-prime residential mortgage market
have adversely affected the general economy and the availability of funds for
commercial real estate developers.  We believe this lack of available
funds has led to an increase in defaults on our loans.  Furthermore,
problems experienced in U.S. credit markets since the summer of 2007 have
reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary to pay back our
loans.  Thus, an extended period of illiquidity in the credit markets
could result in a material increase in the number of our loans that are not paid
back on time.  Any sustained period of increased delinquencies,
defaults or foreclosures will likely have an adverse affect upon our ability to
originate, purchase and securitize loans, which could significantly harm our
business, financial condition, liquidity and results of operations.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.
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  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 depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.
 
 In
addition, most of the appraisals are prepared on an as-if developed basis, which
approximates the post-construction value of the collateralized property assuming
such property is developed.  As-if developed values on raw land loans
or acquisition and development loans often dramatically exceed the immediate
sales value and may include anticipated zoning changes and successful
development by the purchaser upon which development is dependent on availability
of financing.  As most of the appraisals will be prepared on an as-if
developed basis, if the loan goes into default prior to completion of the
project, the market value of the property may be substantially less than the
appraised value.  As a result, there may be less security than
anticipated at the time the loan was originally made.  If there is
less security and a default occurs, we may not recover the full amount of our
loan, thus reducing the amount of funds available to distribute.
 
 We
typically make “balloon payment” loans, which are riskier than loans with
payments of principal over an extended period of time.
 
 The loans
we invest in or purchase generally require the borrower to make a “balloon
payment” on the principal amount upon maturity of the loan.  A balloon
payment is a large principal balance that is payable after a period of time
during which the borrower has repaid none or only a small portion of the
principal balance.  As of June 30, 2008, all of our loans provided for
payments of interest only with a “balloon” payment of principal payable in full
at the end of the term.  Loans with balloon payments are riskier than
loans with payments of principal over an extended time period such as 15 or 30
years because the borrower’s repayment depends on its ability to sell the
property, obtain suitable refinancing or otherwise raise a substantial amount of
cash when the loan comes due.  The borrower’s ability to achieve a
successful sale or refinancing of the property may be adversely impacted by
deteriorating economic conditions or illiquidity in the credit
markets.  There are no specific criteria used in evaluating the credit
quality of borrowers for loans requiring balloon
payments.  Furthermore, a substantial period of time may elapse
between the review of the financial statements of the borrower and the date when
the balloon payment is due.  As a result, there is no assurance that a
borrower will have sufficient resources to make a balloon payment when
due.
 
 Our
loans are not guaranteed by any governmental agency.
 
 Our loans
are not insured or guaranteed by a federally owned or guaranteed mortgage
agency.  Consequently, our recourse, if there is a default, may be to
foreclose upon the real property securing a loan and/or pursuing the borrower’s
guarantee of the principal.  The value of the foreclosed property may
have decreased and may not be equal to the amount outstanding under the
corresponding loan, resulting in a decrease of the amount available to
distribute.
 
 Our
real estate loans may not be marketable, and we expect no secondary market to
develop.
 
 We do not
expect our real estate loans to be marketable, and we do not expect a secondary
market to develop for them.  As a result, we will generally bear all
the risk of our investment until the loans mature.  This will limit
our ability to hedge our risk in changing real estate markets and may result in
reduced returns to our investors.
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  The
terms of our indebtedness increase our operating risk and may reduce the amount
we have available to distribute to stockholders.
 
 In June
2007, we completed the issuance of $60.1 million of trust preferred securities
through a special purpose business trust in order to expand our capacity to
invest in real estate loans.  We may borrow up to 70% of the fair
market value of our outstanding real estate loans at any time and consequently,
subject to the terms of the trust preferred securities, we may borrow additional
funds in order to further expand our loan portfolio.  These borrowings
will require us to carefully manage our cost of funds.  The junior
subordinated notes sold in June 2007 in connection with the trust preferred
financing bear interest at a fixed rate of 8.75% through July 2012; thereafter
the interest rate is LIBOR plus 3.5%, resetting quarterly.  In order
to benefit from this arrangement, we need to loan the proceeds at rates in
excess of the rates payable on the junior subordinated notes.  Loans
made during the six months ended June 30, 2008 had a weighted average interest
rate of 13.27%.  However, no assurance can be given that we will be
successful in continuing to make loans at rates in excess of our cost of funds,
particularly if non-performing loans reduce our effective rate of return on our
outstanding loans or if there is a continuing decline in interest
rates.
 
 In
addition, the indenture governing the junior subordinated notes sets forth a
number of covenants, which may constrain our flexibility in operating our
business.  Should we breach a material covenant or if we are unable to
meet our payment obligations on the junior subordinated notes, the purchasers of
the trust preferred securities will likely declare us in default, resulting in
acceleration of the principal sums due on the notes and restrictions on the
payment of dividends to our stockholders.
 
 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 June 30, 2008, we had $21.0 million in funds,
including approximately $1.2 million in interest reserves, used under
Inter-creditor Agreements as compared to none as of December 31,
2007.
 
 The terms
of any additional indebtedness we incur may vary.  However, some
lenders may require as a condition of making a loan to us that the lender will
receive a priority on loan repayments received by us.  As a result, if
we do not collect 100% on our investments, the first dollars may go to our
lenders and we may incur a loss that will result in a decrease of the amount
available for distribution.  In addition, we may enter into
securitization arrangements in order to raise additional funds.  Such
arrangements could increase our leverage and adversely affect our cash flow and
our ability to make distributions.
 
 We may
need cash to meet our minimum REIT distribution requirements and limit U.S.
federal income taxation.  Because we are required to distribute
annually to our stockholders at least 90% of our REIT taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) to qualify as a REIT and because we intend to distribute substantially
all of our REIT taxable income and net capital gain, our ability to expand our
loan portfolio will depend in large part on external sources of
capital.  In addition, if our minimum distribution requirements to
maintain our REIT status and minimize U.S. federal income taxation become large
relative to our cash flow as a result of our taxable income exceeding our cash
flow from operations, then we may be required to borrow funds or raise capital
by selling assets to meet those distribution requirements.  Any equity
financing may result in substantial dilution to our stockholders, and any debt
financing may include restrictive covenants.  We may not be able to
raise capital on reasonable terms, if at all.
 
 We
may have difficulty protecting our rights as a secured lender.
 
 We
believe that our loan documents will enable us to enforce our commercial
arrangements with borrowers.  However, the rights of borrowers and
other secured lenders may limit our practical realization of those
benefits.  For example:
 
 ·
              Judicial
      foreclosure is subject to the delays of protracted
      litigation.  Although we expect non-judicial foreclosure to be
      quicker, our collateral may deteriorate and decrease in value during any
      delay in foreclosing on it;
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 ·
              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 N – Legal Matters Involving The
      Company in the notes to the consolidated financial statement under
      Part I, Item 1
      Consolidated Financial Statementsof this Interim Report Form
      10-Q.
 
 ·
              We
      may not be able to pursue deficiency judgments after we foreclose on
      collateral; and
 
 ·
              State
      and federal bankruptcy laws can prevent us from pursuing any actions,
      regardless of the progress in any of these suits or
      proceedings.
 
 By
becoming the owner of property, we may incur additional obligations, which may
reduce the amount of funds available for distribution.
 
 We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  If we foreclose on
the security property, we expect to obtain the services of a real estate broker
and pay the broker’s commission in connection with the sale of the
property.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.
 
 Under
applicable environmental laws, any owner of real property may be fully liable
for the costs involved in cleaning up any contamination by materials hazardous
to the environment.  Even though we might be entitled to
indemnification from the person that caused the contamination, there is no
assurance that the responsible person would be able to indemnify us to the full
extent of our liability.  Furthermore, we would still have court and
administrative expenses for which we may not be entitled to
indemnification.
 
 Our
results are subject to fluctuations in interest rates and other economic
conditions.
 
 Our
results of operations will vary with changes in interest rates and with the
performance of the relevant real estate markets.  If the economy is
healthy, we expect that more people will be borrowing money to acquire, develop
or renovate real property.  However, if the economy grows too fast,
interest rates may increase too much and the cost of borrowing may become too
expensive.  Alternatively, if the economy enters a recession, real
estate development may slow.  A slowdown in real estate lending may
mean we will have fewer loans to acquire, thus reducing our revenues and
distributions to stockholders.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 §
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and distributions will decline if we are unable to reinvest at
      higher rates or if an increasing number of borrowers default on their
      loans; and
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 §
              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 June 30, 2008,
      none of our loans had a prepayment penalty, although 28 of our loans,
      totaling approximately $187.3 million, had an exit fee.  Out of
      the 28 loans with an exit fee, 14 loans, totaling approximately $115.9
      million, were considered non-performing as of June 30,
      2008.  However, depending upon the amount by which interest
      rates decline, the amount of the exit fees is generally not significant in
      relation to the potential savings borrowers may realize as a result of
      prepaying their loans.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
June 30, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington, with approximately 38%
of our loans in Nevada.  Depending on the market and on our company’s
performance, we plan to expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southern United States.  Real estate markets vary greatly
from location to location and the rights of secured real estate lenders vary
considerably from state to state.
 
 Legal
actions seeking damages and appraisal rights could harm our operating results
and financial condition.
 
 We are a
party in several legal actions seeking damages and appraisal rights in
connection with the REIT conversion.  See Note M – Legal Matters Involving The
Manager and Note N – Legal Matters Involving The
Company in the notes to the consolidated financial statement under Part
I, Item 1 Consolidated
Financial Statementsof this Interim Report Form 10-Q.  While
we believe these actions are without merit, the defense of such actions has
materially increased our legal costs and may require the substantial attention
of our management.  This in turn might adversely impact our operating
results.  As of June 30, 2008, we have incurred legal expenses of
approximately $1.7 million related to such actions.  Moreover, any
adverse outcome in such actions could result in our having to pay substantial
damages, which would reduce our cash resources and harm our financial
condition.
 
 We
face competition for real estate loans that may reduce available yields and fees
available.
 
 We
consider our direct competitors to be the providers of real estate loans who
offer short-term, equity-based loans on an expedited basis for higher fees and
rates than those charged by other financial institutional lenders such as
commercial banks, insurance companies, mortgage brokers and pension
funds.  Many of the companies against which we compete have
substantially greater financial, technical and other resources than either our
company or our manager.  Competition in our market niche depends upon
a number of factors, including price and interest rates of the loan, speed of
loan processing, cost of capital, reliability, quality of service and support
services.  If our competition decreases interest rates on their loans
or makes funds more easily accessible, yields on our loans could decrease and
the costs associated with making loans could increase, both of which would
reduce our revenues and our distributions to stockholders.
 
 We
may have a lack of control over participations.
 
 We will
consider investing in or purchasing loans jointly with other lenders and
purchasers, some of whom might be affiliates of Vestin Mortgage.  We
will initially have, and will maintain a controlling interest as lead lender in
participations with non-affiliates.  Although it is not our intention
to lose control, there is a risk that we will be unable to remain as the lead
lender in the loans in which we participate in the future.  In the
event of participation with a publicly registered affiliate, the investment
objectives of the participants shall be substantially
identical.  There shall be no duplicate fees.  The
compensation to the sponsors must be substantially identical, and the investment
of each participant must be on substantially the same terms and
conditions.
 
 Each
participant shall have a right of first refusal to buy the other's interest if
the co-participant decides to sell its interest.  We will not
participate in joint ventures or partnerships with affiliates that are not
publicly registered except as permitted in the NASAA Guidelines or otherwise
approved by our board of directors.  If our co-participant affiliate
determines to sell its interest in the loan, there is no guarantee that we will
have the resources to purchase such interest and we will have no control over a
sale to a third party purchaser.
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  MANAGEMENT
AND CONFLICTS OF INTEREST RISKS
 
 We
rely on our manager to manage our day-to-day operations and select our loans for
investment.
 
 Our
ability to achieve our investment objectives and to make distributions depends
upon our manager’s and its affiliate’s performance in obtaining, processing,
making and brokering loans for us to invest in and determining the financing
arrangements for borrowers.  Stockholders have no opportunity to
evaluate the financial information or creditworthiness of borrowers, the terms
of mortgages, the real property that is our collateral or other economic or
financial data concerning our loans.  We pay our manager an annual
management fee of up to 0.25% of our aggregate capital received by us and Fund
II from the sale of shares or membership units.  This fee is payable
regardless of the performance of our loan portfolio.  Our manager’s
duties to our stockholders are generally governed by the terms of the management
contract, rather than by common law principles of fiduciary
duty.  Moreover, our manager is not required to devote its employees’
full time to our business and may devote time to business interests competitive
to our business.
 
 Our
manager’s lack of experience with certain real estate markets could impact its
ability to make prudent investments on our behalf.
 
 As of
June 30, 2008, our loans were in the following states: Arizona, California,
Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington.  Depending on
the market and on our company’s performance, we plan to expand our investments
throughout the United States.  However, our manager has limited
experience outside of the Western and Southern United States.  Real
estate markets vary greatly from location to location and the rights of secured
real estate lenders vary considerably from state to state.  Our
manager’s limited experience in most U.S. real estate markets may impact its
ability to make prudent investment decisions on our
behalf.  Accordingly, where our manager deems it necessary, it plans
to utilize independent real estate advisors and local legal counsel located in
markets where it lacks experience for consultation prior to making investment
decisions.  Stockholders will not have an opportunity to evaluate the
qualifications of such advisors and no assurance can be given that they will
render prudent advice to our manager.
 
 Our
success depends on key personnel of our manager, the loss of whom could
adversely affect our operating results, and on our manager’s ability to attract
and retain qualified personnel.
 
 Our
success depends in part upon the continued contributions of certain key
personnel of our manager, including; Michael V. Shustek (Chief Executive Officer
and President), Rocio Revollo (Chief Financial Officer), and Daniel B. Stubbs
(Senior Vice President, Underwriting) some of whom would be difficult to replace
because of their extensive experience in the field, extensive market contacts
and familiarity with our company.  If any of these individuals were to
cease their employment with our manager, our operating results could
suffer.  None of the key personnel of our manager is subject to an
employment, non-competition or confidentiality agreement with our manager, or us
and we do not maintain “key man” life insurance policies on any of
them.  Our future success also depends in large part upon our
manager’s ability to hire and retain additional highly skilled managerial,
operational and marketing personnel.  Our manager may require
additional operations and marketing people who are experienced in obtaining,
processing, making and brokering loans and who also have contacts in the
relevant markets.  Competition for personnel is intense, and we cannot
be assured that we will be successful in attracting and retaining skilled
personnel.  If our manager were unable to attract and retain key
personnel, the ability of our manager to make prudent investment decisions on
our behalf may be impaired.
 
 Vestin
Mortgage serves as our manager pursuant to a long-term management agreement that
may be difficult to terminate and does not reflect arm’s length
negotiations.
 
 We have
entered into a long-term management agreement with Vestin Mortgage to act as our
manager.  The term of the management agreement is for the duration of
our existence.  The management agreement may only be terminated upon
the affirmative vote of a majority in interest of stockholders entitled to vote
on the matter or by our board of directors for cause upon 90 days’ written
notice of termination.  Consequently, it may be difficult to terminate
our management agreement and replace our manager in the event that our
performance does not meet expectations or for other reasons unless the
conditions for termination of the management agreement are
satisfied.  The management agreement was negotiated by related parties
and may not reflect terms as favorable as those subject to arm’s length
bargaining.
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  Our
manager will face conflicts of interest concerning the allocation of its
personnel’s time.
 
 Our
manager is also the manager of VRM I, Fund III and inVestin, companies with
investment objectives similar to ours.  Our manager and Mr. Shustek,
who indirectly owns 100% of our manager, anticipate that they may also sponsor
other real estate programs having investment objectives similar to
ours.  As a result, our manager and Mr. Shustek may have conflicts of
interest in allocating their time and resources between our business and other
activities.  During times of intense activity in other programs and
ventures, our manager and its key people will likely devote less time and
resources to our business than they ordinarily would.  Our management
agreement with our manager does not specify a minimum amount of time and
attention that our manager and its key people are required to devote to our
company.  Thus, our manager may not spend sufficient time managing our
operations, which could result in our not meeting our investment
objectives.
 
 Our
manager and its affiliates will face conflicts of interest arising from our fee
structure.
 
 Vestin
Originations, an affiliate of our manager, will receive substantial fees from
borrowers for transactions involving real estate loans.  Many of these
fees are paid on an up-front basis.  In some cases, Vestin
Originations or our manager may be entitled to additional fees for loan
extensions or modifications and loan assumptions, reconveyances and exit
fees.  These and other fees are quantified and described in greater
detail in our management agreement under “Management Agreement —
Compensation.”  Vestin Originations’ compensation is based on the
volume and size of the real estate loans selected for us, regardless of their
performance, which could create an incentive to make or extend riskier
loans.  Our interests may diverge from those of our manager, Vestin
Originations and Mr. Shustek to the extent that Vestin Originations benefits
from up-front fees that are not shared with us.
 
 Vestin
Originations will be receiving fees from borrowers that would otherwise increase
our returns.  Because Vestin Originations receives all of these fees,
our interests will diverge from those of our manager, Vestin Originations and
Mr. Shustek when our manager decides whether we should charge the borrower
higher interest rates or our manager’ affiliates should receive higher fees from
borrowers.
 
 We paid
our manager a management fee of $549,000 for the six months ended June 30,
2008.  In addition, Vestin Mortgage and Vestin Originations received a
total of approximately $1.9 million and $3.7 million, respectively, in fees
directly from borrowers for the six months ended June 30, 2008.  The
amounts received from borrowers represent fees earned by Vestin Mortgage and
Vestin Originations for loans originated for all funds managed by Vestin
Mortgage, including us, VRM I, Fund III and inVestin.  Our assets
represented approximately 78% of the assets managed by Vestin Mortgage as of
June 30, 2008.
 
 Our
manager will face conflicts of interest relating to other investments in real
estate loans.
 
 We expect
to invest in real estate loans when one or more other companies managed by our
manager are also investing in real estate loans.  There is a risk that
our manager may select for us a real estate loan investment that provides lower
returns than a real estate loan investment purchased by another program or
entity managed by our manager.  Our manager also serves as the manager
for VRM I, Fund III and inVestin, which have similar investment objectives as
our company.  There are no restrictions or guidelines on how our
manager will determine which loans are appropriate for us and which are
appropriate for VRM I, Fund III, inVestin or another company that our manager
manages.  Moreover, our manager has no obligation to provide us with
any particular opportunities or even a pro rata share of opportunities afforded
to other companies it manages.
 
 Our
manager may face conflicts of interest in considering a possible combination of
the Company with VRM I.
 
 VRM I is
a company, which is engaged in making mortgage loans similar to the loans that
we make and is managed by our manager.  There may be cost savings and
operating synergies that could be achieved by combining VRM I with VRM
II.  After initial exploration of a possible combination of VRM I with
VRM II, our Board of Directors decided to postpone further consideration of the
possible combination.  Notwithstanding the postponement, our
management has evaluated issues relevant to a possible combination and it is
possible the potential combination will be pursued again in the
future.  At this time, no decision has been made with respect to
whether a combination will be pursued, or with respect to the possible form of
any such combination.
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  Since our
manager owes a duty to the investors in each of these entities, it could face a
conflict of interest in considering such a possible combination.  Any
decision with respect to a proposed combination with VRM I will most likely be
subject to the approval of the independent directors or stockholders of VRM I as
well as the approval of our Board of Directors.
 
 UNITED
STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT QUALIFICATION
 
 Our
failure to qualify as a REIT would subject us to U.S. federal income tax, which
would reduce amounts available for distribution to our
stockholders.
 
 We have
elected to be taxed as a REIT under the Code.  Our qualification as a
REIT requires us to satisfy numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations, and
involves the determination of various factual matters and circumstances not
entirely within our control.  We intend that our organization and
method of operation will enable us to qualify as a REIT, but we may not so
qualify or we may not be able to remain so qualified in the
future.  Future legislation, new regulations, administrative
interpretations or court decisions could adversely affect our ability to qualify
as a REIT or adversely affect our stockholders.
 
 If we
fail to qualify as a REIT in any taxable year, we would be subject to U.S.
federal income tax (including any applicable alternative minimum tax) on our
taxable income at corporate rates, and we would not be allowed to deduct
distributions made to our stockholders in computing our taxable
income.  We may also be disqualified from treatment as a REIT for the
four taxable years following the year in which we failed to
qualify.  The additional tax liability would reduce our net earnings
available for investment or distribution to stockholders.  In
addition, we would no longer be required to make distributions to our
stockholders.  Even if we continue to qualify as a REIT, we will
continue to be subject to certain U.S. federal, state and local taxes on our
income and property.
 
 Distributions
from a REIT are currently taxed at a higher rate than corporate
distributions.
 
 Under the
Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax
rate on both distributions from certain domestic and foreign corporations and
net long-term capital gain for individuals was reduced to 15% until
2008.  The Tax Increase Prevention and Reconciliation Act of 2005,
which signed into law on May 17, 2006, extended the 15% long-term net capital
gain rate to 2010.  However, this reduced rate of tax on distributions
generally will not apply to our distributions (except those distributions
identified by the company as “capital gain dividends” which are taxable as
long-term capital gain) and therefore such distributions generally will be taxed
as ordinary income.  Ordinary income generally is subject to U.S.
federal income tax rate at a rate of up to 35% for individuals.  The
higher tax rate on our distributions may cause the market to devalue our common
stock relative to stock of those corporations whose distributions qualify for
the lower rate of taxation.  Please note that, as a general matter,
distributions from a REIT will be taxed at the same rate as stockholders’ share
of Vestin Realty Mortgage II’s taxable income attributable to its realized net
interest income.
 
 A
portion of our business is potentially subject to prohibited transactions
tax.
 
 As a
REIT, we are subject to a 100% tax on our net income from “prohibited
transactions.”  In general, prohibited transactions are sales or other
dispositions of property to customers in the ordinary course of
business.  Sales by us of property in the course of our business will
generally constitute prohibited transactions.
 
 We intend
to avoid the 100% prohibited transactions tax on property foreclosed upon by
Fund II prior to the REIT conversion by holding and selling such properties
through one or more wholly-owned taxable REIT subsidiaries.  However,
under the Code, no more than 20% of the value of the assets of a REIT may be
represented by securities of one or more taxable REIT subsidiaries and a taxable
REIT subsidiary generally cannot operate a lodging or health care
facility.
 
 As of
June 30, 2008, we held five properties with a total carrying value of
approximately $21.7 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 7% of our assets as of June 30, 2008.
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  Taxable
REIT subsidiaries are subject to corporate-level tax, which may devalue our
common stock relative to other companies.
 
 Taxable
REIT subsidiaries are corporations subject to corporate-level
tax.  Our use of taxable REIT subsidiaries may cause the market to
value its common stock lower than the stock of other publicly traded REITs which
may not use taxable REIT subsidiaries and lower than the equity of mortgage
pools taxable as non-publicly traded partnerships such as Fund II’s intended
qualification prior to the REIT conversion, which generally are not subject to
any U.S. federal income taxation on their income and gain.
 
 Our
use of taxable REIT subsidiaries may have adverse U.S. federal income tax
consequences.
 
 We must
comply with various tests to continue to qualify as a REIT for U.S. federal
income tax purposes, and our income from and investments in taxable REIT
subsidiaries generally do not constitute permissible income and investments for
purposes of the REIT qualification tests.  While we will attempt to
ensure that our dealings with our taxable REIT subsidiaries will not adversely
affect our REIT qualification, we cannot be assured that we will successfully
achieve that result.  Furthermore, we may be subject to a 100% penalty
tax, or our taxable REIT subsidiaries may be denied deductions, to the extent
our dealings with our taxable REIT subsidiaries are not deemed to be arm’s
length in nature.
 
 We
may endanger our REIT status if the distributions we receive from our taxable
REIT subsidiaries exceed applicable REIT gross income tests.
 
 The
annual gross income tests that must be satisfied to ensure REIT qualification
may limit the amount of distributions that we can receive from our taxable REIT
subsidiaries and still maintain our REIT status.  Generally, not more
than 25% of our gross income can be derived from non-real estate related
sources, such as distributions from a taxable REIT subsidiary.  If,
for any taxable year, the distributions we received from our taxable REIT
subsidiaries, when added to our other items of non-real estate related income,
represent more than 25% of our total gross income for the year, we could be
denied REIT status, unless we were able to demonstrate, among other things, that
our failure of the gross income test was due to reasonable cause and not willful
neglect.
 
 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
June 30, 2008, has ranged from $2.00 to $15.96 (adjusted for the 1-for-2.6
reverse stock split in December 2007).  We believe the price of our
stock in the months after we were listed was affected by, among other things,
selling pressure from stockholders seeking immediate liquidity and the level of
non-performing assets, which we own.  We continue to own a significant
level of non-performing assets and our sector of the market has suffered from
the problems encountered by sub-prime residential lenders.  Our stock
price may continue to be highly volatile and subject to wide
fluctuations.  In addition, the trading volume in our common stock may
fluctuate and cause significant price variations to occur.  Our
Company will be dissolved on December 31, 2020 unless the holders of a majority
of our common stock determine otherwise.  As we move closer to the
dissolution date, we expect to stop making new loans and our stock price could
approach our book value per share.  However, no assurance can be given
that the stock price will approach book value and then prevailing market
conditions may affect the price of our stock even as we near 2020.
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  The
market price of our common stock may fluctuate or decline significantly in the
future.  Some of the factors, many of which are beyond our control,
that could negatively affect our stock price or result in fluctuations in the
price or trading volume of our common stock include:
 
 ·
              Increases
      in loans defaulting or becoming non-performing or being written
      off;
 
 ·
              Actual
      or anticipated variations in our quarterly operating results or
      distributions;
 
 ·
              Publication
      of research reports about us or the real estate
  industry;
 
 ·
              Changes
      in market valuations of similar
companies;
 
 ·
              Changes
      in tax laws affecting REITs;
 
 ·
              Litigation;
 
 ·
              Adverse
      market reaction to any increased indebtedness we incur in the future;
      and
 
 ·
              General
      market and economic conditions.
 
 Market
interest rates could have an adverse effect on our stock price.
 
 One of
the factors that will influence the price of our common stock will be the
dividend yield on our common stock (as a percentage of the price of our common
stock) relative to market interest rates.  Thus, an increase in market
interest rates may lead prospective purchasers of our common stock to expect a
higher dividend yield, a lack of which could adversely affect the market price
of our common stock.
 
 We
are the subject of stockholder litigation, which may depress the price of our
stock.
 
 A number
of lawsuits have been filed against us by stockholders who claim, among other
things, that they were improperly denied dissenter’s rights in connection with
the conversion of Fund II into a REIT.  We believe the suits are
without merit and we intend to vigorously defend against such
claims.  Nonetheless, the outcome of the lawsuits cannot be predicted
at this time, nor can a meaningful evaluation be made of the potential impact
upon us if the plaintiffs were to prevail in their claims.  The
resulting uncertainty may depress the price of our stock.  Moreover,
concerns about the costs of defense and the potential diversion of our manager’s
time to deal with these lawsuits may have an adverse effect upon the price of
our stock.
 
 Our
charter documents and Maryland law contain provisions that may delay, defer or
prevent a change of control transaction.
 
 Our
charter and bylaws and Maryland corporate law contain a number of provisions (as
further described in exhibit 3.2 Bylaws of the Registrant
under the Exhibit Index included in Part IV, Item 15 Exhibits and Financial Statement
Schedules of this Report Form 10-K) that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price for
holders of our common stock or otherwise be in their best interests,
including:
 
 ·
              Ownership
      Limit.  Our articles of incorporation, subject to certain
      exceptions, authorizes our board of directors to take such actions as are
      necessary and desirable to preserve our qualification as a REIT and to
      limit any person to actual or constructive ownership of no more than a
      9.8% of the number or value, whichever is more restrictive, of the
      outstanding shares of our stock, unless our board of directors waives this
      ownership limit.  However, our board of directors may not grant
      a waiver of the ownership limit that would permit a person to acquire more
      than 15% of our stock without exception.  The ownership limit
      may have the effect of precluding a change in control of us by a third
      party, even if such change in control would be in the interest of our
      stockholders (and even if such change in control would not reasonably
      jeopardize our REIT status).
 
 ·
              Staggered
      Board.  Our board of directors is divided into three
      classes, with each class serving staggered three-year
      terms.  This classification of our board of directors may have
      the effect of delaying or preventing changes in our control or
      management.
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 ·
              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.
 
 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.
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 ·
              Advance Notice of Director
      Nominations and Stockholder Proposals.  Our bylaws impose
      certain advance notice requirements that must be met for nominations of
      persons for election to the board of directors and the proposal of
      business to be considered by
stockholders.
 
 Our
rights and the rights of our stockholders to take action against our directors
and officers are limited.
 
 Maryland
law provides that a director has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably
believes to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances.  Our charter limits the liability of our directors and
officers to us and our stockholders for money damages, except for liability
resulting from:
 
 ·
              Actual
      receipt of an improper benefit or profit in money, property or services;
      or
 
 ·
              A
      final judgment based upon a finding of active and deliberate dishonesty by
      the director or officer that was material to the cause of action
      adjudicated.
 
 In
addition, our articles of incorporation authorize us to obligate our company,
and our bylaws require us, to indemnify our directors and officers for actions
taken by them in those capacities to the maximum extent permitted by Maryland
law.  As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise exist under
common law.  Accordingly, in the event that actions taken in good
faith by any of our directors or officers impede the performance of our company,
stockholders’ ability to recover damages from such director or officer will be
limited.
 
 ITEM
      2.
              UNREGISTEREDSALES OF EQUITY AND USE OF
      PROCEEDS
 
 None.
 
 ITEM
      3.
              DEFAULTS
      UPON SENIORSECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
    HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 None.
 
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 ITEM
      6.
              EXHIBITS
 
 EXHIBIT
INDEX
 
 
 Exhibit
      No.
              
              Description
      of Exhibits2.1(2)
              
              Agreement
      and Plan of Merger between Vestin Fund II, LLC and the
      Registrant3.1(1)
              
              Articles
      of Incorporation of the Registrant3.2(1)
              
              Bylaws
      of the Registrant3.3(1)
              
              Form
      of Articles Supplementary of the Registrant3.4(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.5(5)
              
              Amendment
      to Vestin Realty Mortgage II’s Articles of Incorporation, effective
      December 31, 2007.3.6
      (6)
              
              Amended
      Articles of Incorporation of the Registrant4.1(1)
              
              Reference
      is made to Exhibits 3.1, 3.2 and 3.34.2(2)
              
              Specimen
      Common Stock Certificate4.3(1)
              
              Form
      of Rights Certificate4.4(4)
              
              Junior
      Subordinated Indenture10.1(1)
              
              Form
      of Management Agreement between Vestin Mortgage, Inc. and the
      Registrant10.2(1)
              
              Form
      of Rights Agreement between the Registrant and the rights
      agent10.9(4)
              
              Form
      of Purchase Agreement10.10(4)
              
              Amended
      and Restated Trust Agreement10.11
              
              Intercreditor Agreement, dated June 16, 2008, by
      and between Vestin Originations, Inc., Vestin Mortgage, Inc., Vestin
      Realty Mortgage II, Inc., and Owens Mortgage Investment
      Fund21.1(2)
              
              List
      of subsidiaries of the Registrant31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      135099.2R(3)
              
              Vestin
      Realty Mortgage II, Inc. Code of Business Conduct and
    Ethics
 
 (1)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 6 to our Form S-4
      Registration Statement filed on January 4, 2006 (File No.
      333-125121).(2)
              
              Incorporated
      herein by reference to Post-Effective Amendment No. 7 to our Form S-4
      Registration Statement filed on January 13, 2006 (File No.
      333-125121).(3)
              
              Incorporated
      herein by reference to the Transition Report on Form 10-K for the nine
      month transition period ended March 31, 2006 filed on September 7, 2006
      (File No. 000-51892)(4)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on June 27,
      2007 (File No. 000-51892)(5)
              
              Incorporated
      herein by reference to the Current Report on Form 8-K filed on January 4,
      2008 (File No. 000-51892)(6)
              
              Incorporated
      herein by reference to the Annual Report on Form 10-K filed on March 14,
      2008 (File No. 000-51892)
 
 
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 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
 Vestin
      Realty Mortgage II, Inc.By:
              /s/
      Michael V. ShustekMichael
      V. ShustekPresident
      and Chief Executive OfficerDate:
              August
      11, 2008
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
              
              Capacity
              
              Date/s/
      Michael V. Shustek
              
              President
      and Chief Executive Officer and Director
              
              August
      11, 2008Michael
      V. Shustek
              
              (Principal
      Executive Officer)/s/
      Rocio Revollo
              
              Chief
      Financial Officer
              
              August
      11, 2008Rocio
      Revollo
              
              (Principal
      Financial and Accounting Officer)/s/
      John E. Dawson
              
              Director
              
              August
      11, 2008John
      E. Dawson/s/
      Robert J. Aalberts
              
              Director
              
              August
      11, 2008Robert
      J. Aalberts/s/
      Fredrick J. Zaffarese Leavitt
              
              Director
              
              August
      11, 2008Fredrick
      J. Zaffarese Leavitt/s/
      Roland M. Sansone
              
              Director
              
              August
      11, 2008Roland
      M. Sansone
 
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