UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-K
 
 (Mark
one)
 
 [X]  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
fiscal year ended December 31,
2008
 
 Or
 
 [   ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 For the
transition period from _________ to _________
 
 Commission
File Number 333-105017
 
 VESTIN
      FUND III, LLC(Exact
      name of registrant as specified in its
charter)
 
 NEVADA
              
              87-0693972(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, including area code 702.227.0965
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 None
              
              None(Title
      of each class)
              
              (Name
      of each exchange on which
registered)
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 None(Title
      of class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes
[   ] No [X]
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes
[   ] No [X]
 
 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer [   ]
              Accelerated
      filer [   ]Non-accelerated
      filer [X]
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company
[   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes [   ] No [X]
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.  Not applicable.
 
 As of
March 4, 2009, the Company had 2,248,825 units outstanding.
 
 
  
  TABLEOF CONTENTS
 
 PagePART IITEM 1.
              BUSINESS
              1ITEM 1A.
              RISK FACTORS
              13ITEM 1B.
              UNRESOLVED STAFF COMMENTS
              22ITEM 2.
              PROPERTIES
              22ITEM 3.
              LEGAL PROCEEDINGS
              22ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              22PART IIITEM 5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
              22ITEM 6.
              SELECTED FINANCIAL DATA
              24ITEM 7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              25ITEM 7A.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              39ITEM 8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA
              40ITEM 9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
              79ITEM 9A.
              CONTROLS AND PROCEDURES
              79ITEM 9A(T).
              CONTROLS AND PROCEDURES
              80ITEM 9B.
              OTHER INFORMATION
              80PART IIIITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
              81ITEM 11.
              EXECUTIVE COMPENSATION
              82ITEM 12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              82ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
              83ITEM 14.
              PRINCIPAL ACCOUNTING FEES AND SERVICES
              83PART IVITEM 15.
              EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              84EXHIBIT INDEX
              85SIGNATURES
              86
 
 
 
  Table of Contents
  
 PARTI
 
 Note
Regarding Forward-Looking Statements
 
 This
report and other written reports and oral statements made from time to time by
us may contain forward-looking statements.  Such forward-looking
statements may be identified by the use of such words as “expects,” “plans,”
“estimates,” “intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,”
“projects,” “anticipates,” “believes” and words of similar
expression.  Forward-looking statements are likely to address such
matters as our business strategy, future operating results, future sources of
funding for real estate loans brokered by us, future economic conditions and
pending litigation involving us.  Some of the factors which could
affect future results are set forth in the discussion under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Factors Affecting Our Operating Results.”
 
 ITEM
      1.
              BUSINESS
 
 General
 
 Vestin
Fund III, LLC was organized in April 2003 as a Nevada limited liability company
for the purpose of investing in commercial real estate loans (hereafter referred
to as “real estate loans”) and income-producing real property.  On
March 5, 2007, a majority of our members approved the Third Amended and Restated
Operating Agreement, which limits the Company’s investment objectives to
investments in real estate loans.  Prior to adopting this amendment,
we also invested in revenue-generating commercial real estate.  We
sold our real estate investment in November 2006.  In this report, we
refer to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”,
“us”, or “our”.
 
 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 Operating
Agreement as “Mortgage Assets”).  We commenced operations in February
2004.  Under our Operating Agreement, we would continue our operations
until December 2023 unless dissolved prior thereto or extended by vote of the
members under the provisions of our Operating Agreement.  However, our
manager is considering a proposal to the members to wind up our operations in
view of our limited operating assets.
 
 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 company investing in real estate loans we are
subject to the North American Securities Administration Association Mortgage
Program Guidelines (the “NASAA Guidelines”) promulgated by the state securities
administrators.  Prior to March 5, 2007, we also invested in real
estate and were subject to the North American Securities Administration
Association Real Estate Guidelines.
 
 On
November 7, 2003, our Registration Statement as filed with the United States
Securities and Exchange Commission (“SEC”) became effective for the initial
public offering of up to 10,000,000 units at $10 per unit
(“unit”).  On November 7, 2005, we discontinued the offering of our
units; however, members continued to purchase additional units through our
Distribution Reinvestment Plan whereby the members’ distributions were used to
purchase additional units at the current value.  As of December 31,
2008, we had sold approximately 3,113,166 units, which includes 247,245 units
purchased through our Distribution Reinvestment Plan.  On April 2,
2007, our manager decided to terminate our Distribution Reinvestment Plan
effective May 7, 2007, pursuant to Section 8.5 of our Operating
Agreement.  A letter was sent on April 2, 2007 to our members
notifying them of the Distribution Reinvestment Plan’s termination.
 
  - 1
-
 Table of Contents
  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, 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 Operating Agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us.  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.  The Operating Agreement also
provides that the members have certain rights, including the right to terminate
our manager subject to a majority vote of the members.
 
 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 Realty Mortgage
II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund
II) and inVestin Nevada, Inc., (“inVestin”) a company wholly owned by our
manager’s CEO.  These entities have been formed to invest in real
estate loans.
 
 For the
year ended December 31, 2006, the financial statements include the accounts of
the Company and its wholly owned subsidiary, VF III HQ, LLC.  All
significant inter-company transactions and balances have been eliminated in
consolidation.  During December 2006, VF III HQ, LLC was
dissolved.
 
 Real Estate Program Objectives
(Prior to March 5,
2007)
 
 Prior to
March 5, 2007, we sought to invest in income-producing multifamily residential
units, office, industrial, and retail properties, assisted living facilities and
other income-producing real property.  Such properties could have
included hotels and resorts, restaurants, parking lots, amusement parks or other
leasehold properties.  We intended to primarily lease the real
property owned by us.  We sought to hold our properties until such
time as we believed it was the optimal time to enable us to capitalize on the
potential for appreciation of our properties.
 
 A Special
Meeting of our members was held on March 5, 2007 to vote on approval of the
Third Amended and Restated Operating Agreement, which limits the Company’s
investment objectives to investment in real estate loans.  A majority
of our members approved the Third Amended and Restated Operating
Agreement.
 
 Real
Estate Loan Objectives
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.  The loans we invest in are
selected for us by our manager from among loans originated by Vestin
Originations or non-affiliated mortgage brokers.  When Vestin
Originations or a non-affiliated mortgage broker originates a loan for us, that
entity identifies the borrower, processes the loan application, brokers and
sells, assigns, transfers or conveys the loan to us.  We believe that
our loans are attractive to borrowers because of the expediency of our manager’s
loan approval process, which takes about ten to twenty days.
 
 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.  Because of our increased willingness
to fund riskier loans, borrowers are generally willing to pay us an interest
rate that is above the rates generally charged by other commercial
lenders.  We invest a significant amount of our funds in loans in
which the real property, held as collateral, is not generating any income to the
borrower.  The loans in which we invest are generally riskier because
the borrower’s repayment depends on their ability to refinance the loan or
develop the property so they can refinance the loan.
 
  - 2
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 Table of Contents
  Our
principal investment objectives are to:
 
 ·
              Produce
      revenues from the interest income on our real estate
  loans;
 
 ·
              Provide
      cash distributions from the net income generated by our real estate
      loans;
 
 ·
              Preserve
      capital contributions; and
 
 ·
              Reinvest,
      to the extent permissible, payments of principal and sales (net of
      expenses).
 
 Acquisition
and Investment Policies
 
 We seek
to invest approximately 97% of our assets in real estate
loans.  Approximately 3% will be held as a working capital cash
reserve.  As of December 31, 2008, approximately 58% of our assets,
net of allowance for loan losses, are classified as investments in real estate
loans.
 
 Generally,
the collateral on our real estate loans is the real property that the borrower
is purchasing or developing, along with a guarantee of the main principal of the
borrower, with the funds that we make available.  We sometimes refer
to these real properties as the security properties.  While we may
invest in other types of loans, most of the loans in which we invest have been
made to real estate developers.
 
 Our real
estate investments are not insured or guaranteed by any government
agency.
 
 Our
manager continuously evaluates prospective investments, selects the loans in
which we invest and makes all investment decisions on our behalf.  In
evaluating prospective real estate loan investments, our manager considers such
factors as the following:
 
 ·
              The
      ratio of the amount of the investment to the value of the property by
      which it is secured, or the loan-to-value
ratio;
 
 ·
              The
      potential for capital appreciation or depreciation of the property
      securing the investment;
 
 ·
              Expected
      levels of rental and occupancy rates, if
  applicable;
 
 ·
              Potential
      for rental increases, if
applicable;
 
 ·
              Current
      and projected revenues from the property, if
  applicable;
 
 ·
              The
      status and condition of the record title of the property securing the
      investment;
 
 ·
              Geographic
      location of the property securing the investment;
  and
 
 ·
              The
      financial condition of the borrowers and their principals, if any, who
      guarantee the loan.
 
 Our
manager may obtain our loans from an affiliated or non-affiliated mortgage
broker who may solicit previous or new borrowers in those states where
permissible.  We may purchase existing loans that were originated by
third party lenders or brokered by Vestin Originations to facilitate our
purchase of the loans.  Vestin Originations and/or our manager will
sell, assign, transfer or convey the loans to us without a premium, but may
include its service fees and compensation.
 
 When
selecting real estate loans for us, our manager generally adheres to the
following guidelines, which are intended to control the quality of the
collateral given for our loans:
 
  - 3
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 Table of Contents
  1.Priority of
Loans.Generally, our assets are secured by first deeds of
trust.  First deeds of trust are loans secured by a full or divided
interest in a first deed of trust secured by the property.  We will
not invest in any loan that is junior to more than one loan.  As of
December 31, 2008, approximately 93% of the principal amount of our outstanding
investments in loans was secured by first deeds of trust.
 
 2.Loan-to-Value
Ratio.The amount of our loan combined with the outstanding
debt secured by a senior loan on a security property generally does not exceed
the following percentage of the appraised value of the security property at
origination:
 
 Type
      of Secured Property
              Loan-to-Value
      RatioResidential
              75%Unimproved
      Land
              60%
       (of anticipated as-if developed value)Acquisition
      and Development
              60%
       (of anticipated as-if developed value)Commercial
      Property
              75%
       (of anticipated as-if developed value)Construction
              75%
       (of anticipated post- developed value)Leasehold
      Interest
              75%
       (of value of leasehold
interest)
 
 We may
deviate from these guidelines under certain circumstances.  For
example, our manager, in its discretion, may increase any of the above
loan-to-value ratios if it believes a given loan is supported by credit adequate
to justify a higher loan-to-value ratio, including personal
guarantees.  Occasionally, our collateral may include personal
property attached to the real property as well as real property.  We
do not have specific requirements with respect to the projected income or
occupancy levels of a property securing our investment in a particular
loan.  These loan-to-value ratios will not apply to financing offered
to the purchaser of any real estate acquired through foreclosure or to refinance
an existing loan that is in default when it matures.  In those cases,
our manager, in its sole discretion, shall be free to accept any reasonable
financing terms that it deems to be in our best interest.  As of
December 31, 2008, our actual loan-to-value ratio for our loan portfolio as a
whole, including allowances for loan losses based on the most recent updated
appraisals obtained and our manager’s analysis was 96.60% on a weighted average
basis.
 
 Loan-to-value
ratios are initially based on appraisals obtained at the time of loan
origination.  Such appraisals, which may have been commissioned by the
borrower and may precede the placement of the loan with us, are generally dated
no greater than 12 months prior to the date of loan
origination.  Current loan-to-value ratios are generally based on the
most recent appraisals and include allowances for loan
losses.  Recognition of allowance for loan losses will result in a
maximum loan-to-value ratio of 100% per loan.
 
 Appraisals
may not reflect subsequent changes in value and may be for the current estimate
of the “as-if developed” value of the property, which approximates the
post-construction value of the collateralized property assuming that such
property is developed.  “As-if developed” values on raw land loans or
acquisition and development loans often dramatically exceed the immediate sales
value and may include anticipated zoning changes, and successful development by
the purchaser; upon which development is dependent on availability of
financing.  As most of the appraisals will be prepared on an “as-if
developed” basis, if a loan goes into default prior to development of a project,
the market value of the property may be substantially less than the appraised
value.  As a result, there may be less security than anticipated at
the time the loan was originally made.  If there is less security and
a default occurs, we may not recover the outstanding balance of the
loan.
 
 We or the
borrower retain appraisers who are state certified or licensed appraisers and/or
hold designations from one or more of the following organizations: the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, the
National Association of Review Appraisers, the Appraisal Institute, the National
Society of Real Estate Appraisers, American Society of Real Estate Appraisers,
or from among appraisers with other qualifications acceptable to Vestin
Originations and/or our manager.  However, appraisals are only
estimates of value and cannot be relied on as measures of realizable
value.  An employee or agent of Vestin Originations or our manager
will review each appraisal report and will generally conduct a physical
inspection for each property.  A physical inspection includes an
assessment of the subject property, the adjacent properties and the
neighborhood, but generally does not include entering any structures on the
property.
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 Table of Contents
  
 3.  Terms of Real Estate
Loans.Our loans as of December 31, 2008, had original terms
of 12 months to 24 months, excluding extensions.  Most of our loans
are for an initial term of 12 months.  Generally, our original loan
agreements permit extensions to the term of the loan by mutual
consent.  Such extensions are generally provided on loans where the
original term was 12 months or less and where a borrower requires additional
time to complete a construction project or negotiate take out
financing.  However, our manager generally grants extensions when a
borrower is in compliance with the material terms of the loan, including, but
not limited to the borrower’s obligation to make interest payments on the
loan.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  The weighted average term of outstanding loans, including
extensions, at December 31, 2008, was 21 months.
 
 As
      of December 31, 2008, all of our loans provided for payments of interest
      only with a “balloon” payment of principal payable in full at the end of
      the term.  In addition, we 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 December 31, 2008,
      we had approximately $1.1 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 $24.0 million.  These loans
      had interest reserves of approximately $1.5 million, of which our portion
      was $35,000.  At December 31, 2007, we had approximately $6.2
      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 $78.6 million.  These loans had interest reserves
      of approximately $3.7 million, of which our portion was approximately $0.3
      million.
 
 4.  Escrow
Conditions.Our loans will often be funded by us through an
escrow account held by a title insurance company, subject to the following
conditions:
 
 ·
              Borrowers
      will obtain title insurance coverage for all loans, providing title
      insurance in an amount at least equal to the principal amount of the
      loan.  Title insurance insures only the validity and priority of
      our deed of trust, and does not insure us against loss by other causes,
      such as diminution in the value of the security
  property.
 
 ·
              Borrowers
      will obtain liability insurance coverage for all
  loans.
 
 ·
              Borrowers
      will obtain fire and casualty insurance for all loans secured by improved
      real property, covering us in an amount sufficient to cover the
      replacement cost of improvements.
 
 ·
              All
      insurance policies, notes, deeds of trust or loans, escrow agreements, and
      any other loan documents for a particular transaction will cover us as a
      beneficiary.
 
 5.  Purchase of Real Estate Investments
from Affiliates.We may acquire real estate loans from our
affiliates, including our manager, without a premium, but may include allowable
fees and expenses in accordance with applicable NASAA guidelines, but without
allowance of any other compensation for the loans.  Except for the
compensation paid to our manager, all income generated and expense associated
with the loans so acquired shall be treated as belonging to us.
 
 We may
acquire real estate loans from our affiliates, including our manager, that are
accounted for at the principal balance and no gain or loss is recognized by us
or any affiliate.  These purchases may include allowable fees and
expenses in accordance with applicable NASAA guidelines, but no other
compensation for the loans.  Excluding the compensation paid to our
manager, all income generated and expense associated with the loans so acquired
shall be treated as belonging to us.
 
  - 5
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 Table of Contents
  6.  Note
Hypothecation.We may also acquire real estate loans secured
by assignments of secured promissory notes.  These real estate loans
must satisfy our stated investment standards, including our loan-to-value
ratios, and may not exceed 80% of the principal amount of the assigned note upon
acquisition.  For example, if the property securing a note we acquire
is commercial property, the total amount of outstanding debts secured by the
property must not exceed 75% of the appraised value of the property, and the
real estate loan will not exceed 80% of the principal amount of the assigned
note.  For real estate loans secured by promissory notes, we will rely
on the appraised value of the underlying property, as determined by an
independent written appraisal that was conducted within the then-preceding
twelve months.  If an appraisal was not conducted within that period,
then we will arrange for a new appraisal to be prepared for the property prior
to acquisition of the loan.
 
 7.  Participation.We
participate in loans with other lenders, including affiliates as permitted by
the NASAA Guidelines, by providing funds for or purchasing an undivided interest
in a loan meeting our investment guidelines described
above.  Typically, we participate in loans if:
 
 ·
              We
      did not have sufficient funds to invest in an entire
  loan;
 
 ·
              We
      are seeking to increase the diversification of our loan portfolio;
      or
 
 ·
              A
      loan fits within our investment guidelines, however it would constitute
      more than 20% of our anticipated capital contribution or otherwise be
      disproportionately large given our then existing
  portfolio.
 
 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 VRM II (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.
 
 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 Lenders being
repaid.
 
 As of
December 31, 2008, all of our loans were loans in which we participated with
other lenders, most of whom are our affiliates.
 
 8.  Diversification.The
NASAA Guidelines provide that we neither invest in or make real estate loans on
any one property, which would exceed in the aggregate, an amount equal to 20% of
our capital, nor may we invest in or make real estate loans to or from any one
borrower, which would exceed, in the aggregate, an amount greater than 20% of
our capital, provided we are fully funded.  As of December 31, 2008,
our single largest loan accounted for approximately 12% of our members’
equity.  The loan yields interest at 12% per annum and as of December
31, 2008, our portion of the outstanding balance of the loan was approximately
$1.5 million.  As of March 4, 2009, this loan was
non-performing.  For additional information regarding the above
non-performing loan see “Non-Performing Loans” in Note D – Investments In Real Estate
Loans of the Notes to the Financial Statements included in Part II, Item
8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 As of
December 31, 2008, we had loans with common guarantors.  For
additional information regarding loans with common guarantors see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Financial Statements
included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
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 Table of Contents
  
 9.  Reserve
Fund.Although the NASAA Guidelines require reserves of not
less than 1% of the offering proceeds, we have established contingency working
capital reserves of approximately 3% of our capital to cover our unexpected cash
needs.
 
 10.  Credit
Evaluations.When reviewing a loan proposal, our manager
determines whether a borrower has sufficient equity in the security
property.  Our manager may also consider the income level and
creditworthiness of a borrower to determine its ability to repay the real estate
loan.
 
 11.  Sale of Real Estate Loan
Investments.Our manager may sell our real estate loans or
interest in our loans to either affiliates or non-affiliated parties when our
manager believes that it is advantageous for us to do so.  However, we
do not believe that the loans will be marketable or that a secondary market will
develop for them.
 
 Real
Estate Loans to Affiliates
 
 We will
not invest in real estate loans made to our manager, Vestin Group or any of our
affiliates.  However, we may acquire an investment in a real estate
loan payable by our manager when our manager has assumed the obligations of the
borrower under that loan, through a foreclosure on the property.
 
 Investment
of Loans from our manager and Its Affiliates
 
 In
addition to those loans our manager selects for us, we invest in loans that were
originated by Vestin Originations or other parties as long as the loan(s)
otherwise satisfies all of our lending criteria.  However, we will not
acquire a loan from or sell a loan to a real estate program in which our manager
or an affiliate has an interest except in compliance with NASAA
Guidelines.
 
 Types
of Loans We Invest In
 
 We
primarily invest in loans that are secured by first or second trust deeds on
real property.  Such loans fall into the following categories: raw and
unimproved land, acquisition and development, construction, commercial property
and residential loans.  The following discussion sets forth certain
guidelines our manager intends to follow in allocating our investments among the
various types of loans.  Our manager, however, may change these
guidelines at its discretion, subject to the terms of our Operating
Agreement.  Actual investments will be determined by our manager
pursuant to the terms of the management agreement, and the actual percentages
invested among the various loan categories may vary from the guidelines below,
due to, but not limited to, investment opportunities and subsequent sales and
foreclosures.
 
 Raw
and Unimproved Land Loans
 
 Generally,
15% to 25% of the loans invested in by us may be loans made for the purchase or
development of raw, unimproved land.  Generally, we determine whether
to invest in these loans based upon the appraised value of the property and the
borrower’s actual capital investment in the property.  We will
generally invest in loans for up to 60% of the initial as-if developed appraised
value of the property and we generally require that the borrower has invested in
the property actual capital expenditures of at least 25% of the property’s
value.  As-if developed values on raw and unimproved land 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 of December 31, 2008,
approximately 29% of our loans were in this category.
 
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  Acquisition
and Development Loans
 
 Generally,
10% to 25% of the loans invested in by us may be acquisition and development
loans.  Such loans enable borrowers to acquire and/or complete the
basic infrastructure and development of their property prior to the construction
of buildings or structures.  Such development may include installing
utilities, sewers, water pipes, and/or streets, together with the costs
associated with obtaining entitlements, including zoning, mapping and other
required governmental approvals.  We will generally invest in loans
with an initial face value of up to 60% of the appraised value of the
property.  Loan-to-value ratios on acquisition and development loans
are calculated using as-if developed appraisals.  Such appraisals have
the same valuation limitations as raw and unimproved land loans, described
above.  As of December 31, 2008, none of our loans were in this
category.
 
 Construction
Loans
 
 Generally,
10% to 70% of our loans may be construction loans.  Such loans provide
funds for the construction of one or more structures on developed
land.  Funds under this type of loan will generally not be forwarded
to the borrower until work in the previous phase of the project has been
completed and an independent inspector has verified certain aspects of the
construction and its costs.  We will typically require material and
labor lien releases by the borrower per completed phase of the
project.  We will review the appraisal of the value of the property
and proposed improvements, and will generally finance up to 75% of the initial
appraised value of the property and proposed improvements.  Such
appraisals have the same valuation limitations as raw and unimproved land loans,
described above.  As of December 31, 2008, approximately 12% of our
loans were in this category.
 
 Commercial
Property Loans
 
 Generally,
20% to 50% of the loans we invest in may be commercial property
loans.  Such loans provide funds to allow borrowers to acquire
income-producing property or to make improvements or renovations to the property
in order to increase the net operating income of the property so that it may
qualify for institutional refinancing.  Generally, we review the
initial property appraisal and generally invest in loans for up to 75% of such
appraised value of the property.  As of December 31, 2008,
approximately 59% of our loans were in this category.
 
 Residential
Loans
 
 A small
percentage of the loans invested in by us may be residential
loans.  Such loans facilitate the purchase or refinance of one to four
family residential property units provided the borrower uses one of the units on
the property as such borrower’s principal residence.  We will
generally invest in loans for up to 75% of the initial value of the
property.  As of December 31, 2008, none of our loans were in this
category.
 
 Collateral
 
 Each loan
is secured by a lien on either a fee simple or leasehold interest in real
property as evidenced by a first deed of trust or a second deed of
trust.
 
 First
Deed of Trust
 
 Most of
our loans are secured by first deeds of trust.  Thus as a lender, we
will have rights as a first priority lender of the collateralized
property.  As of December 31, 2008, approximately 93% of our loans
were secured by first deeds of trust.
 
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  Second
Deed of Trust
 
 Up to 10%
of our loans may be secured by second deeds of trust.  In a second
priority loan, the rights of the lender (such as the right to receive payment on
foreclosure) will be subject to the rights of the first priority
lender.  In a wraparound loan, the lender’s rights will be comparably
subject to the rights of a first priority lender, but the aggregate indebtedness
evidenced by the loan documentation will be the first priority loan plus the new
funds the lender invests.  The lender would receive all payments from
the borrower and forward to the senior lender its portion of the payments the
lender receives.  As of December 31, 2008, approximately 7% of our
loans were secured by second deeds of trust.  While such loans, when
funded, constituted less then 10% or our loans, a future decrease in the value
of loans secured by first deeds of trust, due to sales and foreclosures, may
increase the percentage of our portfolio secured by second deeds of trust to
more than 10%.
 
 Prepayment
Penalties and Exit Fees
 
 Generally,
the loans we invest in will not contain prepayment penalties but may contain
exit fees payable when the loan is paid in full, by the borrower, to Vestin
Originations or its affiliates as part of their compensation.  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 December 31, 2008, none of our loans
had a prepayment penalty, although 13 of our loans, totaling approximately $8.0
million, had an exit fee.  Out of the 13 loans with an exit fee, 5
loans, totaling approximately $5.4 million, were considered non-performing as of
December 31, 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.
 
 Extensions
to Term of Loan
 
 Our
original loan agreements generally permit extensions to the term of the loan by
mutual consent.  Such extensions are generally provided on loans where
the original term was 12 months or less and where a borrower requires additional
time to complete a construction project or negotiate take-out
financing.  However, our manager generally grants extensions when a
borrower is in compliance with the material terms of the loan, including, but
not limited to the borrower’s obligation to make interest payments on the
loan.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  As of December 31, 2008, our manager had granted
extensions on 13 loans, totaling approximately $134.0 million, of which our
portion was approximately $10.8 million.  Subsequent to their
extension, 8 of the 13 loans have become non-performing.  The loans,
which became non-performing after their extension, had a total principal amount
at December 31, 2008 of approximately $98.0 million, of which our portion is
approximately $8.7 million.
 
 Interest
Reserves
 
 We may
invest in loans that include a commitment for an interest reserve, which is
usually established at loan closing.  The interest reserve may be
advanced by us or other lenders with the amount of the borrower’s indebtedness
increased by the amount of such advances.  At December 31, 2008, we
had approximately $1.1 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 $24.0 million.  These loans had interest
reserves of approximately $1.5 million, of which our portion was
$35,000.
 
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  Balloon
Payment
 
 As of
December 31, 2008, all of our loans provided for payments of interest only with
a “balloon” payment of principal payable in full at the end of the
term.  There are no specific criteria used in evaluating the credit
quality of borrowers for real estate 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.  To the extent that a borrower has an obligation to pay real
estate loan principal in a large lump sum payment, its ability to repay the loan
may be dependent upon its ability to sell the property, obtain suitable
refinancing or otherwise raise a substantial amount of cash.  As a
result, these loans can involve a higher risk of default than loans where the
principal is paid at the same time as the interest payments.
 
 Repayment
of Loans on Sale of Properties
 
 We may
require a borrower to repay a real estate loan upon the sale of the property
rather than allow the buyer to assume the existing loan.  We will
require repayment if we determine that repayment appears to be advantageous to
us based upon then-current interest rates, the length of time that the loan has
been held by us, the creditworthiness of the buyer and our
objectives.  We will either invest our net proceeds from any capital
transaction in new real estate loans, hold the net proceeds as cash or
distribute them to our members.  These net proceeds will also include
the principal of a loan deemed to be repaid for tax purposes as a result of the
nature of a loan modification or loan extension.  Our Operating
Agreement provides that whether we choose to distribute the proceeds or reinvest
them, members will be deemed to have received a distribution of capital and
re-contributed the same amount to us.  Capital transactions include
payments of principal, foreclosures, and prepayments of real estate loans, to
the extent classified as a return of capital under the Internal Revenue Code,
and any other disposition of a real estate loan or property.
 
 Variable
Rate Loans
 
 Occasionally
we may acquire variable rate loans.  Variable rate loans originated by
Vestin Originations may use as indices the one and five year Treasury Constant
Maturity Index, the Prime Rate Index and the Monthly Weighted Average Cost of
Funds Index for Eleventh District Savings Institutions (Federal Home Loan Bank
Board).  As of December 31, 2008, all of the loans in our real estate
loan portfolio were fixed rate loans, with the exception of one loan with a
variable interest rate, totaling approximately $1.2 million.  This
loan was non-performing as of December 31, 2008, see Peoria 180, LLC under
“Non-Performing Loans” in Note D – Investments in Real Estate
Loans in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for more
information.
 
 It is
possible that the interest rate index used in a variable rate loan will rise (or
fall) more slowly than the interest rate of other loan investments available to
us.  Our manager and Vestin Originations attempt to minimize this
interest rate differential by tying variable rate loans to indices that are
sensitive to fluctuations in market rates.  Additionally, most
variable rate loans originated by Vestin Originations contain provisions under
which the interest rate cannot fall below the initial rate.
 
 Variable
rate loans generally have interest rate caps.  For these loans, there
is the risk that the market rate may exceed the interest cap rate.
 
 Borrowing
 
 We may
incur indebtedness to:
 
 ·
              Finance
      our investments in real estate
loans;
 
 ·
              Prevent
      a default under real estate loans that are senior to our real estate
      loans;
 
 ·
              Discharge
      senior real estate loans if this becomes necessary to protect our
      investment in real estate loans;
or
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 ·
              Operate
      or develop a property that we acquired under a defaulted
    loan.
 
 Our
indebtedness should not exceed 70% of the fair market value of our real estate
loans.  This indebtedness may be with recourse to our
assets.
 
 In
addition, we may enter into structured arrangements with other lenders in order
to provide them with a senior position in real estate loans that we might
jointly fund.  For example, we might establish a wholly owned special
purpose corporation that would borrow funds from an institutional lender under
an arrangement where the resulting real estate loans would be assigned to a
trust, and the trust would issue a senior certificate to the institutional
lender and a junior certificate to the special purpose
corporation.  This would assure the institutional lender of repayment
in full prior to our receipt of any repayment on the jointly funded real estate
loans.
 
 No
Trust or Investment Company Activities
 
 We have
not qualified as a real estate investment trust under the Internal Revenue Code,
and therefore we are not subject to the restrictions on its activities that are
imposed on real estate investment trusts.  We conduct our business so
that we are not an “investment company” within the meaning of the Investment
Company Act of 1940.  We also intend to conduct our business so that
we are not to be deemed a “dealer” in real estate loans for federal income tax
purposes.
 
 Various
Other Policies and Procedures
 
 Without
approval of a majority of the members, we will not:
 
 ·
              Issue
      securities senior to the units or issue any units or other securities for
      other than cash;
 
 ·
              Invest
      in the securities of other issuers for the purpose of exercising control,
      except when exercising our rights as a secured
  lender;
 
 ·
              Underwrite
      securities of other issuers;
 
 ·
              Discontinue
      providing our members with the reports described in our
      prospectus;
 
 ·
              Offer
      securities in exchange for property;
or
 
 ·
              Change
      the nature of our business or our investment
  policies.
 
 Competition
 
 Generally,
real estate developers depend upon the timely completion of a project to obtain
a competitive advantage when selling their properties.  We have sought
to attract real estate developers by offering expedited loan processing, which
generally provides quick loan approval and funding of a loan.  As a
result, we have established a market niche as a non-conventional real estate
lender.
 
 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.
 
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  Regulation
 
 We are
managed by Vestin Mortgage pursuant to the terms and conditions of our Operating
Agreement.  Vestin Originations, an affiliate of Vestin Mortgage,
operates as a mortgage broker and is subject to extensive regulation by federal,
state and local laws and governmental authorities.  Vestin
Originations conducts its real estate loan business under a license issued by
the State of Nevada Mortgage Lending Division.  Under applicable
Nevada law, the division has broad discretionary authority over Vestin
Originations’ activities, including the authority to conduct periodic regulatory
audits of all aspects of Vestin Originations’ operations.
 
 We, our
manager and Vestin Originations are also subject to the Equal Credit Opportunity
Act of 1974, which prohibits creditors from discriminating against loan
applicants on the basis of race, color, sex, age or marital status, and the Fair
Credit Reporting Act of 1970, which requires lenders to supply applicants with
the name and address of the reporting agency if the applicant is denied
credit.  We are also subject to various other federal and state
securities laws regulating our activities.  In addition, our manager
is subject to the Employee Retirement Income Security Act of 1974.
 
 The NASAA
Guidelines have been adopted by various state agencies charged with protecting
the interest of the investors.  Administrative fees, loan fees, and
other compensation paid to our manager and its affiliates would be generally
limited by the NASAA Guidelines.  These guidelines also include
certain investment procedures and criteria, which are required for new loan
investments.
 
 Because
our business is regulated, the laws, rules and regulations applicable to us are
subject to regular modification and change.  There can be no assurance
that laws, rules or regulations will not be adopted in the future that could
make compliance much more difficult or expensive, restrict our ability to broker
or service loans, further limit or restrict the amount of commissions, interest
and other charges earned on loans brokered by us, Vestin Originations, our
manager, or otherwise adversely affect our business or prospects.
 
 Policies
on Limitation on Investments
 
 We will
not invest in other limited partnerships except as permitted under our Operating
Agreement and the NASAA Guidelines.  We will not invest in limited
partnership interests of any other limited partnership of which our manager
serves as a managing or general partner unless our manager does not receive
duplicate fees or compensation beyond what is permissible by the NASAA
Guidelines.
 
 We will
not engage in the following:
 
 ·
              Issue
      senior securities;
 
 ·
              Acquire
      property for membership interests;
 
 ·
              Issue
      any units after termination of this Offering, except for the reinvestment
      plan offered to our members, or issue units in exchange for
      property;
 
 ·
              Underwrite
      securities of other issuers;
 
 ·
              Make
      loans to our manager or its
affiliates.
 
 We do not
intend to become an investment company under the Investment Company Act of
1940.  We will only repurchase our securities in response to a request
for redemption pursuant to our Operating Agreement.
 
  - 12
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  Employees
 
 We have
no employees.  Our manager, Vestin Originations and their parent
company, Vestin Group, Inc., have provided and will continue to provide all of
the employees necessary for our operations.  As of December 31, 2008,
those entities had a total of 21 full-time and no part-time
employees.  Except as hereinafter noted, all employees are at-will
employees and none are covered by collective bargaining
agreements.  John Alderfer, our former CFO, is a party to an
employment, non-competition, confidentiality and consulting contract with Vestin
Group, Inc., the parent company of our manager, through December 31,
2016.
 
 Available
Information
 
 Our
Internet website address is http://www.vestinmortgage.com/Products/Product_FundIII.aspx.  We
make available free of charge through http://www.vestinmortgage.com/Products/Product_FundIII.aspx
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and all amendments to those reports as soon as reasonably practical
after such material is electronically filed with or furnished, pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the United
States Securities and Exchange Commission (“SEC”).  Further, a copy of
this annual report on Form 10-K is located at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549.  Information on the
operations of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.  The SEC maintains an internet site that contains
reports, proxy and information statements and other information regarding our
filings at www.sec.gov.  Information
contained on our website does not constitute a part of this Report on Form
10-K.
 
 ITEM
      1A.
              RISK
      FACTORS
 
 In
considering our future performance and any forward-looking statements made in
this report, the material risks described below should be considered
carefully.  These factors should be considered in conjunction with the
other information included elsewhere in this report.
 
 RISKS
RELATED TO OUR BUSINESS
 
 Defaults
on our real estate loans will decrease our revenues and members’
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
December 31, 2008, our non-performing assets were approximately $8.2 million,
representing approximately 67% of our members’ equity.  Non-performing
assets included approximately $5.5 million in non-performing loans, net of
allowance for non-performing loan losses of approximately $4.8 million, and
approximately $2.7 million of real estate held for sale.  We believe
that the level of non-performing assets is largely attributable to difficulties
in the real estate and credit markets.  At this time, we are not able
to predict how long such difficult economic conditions will
continue.
 
 As of
December 31, 2008 and 2007, we had approximately $5.4 million and $1.0 million
in allowances for loan losses, respectively, resulting in net weighted average
loan-to-value ratios of 96.60% and 72.70%, respectively.  Not
including allowance for loan losses, our weighted average loan-to-value ratio,
as of December 31, 2008 and 2007, was 212.43%, and 78.27%, respectively,
primarily as a result of declining real estate values that have eroded the
market value of our collateral.  As a result, we may not be able to
recover the full amount of our loans if the borrower
defaults.  Moreover, any failure of a borrower to pay interest on
loans will reduce our revenues, the distributions we pay to members and, most
likely, the value of our units.  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.
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 The
current recession and constraints in the credit markets are adversely affecting
our operating results and financial condition.
 
 The risks
associated with our business are more acute during periods of economic slowdown
or recession because these periods can be accompanied by illiquid credit markets
and declining real estate values.  During the year ended December 31,
2008, we conducted updated appraisals on all the properties securing our loans,
which negatively impacted our weighted average loan to value
ratio.  Based on these updated appraisals and our manager’s analysis,
we recognized in 2008 approximately $5.9 million in provisions for loan
losses.  As a commercial real estate lender willing to invest in
riskier loans, rates of delinquencies, foreclosures and losses on our loans
could be higher than those generally experienced in the commercial mortgage
lending industry during periods of economic slowdown or
recession.  Problems in the sub-prime residential mortgage market have
adversely affected the general economy and the availability of funds for
commercial real estate developers.  We believe this lack of available
funds has led to an increase in defaults on our loans.  Furthermore,
problems experienced in U.S. credit markets since the summer of 2007 have
reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary in many cases to pay
back our loans.  Thus, an extended period of illiquidity in the credit
markets has resulted in a material increase in the number of our loans that are
not paid back on time.  Any sustained period of increased
delinquencies, defaults or foreclosures will have an adverse affect upon our
ability to originate, purchase and securitize loans, which could significantly
harm our business, financial condition, liquidity and results of
operations.
 
 Our
underwriting standards and procedures are more lenient than many institutional
lenders, which may result in a higher level of non-performing assets and less
amounts available for distribution.
 
 There may
be a greater risk of default by our borrowers, which may impair our ability to
make timely distributions and which may reduce the amount we have available to
distribute.  Our underwriting standards and procedures are more
lenient than many institutional lenders in that we will invest in loans to
borrowers who may not be required to meet the credit standards of other
financial institutional real estate lenders.  This may lead to an
increase in non-performing assets in our loan portfolio and create additional
risks of return.  We approve real estate loans more quickly than other
lenders.  We rely heavily on third-party reports and information such
as appraisals and environmental reports.  Because of our accelerated
due diligence process, we may accept documentation that was not specifically
prepared for us or commissioned by us.  This creates a greater risk of
the information contained therein being out of date or
incorrect.  Generally, we will not spend more than 20 days assessing
the character and credit history of our borrowers.  Due to the nature
of loan approvals, there is a risk that the credit inquiry we perform will not
reveal all material facts pertaining to the borrower and the
security.
 
 We
depend upon our real estate security to secure our real estate loans, and we may
suffer a loss if the value of the underlying property declines.  We
are currently experiencing a trend of declining real estate values which
increases the risk that our collateral will prove insufficient to protect our
loans.
 
 We depend
upon our real estate security to protect us on the loans that we
make.  We depend upon the skill of independent appraisers to value the
security underlying our loans.  However, notwithstanding the
experience of the appraisers, they may make mistakes, or the value of the real
estate may decrease due to subsequent events.  Our appraisals are
generally dated within 12 months of the date of loan origination and may have
been commissioned by the borrower.  Therefore, the appraisals may not
reflect a decrease in the value of the real estate due to events subsequent to
the date of the appraisals.  During the past 12 months, there has been
a significant decline in real estate values in many of the markets where we
operate, resulting in a decline in the estimated value of the real estate
securing our loans.
 
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  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.
 
 As
a result of our small size, we are not able to build a diversified loan
portfolio, thereby increasing our risk that defaults on one or more loans could
have a material adverse effect upon our operating results.
 
 We are
limited in the number of real estate loans in which we may invest and the value
of members’ investment will fluctuate with the performance of the specific
investments we make.  As of December 31, 2008, we had approximately
$12.3 million in members’ equity and $7.9 million in outstanding loans, net of
allowance of approximately $5.4 million, and we currently are not raising
additional funds through the sale of units.  Accordingly, we are a
relatively small fund and will make a limited number of investments resulting in
less diversification in terms of the number of investments owned, the geographic
regions in which our investments are located and the types of investments that
we make as compared with larger funds.  As a result, our performance
will be closely tied to the performance of each loan we invest in and a default
on a loan could materially reduce the funds available for
distribution.  Our profitability may be affected by the performance of
any one of our investments and members’ investment in our units will be subject
to greater risk.  For additional information about concentrations of
credit risk, see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Financial Statements
included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 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 December 31, 2008, all of our loans provided
for payments of interest only with a “balloon” payment of principal payable in
full at the end of the term.  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.
 
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  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 members.
 
 Any
borrowing by us will increase members risk and may reduce the amount we have
available to distribute.
 
 We may
borrow funds 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.  Any such borrowings will
require us to carefully manage our cost of funds.  No assurance can be
given that we will be successful in this effort.  Should we be unable
to repay the indebtedness and make the interest payments on the loans, the
lender will likely declare us in default and require that we repay all amounts
owing under the loan facility.  Even if we are repaying the
indebtedness in a timely manner, interest payments owing on the borrowed funds
may reduce our income and the distributions members receive.
 
 We may
borrow funds from several sources, and the terms of any 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 have difficulty protecting our rights as a secured lender.
 
 We
believe that our loan documents will enable us to enforce our commercial
arrangements with borrowers.  However, the rights of borrowers and
other secured lenders may limit our practical realization of those
benefits.  For example:
 
 ·
              Judicial
      foreclosure is subject to the delays of protracted
      litigation.  Although we expect non-judicial foreclosure to be
      quicker, our collateral may deteriorate and decrease in value during any
      delay in foreclosing on it;
 
 ·
              The
      borrower’s right of redemption during foreclosure proceedings can deter
      the sale of our collateral and can for practical purposes require us to
      manage the property;
 
 ·
              Unforeseen
      environmental hazards may subject us to unexpected liability and
      procedural delays in exercising our
rights;
 
 ·
              The
      rights of senior or junior secured parties in the same property can create
      procedural hurdles for us when we foreclose on
  collateral;
 
 ·
              Required
      licensing and regulatory approvals may complicate our ability to foreclose
      or to sell a foreclosed property where our collateral includes an
      operating business;
 
 ·
              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.
 
  - 16
-
 Table of Contents
  We intend
to own real property only if we foreclose on a defaulted loan and purchase the
property at the foreclosure sale.  Acquiring a property at a
foreclosure sale may involve significant costs.  If we foreclose on
the security property, we expect to obtain the services of a real estate broker
and pay the broker’s commission in connection with the sale of the
property.  We may incur substantial legal fees and court costs in
acquiring a property through contested foreclosure and/or bankruptcy
proceedings.  In addition, significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs and
related charges, must be made on any property we own regardless of whether the
property is producing any income.  See Note F – Real Estate Held for Sale in
the notes to the financial statement under Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 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 our members.  As a result of the current economic
recession, our revenues and distributions have been reduced.
 
 Interest
rate fluctuations may affect our operating results as follows:
 
 ·
              If
      interest rates rise, borrowers under loans with monthly or quarterly
      principal payments may be compelled to extend their loans to decrease the
      principal paid with each payment because the interest component has
      increased.  If this happens, we are likely to be at a greater
      risk of the borrower defaulting on the extended loan, and the increase in
      the interest rate on our loan may not be adequate compensation for the
      increased risk.  Additionally, any fees paid to extend the loan
      are paid to Vestin Originations or our manager, not to us.  Our
      revenues and distributions will decline if we are unable to reinvest at
      higher rates or if an increasing number of borrowers default on their
      loans; and
 
 ·
              If
      interest rates decline, the amount we can charge as interest on our loans
      will also likely decline.  Moreover, if a borrower should prepay
      obligations that have a higher interest rate from an earlier period, we
      will likely not be able to reinvest the funds in real estate loans earning
      that higher rate of interest.  In the absence of a prepayment
      fee, we will receive neither the anticipated revenue stream at the higher
      rate nor any compensation for its loss.  As of December 31,
      2008, none of our loans had a prepayment penalty, although 13 of our
      loans, totaling approximately $8.0 million, had an exit
      fee.  Out of the 13 loans with an exit fee, 5 loans, totaling
      approximately $5.4 million, were considered non-performing as of December
      31, 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.
 
 Investments
in second deeds of trust and wraparound loans are subject to the rights of the
first deed of trust.
 
  - 17
-
 Table of Contents
  We may
also invest up to 10% of our total real estate loan assets in second deeds of
trust and, in rare instances, wraparound, or all-inclusive, real estate
loans.  In a second deed of trust, our rights as a lender, including
our rights to receive payment on foreclosure, will be subject to the rights of
the first deed of trust.  In a wraparound real estate loan, our rights
will be similarly subject to the rights of a first deed of trust, but the
aggregate indebtedness evidenced by our loan documentation will be the first
deed of trust plus the new funds we invest.  We would receive all
payments from the borrower and forward to the senior lender its portion of the
payments we receive.  Because both of these types of loans are subject
to the first deed of trust’s right to payment on foreclosure, we incur a greater
risk when we invest in each of these types of loans.  As of December
31, 2008, approximately 7% of our loans were secured by second deeds of
trust.  Subsequent decreases in the value of loans secured by first
deeds of trust, due to sales and foreclosures, may result in an increase in the
percentage of our portfolio secured by second deeds of trust.
 
 Investment
in large loans may reduce our ability to diversify our loan
portfolio.
 
 We will
generally invest in loans that constitute an amount equal to less than 5% of our
total capital.  However, we may invest in a larger loan depending on
such factors as the performance of the Fund and the value of the
collateral.  These larger loans have greater risk because they may
reduce our ability to diversify our loan portfolio.  As of December
31, 2008, our largest loan, which was considered non-performing, comprised
approximately 11.4% of our total loan portfolio.
 
 Our
loan portfolio may exhibit greater risk if it is not diversified
geographically.
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas, with approximately 40% of our loans in
Nevada.  Our manager has limited experience outside of the Western and
Southwestern United States.  Real estate markets vary greatly from
location to location and the rights of secured real estate lenders vary
considerably from state to state.
 
 Our
lending operations are subject to certain regulatory requirements.
 
 As a
company investing in real estate loans and having raised funds through a public
offering, we are subject to the NASAA Guidelines promulgated by the state
securities administrators.  The NASAA Guidelines govern, among other
things, our debt to equity ratio and the diversity and composition of our
investments.  For example, the NASAA Guidelines provide that we may
not invest in or make real estate loans to or from any one borrower that would
exceed, in the aggregate, an amount greater than 20% of the capital
contributions that we have raised.  Additionally, the NASAA Guidelines
require reserves of not less than 1% of the offering proceeds.  The
NASAA Guidelines are intended to protect the interests of
investors.  However, our flexibility in making business decisions may
be limited by our obligation to comply with the NASAA Guidelines.
 
 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.  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.
 
  - 18
-
 Table of Contents
  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.  Members 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.  Our manager’s duties to our
members are generally governed by the terms of our Operating Agreement, 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
December 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.  Depending on the market and on
our company’s performance, we may expand our investments throughout the United
States.  However, our manager has limited experience outside of the
Western and Southwestern United States.  Real estate markets vary
greatly from location to location and the rights of secured real estate lenders
vary considerably from state to state.  Our manager’s limited
experience in most U.S. real estate markets may impact its ability to make
prudent investment decisions on our behalf.  Accordingly, where our
manager deems it necessary, it plans to utilize independent real estate advisors
and local legal counsel located in markets where it lacks experience for
consultation prior to making investment decisions.  Members 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.
 
 Any
indemnification of our manager by us will decrease the amount available for
distribution.  Pursuant to our Operating Agreement, we may be required
to indemnify our manager or any of its affiliates, agents, or attorneys from any
action, claim or liability arising from any act or omission made in good faith
and in performance of its duties under the Operating Agreement.  The
availability of such indemnification may reduce the amount of funds we have
available for distribution.  We do not have an independent board of
directors to review and approve any proposed indemnification of our manager
pursuant to the Operating Agreement.
 
 Vestin
Mortgage serves as our manager pursuant to our Operating
Agreement.  It may be difficult to terminate Vestin Mortgage and our
Operating Agreement does not reflect arm’s length negotiations.
 
  - 19
-
 Table of Contents
  Pursuant
to the terms of our Operating Agreement, Vestin Mortgage acts as our
manager.  The term of the Operating Agreement is for the duration of
our existence.  Vestin Mortgage may only be terminated as manager upon
the affirmative vote of a majority of members entitled to vote on the
matter.  Consequently, it may be difficult to replace our manager in
the event that our performance does not meet expectations or for other
reasons.  The Operating Agreement was negotiated by related parties
and may not reflect terms as favorable as those subject to arm’s length
bargaining.
 
 Our
manager will face conflicts of interest concerning the allocation of its
personnel’s time.
 
 Our
manager is also the manager of VRM I, VRM II 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 Operating
Agreement 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 Operating Agreement under “Compensation to Vestin Mortgage and
Affiliates” in our Third Amended and Restated Operating
Agreement.  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 $56,000 for unpaid fees owed to our manager from our
borrowers.  These unpaid fees became due and payable on demand from
us.  Vestin Mortgage and Vestin Originations received a total of
approximately $4.1 million and $5.2 million, respectively, in fees directly from
borrowers for the year ended December 31, 2008.  The amounts received
from borrowers represent fees earned by Vestin Mortgage and Vestin Originations
for loans originated for all funds managed by Vestin Mortgage, including us, VRM
I, VRM II and inVestin.  Our assets represented approximately 5% of
the assets managed by Vestin Mortgage as of December 31, 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, VRM II 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, VRM II, 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.
 
  - 20
-
 Table of Contents
  We
might incur losses if our manager’s parent defaults on a lease obligation,
thereby triggering certain obligations under an outstanding letter of
credit.
 
 Vestin
Group, the parent of our manager, was previously our tenant in building we owned
in Las Vegas, Nevada.  In connection with the sale of such building,
we arranged for a $985,000 letter of credit in favor of the purchaser of the
building (the “Purchaser”), which may be drawn upon by the Purchaser should
Vestin Group default on its lease obligations.  Vestin Group is
currently engaged in a dispute with the Purchaser and has not paid certain
amounts allegedly due under its lease totaling approximately $0.3 million, as of
March 1, 2009.  Vestin Group has provided us with a written agreement
to fully indemnify and hold us harmless in the event that the Purchaser draws
upon the letter of credit and we incur an obligation to reimburse the bank which
issued the letter of credit.  Nonetheless, a continuation of the
dispute between Vestin Group and the Purchaser could result in our suffering
losses which may not be immediately or fully reimbursed.
 
 INVESTMENT
RISKS
 
 Units
lack liquidity and marketability.
 
 There is
no public trading market for units, and members cannot freely sell or transfer
units or use them as collateral for a loan.  Currently, we do not
intend to list the units on any national exchange or on Nasdaq.  Our
Operating Agreement restricts the transfer of units so that we may avoid being
classified as a “publicly traded partnership” under Section 7704 of the Internal
Revenue Code.  If we were classified as a publicly traded partnership
taxable as a corporation, the taxable income derived from our operations would
be subject to the double tax system applicable to corporations and shareholders
for federal income tax purposes (i.e., the taxable income would be subject to
tax at the entity level at regular corporate tax rates and members would be
subject to tax at distribution or capital gain rates on our share of our taxable
income to the extent we distribute).  As a result of this entity level
tax, cash available for distribution to unit holders would be significantly
reduced which in turn would result in a significant reduction in the value of
members’ units.  In order to attempt to avoid these adverse income tax
consequences, members may not sell or assign their units and will not be
entitled to have their units redeemed without the consent of our
manager.  Our manager will withhold its consent to any sale,
assignment or redemption of units to the extent our manager believes such action
is necessary to prohibit transfers that could cause us to be classified as a
publicly traded partnership.  Further, the resale of units may be
restricted by state securities laws.
 
 Members have limited ability to have
units redeemed.
 
 Members
have limited withdrawal rights.  Requests by members for withdrawal
are honored in the order in which they are received by the
manager.  The significant limitations on our members’ withdrawal
rights are the following:
 
 ·
              There
      is no reserve fund for redemptions.
 
 ·
              Payments
      for withdrawn units are made only to the extent we have available cash
      from proceeds of repayments of principal on real estate loans and capital
      contributions; and the redemption would not impair the capital or
      operation of the Fund.  Accordingly, a significant amount of
      withdrawal requests may delay the payment of subsequent
      redemptions.
 
 ·
              The
      total amount withdrawn by all members during any calendar year cannot
      exceed 10% of the amount of capital accounts of all the members with a
      yearly limit of $100,000 per member, subject to the manager’s discretion
      to allow a greater amount.
 
 ·
              We
      will only redeem withdrawn units once a quarter, subject to limitations in
      our Operating Agreement.
 
  - 21
-
 Table of Contents
  Because a
substantial portion of our loans are made on an “interest only” basis, we will
not receive proceeds from the repayment of principal as frequently as we would
with loans where the principal is repaid in periodic installments.  To
help permit withdrawals, we will not refinance or invest in new loans using
payments of loan principal by borrowers or new invested capital of members
unless we have sufficient funds to cover permitted withdrawals.  For
additional information regarding members redemptions, see Note E – Members’ Equity of the Notes
to the Financial Statements included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 ITEM
      1B.
              UNRESOLVED
      STAFFCOMMENTS
 
 None.
 
 ITEM
      2.
              PROPERTIES
 
 Our
manager shares office facilities, in Las Vegas, Nevada, with its parent
corporation, Vestin Group, in a building, which a company wholly owned by our
CEO holds the majority interest and an unrelated third party holds the minority
interest.  Our manager believes that this facility is adequate for
their foreseeable office space needs.  We do not have any separate
offices.
 
 We
previously owned an approximately 42,000 square foot office building in Las
Vegas, Nevada, that was sold to an unrelated third party in November
2006.  This building is leased to our parent corporation Vestin Group
and the lease agreement governing this property expires in August
2014.  We have restricted cash, which relates to a cash deposit held
as collateral by a banking institution to support rent payments on this
property.  The requirement for the deposit expires at the end of the
lease on August 31, 2014.  See Management and Conflicts of Interest
Risks included in Part I, Item 1A Risk Factors of this Report
Form 10-K for a discussion of a pending dispute between Vestin Group and the
building owner.
 
 ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 Please
refer to Note K - Legal
Matters Involving The Manager and Note L - Legal Matters Involving The
Company in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for information
regarding legal proceedings, which discussion is incorporated herein by
reference.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERSTO A VOTE OF SECURITY
  HOLDERS
 
 None.
 
 PARTII
 
 ITEM
      5.
              MARKET
      FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY
  SECURITIES
 
 Market
Information
 
 There is
no established public trading market for the trading of units.
 
 Holders
 
 As of
March 4, 2009, approximately 575 unit holders held 2,248,825 units of interest
in the Company.
 
  - 22
-
 Table of Contents
  Distribution
Policy
 
 We
generally distribute to unit holders on a monthly basis most of our Net Income
Available for Distribution (as defined in our Operating
Agreement).  Net Income Available for Distribution is based upon cash
flow from operations, less certain reserves, and may exceed net income as
calculated in accordance with accounting principles generally accepted in the
United States (“GAAP”).  Our Operating Agreement also permits
distributions of capital.  We made distributions of $689,000 during
the year ended December 31, 2008, which are classified as distribution of
capital.  On August 27, 2008, we suspended payment of distributions as
a result of our current losses.
 
 Recent
Sales of Unregistered Securities
 
 None.
 
 Equity
Compensation Plan Information
 
 None.
 
 Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
 
 Period
                Total
      Number of Units Purchased (1)
                Average
      Price Paid per Unit
                Total
      Number of Units Purchased as Part of Publicly Announced Plans or
      Programs
                Maximum
      Number (or Approximate Dollar Value) of Units that May Yet be Purchased
      under the Plans or ProgramsOctober
      2008
                --
                --
                None
                NoneNovember
      2008
                --
                --
                None
                NoneDecember
      2008
                --
                --
                None
                None
 
 (1)
              Pursuant
      to our Operating Agreement, members may request to have their units
      redeemed.  However, in order to comply with our Operating
      Agreement and the Internal Revenue Code, we may redeem no more than 10% of
      the aggregate Members’ capital in any calendar year and no more than
      $100,000 per members’ account in any calendar year subject to our
      manager’s discretion.  Balances in Members’ capital accounts as
      of January 1, 2008 were approximately $26.3 million, including deferred
      income of approximately $1.0 million, which limited redemptions to
      approximately $2.6 million for calendar 2008.  These redemptions
      have been paid as of December 31, 2008.  For additional
      information regarding members redemptions, see Note E – Members’ Equity of the
      Notes to the Financial Statements included in Part II, Item 8 Financial Statements and
      Supplementary Data of this Report Form
  10-K.
 
  - 23
-
 Table of Contents
  ITEM
      6.
              SELECTED
      FINANCIALDATA
 
 Balance
      at December 31,Vestin
      Fund III, LLC
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Balance
      Sheet Data:Investments
      in real estate loans (net of allowance)
                  
                  $
                  7,866,000
                  
                  
                  $
                  20,825,000
                  
                  
                  $
                  26,999,000
                  
                  
                  $
                  22,964,000
                  
                  
                  $
                  13,520,000Cash,
      cash equivalents, certificates of deposits and marketable
      securities-related party
                  
                  $
                  1,844,000
                  
                  
                  $
                  3,833,000
                  
                  
                  $
                  1,650,000
                  
                  
                  $
                  1,167,000
                  
                  
                  $
                  6,286,000Cash
      - restricted
                  
                  $
                  985,000
                  
                  
                  $
                  985,000
                  
                  
                  $
                  985,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --Real
      estate held for sale
                  
                  $
                  2,734,000
                  
                  
                  $
                  546,000
                  
                  
                  $
                  575,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --Investment
      in real property (net of depreciation)
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  9,591,000
                  
                  
                  $
                  9,814,000Assets
      under secured borrowing
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  4,430,000
                  
                  
                  $
                  527,000
                  
                  
                  $
                  2,590,000Deferred
      offering costs
                  
                  
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  926,000Total
      assets
                  
                  $
                  13,447,000
                  
                  
                  $
                  26,390,000
                  
                  
                  $
                  34,925,000
                  
                  
                  $
                  34,710,000
                  
                  
                  $
                  33,374,000Long
      term liabilities
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  4,830,000
                  
                  
                  $
                  4,928,000Total
      liabilities
                  
                  $
                  1,187,000
                  
                  
                  $
                  1,111,000
                  
                  
                  $
                  5,508,000
                  
                  
                  $
                  5,551,000
                  
                  
                  $
                  8,612,000Members’
      equity
                  
                  $
                  12,260,000
                  
                  
                  $
                  25,279,000
                  
                  
                  $
                  29,417,000
                  
                  
                  $
                  29,159,000
                  
                  
                  $
                  24,762,000
 
 
 For
      the Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Income
      Statement Data:Revenues
                  
                  $
                  945,000
                  
                  
                  $
                  2,502,000
                  
                  
                  $
                  3,363,000
                  
                  
                  $
                  3,583,000
                  
                  
                  $
                  2,328,000Operating
      expenses
                  
                  
                  6,385,000
                  
                  
                  
                  1,323,000
                  
                  
                  
                  1,277,000
                  
                  
                  
                  1,294,000
                  
                  
                  
                  990,000Operating
      income (loss)
                  
                  
                  (5,440,000
                  )
                  
                  
                  1,179,000
                  
                  
                  
                  2,086,000
                  
                  
                  
                  2,289,000
                  
                  
                  
                  1,338,000Non-operating
      income (loss)
                  
                  
                  (1,117,000
                  )
                  
                  
                  239,000
                  
                  
                  
                  132,000
                  
                  
                  
                  33,000
                  
                  
                  
                  32,000Income
      (loss) from real estate held for sale
                  
                  
                  (3,456,000
                  )
                  
                  
                  (93,000
                  )
                  
                  
                  2,612,000
                  
                  
                  
                  --
                  
                  
                  
                  --Net
      income (loss)
                  
                  $
                  (10,013,000
                  )
                  
                  $
                  1,325,000
                  
                  
                  $
                  4,830,000
                  
                  
                  $
                  2,322,000
                  
                  
                  $
                  1,370,000Income
      (loss) from operations per weighted average membership
    units
                  
                  $
                  (2.33
                  )
                  
                  $
                  0.46
                  
                  
                  $
                  0.72
                  
                  
                  $
                  0.81
                  
                  
                  $
                  0.76Net
      income (loss) per weighted average membership units
                  
                  $
                  (4.30
                  )
                  
                  $
                  0.51
                  
                  
                  $
                  1.67
                  
                  
                  $
                  0.82
                  
                  
                  $
                  0.78Cash
      distributions per weighted average membership units
                  
                  $
                  0.30
                  
                  
                  $
                  0.85
                  
                  
                  $
                  0.88
                  
                  
                  $
                  0.91
                  
                  
                  $
                  0.77Weighted
      average membership units
                  
                  
                  2,330,146
                  
                  
                  
                  2,579,314
                  
                  
                  
                  2,896,025
                  
                  
                  
                  2,816,468
                  
                  
                  
                  1,751,700
 
 The
information in this table should be read in conjunction with the accompanying
audited financial statements and notes to the financial statements included
elsewhere in this document.
  - 24
-
 Table of Contents
  
 ITEM
      7.
              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 each of the three years ended December 31, 2008, 2007
and 2006.  This discussion should be read in conjunction with our
financial statements and accompanying notes and other detailed information
regarding us appearing elsewhere in this report on Form 10-K and our reports on
Form 10-Q, Part I, Item 2 Management’s Discussion and Analysis
of Financial Conditions and Results of Operations for the quarters ended
March 31, 2008, June 30, 2008 and September 30, 2008.
 
 FORWARD-LOOKING
STATEMENTS
 
 Certain
statements in this report, including, without limitation, matters discussed
under this Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” should be read in conjunction with the financial
statements, related notes, and other detailed information included elsewhere in
this report on Form 10-K.  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 I Item 1A Risk Factors of this Annual
Report on Form 10-K and in our other securities filings with the Securities and
Exchange Commission (“SEC”).  Our future financial condition and
results of operations, as well as any forward-looking statements, are subject to
change and involve inherent risks and uncertainties.  Our estimates of
the value of collateral securing our loans may change, or the value of the
underlying property could decline subsequent to the date of our
evaluation.  As a result, such estimates are not guarantees of the
future value of the collateral.  The forward-looking statements
contained in this report are made only as of the date hereof.  We
undertake no obligation to update or revise information contained herein to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
 
 RESULTS
OF OPERATIONS
 
 OVERVIEW
 
 Our
primary business objective is to generate income while preserving principal by
investing in real estate loans.  We believe there is a significant
market opportunity to make real estate loans to owners and developers of real
property whose financing needs are not met by other real estate
lenders.  The loan underwriting standards utilized by our manager and
Vestin Originations are less strict than those used by many institutional real
estate lenders.  In addition, one of our competitive advantages is our
ability to approve loan applications more quickly than many institutional
lenders.  As a result, in certain cases, we may make real estate loans
that are riskier than real estate loans made by many institutional lenders such
as commercial banks.  However, in return, we seek a higher interest
rate and our manager takes steps to mitigate the lending risks such as imposing
a lower loan-to-value ratio.  While we may assume more risk than many
institutional real estate lenders, in return, we seek to generate higher yields
from our real estate loans.
 
 Our
operating results are affected primarily by: (i) the amount of capital we have
to invest in real estate loans, (ii) the level of real estate lending activity
in the markets we service, (iii) our ability to identify and work with suitable
borrowers, (iv) the interest rates we are able to charge on our loans and (v)
the level of non-performing assets, foreclosures and related loan losses which
we may experience.
 
  - 25
-
 Table of Contents
  Our
recent operating results have been adversely affected by increases in allowances
for loan losses and increases in non-performing assets.  This negative
trend accelerated sharply during the year ended December 31, 2008.  We
recognized a provision for loan losses of approximately $5.9 million for the
year ended December 31, 2008.  Recognition of this provision was
driven largely by the increase in non-performing assets, coupled with the
deteriorating economic situation that has driven down real estate values and
limited the availability of credit to our borrowers who had anticipated securing
take-out financing to repay our loan.  As of December 31, 2008, we had
nine 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 $5.5 million, net of allowance for loan
losses of approximately $4.8 million.  These loans have been placed on
non-accrual of interest status and are the subject of pending foreclosure
proceedings.
 
 Non-performing
assets, net of allowance for loan losses, totaled approximately $8.2 million or
61% of our total assets as of December 31, 2008, as compared to approximately
$5.6 million or 21% of our total assets as of December 31, 2007.  At
December 31, 2008, non-performing assets consisted of approximately $2.7 million
of real estate held for sale and approximately $5.5 million of non-performing
loans, net of allowance for loan losses.  None of the real estate held
for sale as of December 31, 2008 was generating any income from rentals or other
sources.  See Note F – Real Estate Held for Sale and
Note D – Investments In Real
Estate Loans of the Notes to the Financial Statements included in Part
II, Item 8 Financial
Statements and Supplementary Data of this Annual Report on Form
10-K.
 
 We
believe that the significant increase in the level of our non-performing assets
is a direct result of the deterioration of the economy and credit
markets.  As the economy has weakened and credit has become more
difficult to obtain, many of our borrowers who develop and sell commercial real
estate projects have been unable to complete their projects, obtain takeout
financing or have been otherwise adversely impacted.  Our exposure to
the negative developments in the credit markets and general economy has likely
been increased by our business strategy, which entails more lenient underwriting
standards and expedited loan approval procedures.  Moreover, declining
real estate values in the principal markets in which we operate has in many
cases eroded the current value of the security underlying our
loans.
 
 We expect
that the weakness in the credit markets and the weakness in lending will
continue to have an adverse impact upon our markets for the foreseeable
future.  This may result in a further increase in defaults on our
loans and we might be required to record additional reserves based on decreases
in market values or we may be required to restructure loans.  This
increase in loan defaults has materially harmed our operating results and led to
the suspension of distributions to our members.  For additional
information regarding our non-performing loan see “Non-Performing Loans” in Note
D – Investments In Real Estate
Loans of the Notes to the Financial Statements included in Part II, Item
8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 As of
December 31, 2008, we had loans with common guarantors.  For
additional information regarding loans with common guarantors see Note C – Financial Instruments and
Concentrations of Credit Risk of the Notes to the Financial Statements
included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 As of
March 4, 2009, one performing loan, totaling $0.2 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 As of
December 31, 2008, our loan-to-value ratio was 96.60%, net of allowances for
loan losses, on a weighted average basis generally using appraisals prepared on
an “as-if developed basis” in connection with the loan
origination.  Additional marked increases in loan defaults accompanied
by a rapid decline in real estate values, as evidenced by updated appraisals
generally prepared on an “as-is-basis,” will have a material adverse effect upon
our financial condition and operating results.  The current
loan-to-value ratio is primarily a result of declining real estate values, which
have eroded the market value of our collateral.
  - 26
-
 Table of Contents
  
 As of
December 31, 2008, we have provided a specific reserve allowance for seven
non-performing loans and seven performing loans based on updated appraisals of
the underlying collateral and our evaluation of the borrower for these loans,
obtained by our manager.  For further information regarding allowance
for loan losses, refer to Note D – Investments in Real Estate
Loans in the notes to our financials statements in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 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 to materially increase the funds we will have available to
invest from any other sources.  See discussion under – “Capital and
Liquidity.”
 
 As of
December 31, 2008, our loans were in the following states: Arizona, California,
Nevada, Oklahoma, Oregon and Texas.
 
 Our
manager is currently considering a proposal for submission to our members that
would seek approval to conduct an orderly liquidation of our
operations.  If our manager proceeds with such proposal, a special
meeting will be scheduled and proxy materials describing the proposed
liquidation plan and the reasons therefore will be disseminated to all holders
of record of our limited liability company units.
 
 SUMMARY
OF FINANCIAL RESULTS
 
 The
Year Ended December 31, 2008 Compared To the Year Ended December 31,
2007
 
 Total
Revenues:  For the year ended December 31, 2008, total revenues
were approximately $0.9 million compared to approximately $2.5 million during
the year ended December 31, 2007, a decrease of approximately $1.6 million or
62%.  Revenues were primarily affected by the following
factor:
 
 ·
              Interest
      income from investments in real estate loans decreased to approximately
      $0.9 million during the year ended December 31, 2008, compared to
      approximately $2.5 million during the same period in 2007, primarily due
      to the increase in non-performing loans during the year ended December 31,
      2008, 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 December 31, 2008, our investment in real
      estate loans was approximately $13.3 million compared to our investment in
      real estate loans of approximately $21.9 million as of December 31,
      2007.  This decline is largely attributable to the increase in
      non-performing assets, which has reduced the amount of cash available for
      investment in new loans and the increase of real estate owned properties
      acquired through the foreclosures of our investments in real estate
      loans.  For additional information see Note D – Investment Real Estate
      Loans of the Notes to the Financial Statements included in Part II,
      Item 8Financial
      Statements and Supplementary Dataof this Report Form
      10-K.
 
 Total Operating
Expenses:  For the year ended December 31, 2008, total
operating expenses were approximately $6.4 million compared to approximately
$1.3 million during the year ended December 31, 2007, an increase of
approximately $5.1 million or 383%.
 
 ·
              Operating
      expenses increased primarily as a result of the recognition of provisions
      for loan losses.  During the year ended December 31, 2008, we
      recognized provisions for loan losses totaling approximately $5.9 million,
      compared to approximately $1.0 million for the same period in
      2007.  See “Specific Loan Allowance” in Note D – Investment Real Estate
      Loans of the Notes to the Financial Statements included in Part II,
      Item 8Financial
      Statements and Supplementary Dataof this Report Form
      10-K.  During the year ended December 31, 2008, we foreclosed
      upon seven loans and classified the collateralized properties as real
      estate held for sale.  See Note F – Real Estate Held for
      Sale of the Notes to the Financial Statements included in Part II,
      Item 8Financial
      Statements and Supplementary Dataof this Report Form
      10-K.
 
  - 27
-
 Table of Contents
  Total Non-Operating Income
(Loss):  For the year ended December 31, 2008, total
non-operating loss was approximately $1.1 million compared to non-operating
income of $239,000 during the year ended December 31, 2007, a decline of
approximately $1.4 million or 567%.  This decline is mainly due to the
recognition of an other than temporary impairment of our marketable securities –
related party, totaling approximately $1.2 million, for the year ended December
31, 2008.
 
 Total Loss from Real Estate Held for
Sale:  For the year ended December 31, 2008, total losses from
real estate held for sale were approximately $3.5 million compared to $93,000
during the year ended December 31, 2007, an increase of approximately $3.4
million or 3,616% due in significant part to the following factor:
 
 ·
              We
      wrote down approximately $3.3 million on eight properties held for sale
      during the year ended December 31, 2008.  These write downs
      resulted from declining real estate values which adversely impacted the
      value of the properties we acquired through foreclosure.  As of
      December 31, 2008, we had seven properties held for sale totaling
      approximately $2.7 million compared to one property held for sale as of
      December 31, 2007 totaling approximately $0.5 million.  For
      additional information see Note F – Real Estate Held for
      Sale of the Notes to the Financial Statements included in Part II,
      Item 8Financial
      Statements and Supplementary Dataof this Report Form
      10-K.
 
 Distributions to
Members:  The following is a schedule of distributions made to
members for the years ended December 31, 2008 and 2007.
 
 For
      the Years Ended12/31/2008
                    
                    
                    12/31/2007Distribution
      of net income available for distribution
                    
                    $
                    --
                    
                    
                    $
                    2,193,000Reduction
      to working capital due to net loss
                    
                    
                    (1,869,000
                    )
                    
                    
                    --Distribution
      in excess of net income available for distribution
                    
                    
                    2,558,000
                    
                    
                    
                    --Total
      distributions
                    
                    $
                    689,000
                    
                    
                    $
                    2,193,000
 
 Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in our Operating Agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to
members.  Although we generally do not plan to make distributions in
excess of net income available for distribution, we may do so from time to
time.  Any such distribution will be treated as a return of capital
for income tax purposes.  In addition, cash flows from operations,
which are the significant component of net income available for distribution,
affect the capital available for investment in new loans.  This
non-GAAP financial measure should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP or as an
alternative to cash flows from operating activities as a measure of our
liquidity.  We compensate for these limitations by relying primarily
on our GAAP results and using net income available for distribution only
supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
  - 28
-
 Table of Contents
  
 For
      the Years Ended12/31/2008
                      
                      
                      12/31/2007Distribution
      of net income available for distribution
                      
                      $
                      -
                      
                      
                      $
                      2,193,000Distribution
      of working capital
                      
                      
                      689,000
                      
                      
                      
                      --Additions
      (reductions) to working capital
                      
                      
                      (2,558,000
                      )
                      
                      
                      114,000Realized
      net loss on foreclosure of loans
                      
                      
                      2,280,000
                      
                      
                      
                      --Provision
      of doubtful accounts related to receivables
                      
                      
                      28,000
                      
                      
                      
                      --Loss
      on real estate held for sale
                      
                      
                      30,000
                      
                      
                      
                      --Loss
      on sale of real estate held for sale
                      
                      
                      38,000
                      
                      
                      
                      --Change
      in operating assets and liabilities:Interest
      receivable
                      
                      
                      152,000
                      
                      
                      
                      72,000Accounts
      payable
                      
                      
                      10,000
                      
                      
                      
                      32,000Due
      to related parties
                      
                      
                      66,000
                      
                      
                      
                      11,000Other
      assets
                      
                      
                      3,000
                      
                      
                      
                      3,000Net
      cash provided by operating activities
                      
                      $
                      738,000
                      
                      
                      $
                      2,425,000Net
      cash provided by investing activities
                      
                      $
                      1,487,000
                      
                      
                      $
                      4,414,000Net
      cash used by financing activities
                      
                      $
                      (3,461,000
                      )
                      
                      $
                      (4,940,000
                      )
 
 Stated Unit Value
Adjustment:  In accordance with Section 7.8 of our Operating
Agreement, our manager reviewed the value of our assets during the three months
ended December 31, 2008.  Based on this review the value of members’
capital accounts was adjusted from $7.55 per unit to $5.89 per unit, as of
January 1, 2009.  The periodic review of the estimated net unit value
includes an analysis of unrealized gains that our manager reasonably believes
exist at the time of the review, but that cannot be added to net asset value
under GAAP.
 
 Redemptions:  Under
our Operating Agreement, our members have limited withdrawal
rights.  The withdrawal rights are subject to various limitations set
forth in our Operating Agreement intended to protect our financial health and
our status under the Internal Revenue Code.  These limitations
provide, among other things, that withdrawals may not exceed 10% of the
aggregate Members’ capital in any calendar year and no more than $100,000 per
members’ account in any calendar year, subject to our manager’s discretion which
may be exercised in accordance to our Operating Agreement.  As of
December 31, 2008, the total redemptions made from inception were approximately
$9.0 million.  Balances in Members’ capital accounts as of January 1,
2008 were approximately $26.3 million, including deferred income of
approximately $1.0 million, which limited redemptions to approximately $2.6
million for calendar 2008.  Total redemptions during the year ended
December 31, 2008, were approximately $2.8 million.  These redemptions
have been paid as of December 31, 2008.  For additional information
regarding members redemptions, see Note E – Members’ Equity of the Notes
to the Financial Statements included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 The
Year Ended December 31, 2007 Compared To the Year Ended December 31,
2006
 
 Total
Revenues:  For the year ended December 31, 2007, total revenues
were $2,502,000 compared to $3,363,000 during the year ended December 31, 2006,
a decrease of $861,000 or 26%.  Revenues were primarily affected by
the following factors:
 
 ·
              During
      the year ended December 31, 2006, we recognized rental income of $944,000
      from a building we sold in November 2006.  No comparable income
      was realized during the year ended December 31, 2007, and as noted above,
      we will no longer earn rental income.  Approximately $3.0
      million of the proceeds from the sale of the building were used for the
      redemption of membership units during the year ended December 31,
      2007.
  - 29
-
 Table of Contents
  
 ·
              Interest
      income from investments in real estate loans increased by approximately
      $67,000.  Our revenue is dependent upon the balance of our
      investment in real estate loans and the interest earned on these
      loans.  As of December 31, 2007, our investment in real estate
      loans was approximately $21.9 million with a weighted average interest
      rate of 11.89%.  As of December 31, 2006, our investment in real
      estate loans was approximately $27.0 million with a weighted average
      interest rate of 11.31%.  In addition, our interest income was
      affected by the performances of our loans.  During the year
      ended December 31, 2007, four loans totaling approximately $4.5 million
      became non-performing.  Increases in non-performing loans will
      reduce our future revenues.  Compared to the year ended December
      31, 2006, four loans totaling approximately $2.2 million became
      non-performing
 
 Total Operating
Expenses:  For the year ended December 31, 2007, total
operating expenses were $1,323,000 compared to $1,277,000 during the year ended
December 31, 2006, an increase of $46,000 or 4%.  Expenses were
primarily affected by the following factors:
 
 ·
              During
      the year ended December 31, 2006, we incurred depreciation expense of
      $204,000 on the building that was sold in November 2006.  No
      comparable depreciation expense was recorded during the year ended
      December 31, 2007.
 
 ·
              Interest
      expense relating to the note on the building we sold in November 2006,
      totaled $661,000 which included a defeasance fee of $435,000 on the note
      payoff for the year ended December 31, 2006.  No comparable
      interest expense related to the note on the building was recorded during
      the same period in 2007.
 
 ·
              During
      the year ended December 31, 2007, fees paid to our manager also decreased
      $38,000 or 84%, compared to the same period during 2006.  Our
      manager was entitled to receive from us a management (acquisition and
      advisory) fee up to 2.5% of the gross offering proceeds and up to 3% of
      our rental income.  On March 5, 2007, a majority of our members
      approved the Third Amended and Restated Operating Agreement, which limits
      our investment objectives to investments in real estate
      loans.  We sold our real estate investment in November
      2006.  In addition, on April 2, 2007, our manager decided to
      terminate our Distribution Reinvestment Plan effective May 7, 2007,
      pursuant to Section 8.5 of our Operating
  Agreement.
 
 ·
              During
      the year ended December 31, 2007, these decreases in operating expenses
      were offset by provisions for loan losses of approximately
      $953,000.  See “Specific Loan Allowance” in Notes D Investment Real Estate
      Loans of the Notes to the Financial Statements included in Part II,
      Item 8 Financial
      Statements and Supplementary Data of this Report Form
      10K.  There were no provisions for loan loss recorded during the
      year ended December 31, 2006.
 
 Non-operating
income:  Non-operating income consisted of dividend income from
marketable securities-related party and bank interest income.
 
 Total Income (Loss) from Real Estate
Held for Sale:  For the year ended December 31, 2007, total
loss from real estate held for sale was $93,000 compared to a gain of $2,612,000
for the year ended December 31, 2006.  This decline was primarily due
to the following factors:
 
 ·
              Based
      on our manager’s estimates, as noted above, our write down on our real
      estate held for sale totaled $29,000 and expenses related to this property
      totaled $64,000, for the year ended December 31, 2007.  There
      were no comparable write-downs related to real estate held for sale during
      the year ended December 31, 2006 and expenses totaled
    $12,000.
 
 ·
              During
      the year ended December 31, 2006, we recognized a gain on the sale of the
      building noted above of approximately $2.6
  million.
  - 30
-
 Table of Contents
  
 Distributions to
Members:  The following is a schedule of distributions made to
members for the years ended December 31, 2007 and 2006.
 
 For
      the Years
                      Ended
      December 31,2007
                    
                    
                    2006Distributions
      of net income available for distribution
                    
                    $
                    2,193,000
                    
                    
                    $
                    2,544,000Distributions
      in excess of net income available for distribution generated during the
      period
                    
                    
                    --
                    
                    
                    
                    --Total
      distributions
                    
                    $
                    2,193,000
                    
                    
                    $
                    2,544,000
 
 Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in our Operating Agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to members,
as it constitutes the principal factor in determining the amount of
distributions we pay to our members.  Although we generally do not
plan to make distributions in excess of net income available for distribution,
we may do so from time to time.  Any such distribution will be treated
as a return of capital for income tax purposes.  In addition, cash
flows from operations, which are the significant component of net income
available for distribution, affect the capital available for investment in new
loans.  This non-GAAP financial measure should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP or as an alternative to cash flows from operating activities as a
measure of our liquidity.  We compensate for these limitations by
relying primarily on our GAAP results and using net income available for
distribution only supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
 
 For
      the Years
                        Ended
      December 31,2007
                      
                      
                      2006Distribution
      of net income available for distribution
                      
                      $
                      2,193,000
                      
                      
                      $
                      2,544,000Additions
      to working capital reserves (amount not distributed)
                      
                      
                      114,000
                      
                      
                      
                      2,490,000Gain
      on sale of building
                      
                      
                      --
                      
                      
                      
                      (2,624,000
                      )Change
      in operating assets and liabilities:Interest
      receivable
                      
                      
                      72,000
                      
                      
                      
                      (76,000
                      )Deferred
      rent receivable - related party
                      
                      
                      --
                      
                      
                      
                      (123,000
                      )Accounts
      payable
                      
                      
                      32,000
                      
                      
                      
                      (63,000
                      )Due
      from Vestin Originations
                      
                      
                      --
                      
                      
                      
                      (10,000
                      )Due
      to related parties
                      
                      
                      11,000
                      
                      
                      
                      26,000Other
      assets
                      
                      
                      3,000
                      
                      
                      
                      (6,000
                      )Net
      cash provided by operating activities
                      
                      $
                      2,425,000
                      
                      
                      $
                      2,158,000Net
      cash provided by investing activities
                      
                      $
                      4,414,000
                      
                      
                      $
                      6,945,000Net
      cash used by financing activities
                      
                      $
                      (4,940,000
                      )
                      
                      $
                      (9,449,000
                      )
 
 Stated Unit Value
Adjustment:  In accordance with Section 7.8 of our Operating
Agreement, our manager reviewed the value of our assets during the three months
ended December 31, 2007.  Based on this review the value of members’
capital accounts was adjusted from $10.97 per unit to $10.40 per
unit.  As a result, units redeemed on or after December 31, 2007 will
be redeemed at $10.40 per unit.  The periodic review of the estimated
net unit value includes an analysis of unrealized gains that our manager
reasonably believes exist at the time of the review, but that cannot be added to
net asset value under GAAP.
  - 31
-
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 Redemptions:  In
accordance with the terms of our Operating Agreement and the Internal Revenue
Code, we may redeem no more than 10% of the aggregate Members’ capital in any
calendar year and no more than $100,000 per members’ account in any calendar
year subject to our manager’s discretion.  As of December 31, 2007,
the total redemptions made from inception were approximately $6.3
million.  Balances in Members’ capital accounts as of January 1, 2007
were approximately $30.4 million, including deferred income of approximately
$1.0 million, which limited redemptions to approximately $3.0 million for
calendar 2007.  Total redemptions during the year ended December 31,
2007, were approximately $3.0 million.  The remaining requests to
redeem, as of December 31, 2007, were estimated at approximately $2.5 million in
2008, $2.0 million in 2009, $1.4 million in 2010, $0.2 million in 2011, $0.1
million in 2012, $0.1 million in 2013, $0.1 million in 2014, $0.1 million in
2015, $0.1 million in 2016, $0.1 million in 2017 and $0.1 million in 2018
subject to unit valuation adjustments.
 
 The
Year Ended December 31, 2006 Compared To the Year Ended December 31,
2005
 
 Total
Revenues:  Revenues for the year ended December 31, 2006
decreased compared to the same period in 2005, by $220,000 or approximately 6%,
notwithstanding an increase in the total amount of outstanding loans and an
increase in the weighted average interest rate on our loans from 10.38% to
11.31%.  The decrease in revenues was primarily due to the following
factors:
 
 ·
              Rental
      income declined by $96,000 due to the sale of an office building which we
      owned during November 2006.  In the future, we will no longer
      earn rental income because, at a Special Meeting of our members held on
      March 5, 2007, amendments to our Operating Agreement were approved,
      limiting the Company’s investment objectives to investment in real estate
      loans.
 
 ·
              Interest
      income from investments in real estate loans declined by
      $91,000.  Our revenue is dependent upon the balance of our
      investment in real estate loans and the interest earned on these
      loans.  As of December 31, 2006, our investment in real estate
      loans was approximately $27.0 million with a weighted average interest
      rate of 11.31%.  As of December 31, 2005, our investment in real
      estate loans was approximately $23.0 million with a weighted average
      interest rate of 10.38%.  However, during the first three
      quarters of 2006, our investment in real estate loans decreased by
      approximately $2.2 million, attributable in part to the reduction in
      capital, resulting from membership unit redemptions, we had available for
      investments.  Our capital was reduced by redemption of
      membership units of approximately $2.9 million during the year ended
      December 31, 2006.
 
 ·
              In
      addition, our interest income was affected by the performances of our
      loans.  During the year ended December 31, 2006, four loans
      totaling approximately $2.2 million became non-performing.  One
      of the non-performing loans, with a balance of approximately $0.6 million
      was foreclosed upon and reclassified to real estate held for
      sale.  No loans became non-performing during the year ended
      December 31, 2005.
 
 Total Operating
Expenses:  For each of the years ended December 31, 2006 and
2005, total operating expenses were approximately $1.3
million.  Expenses were primarily affected by the following
factors:
 
 ·
              We
      paid management fees to our manager based on 3% of the total rental income
      and up to 2.5% of the gross offering proceeds for the
      period.  For the year ended December 31, 2005, we paid our
      manager $26,000 for management fees relating to rental activity and
      $129,000 for acquisition and advisory fees pertaining to the gross
      offering proceeds for a total of $155,000.  Since we are no
      longer selling our units, except as permitted in our distribution
      reinvestment plan, fees related to gross offering proceeds during the year
      ended December 31, 2006, were $20,000 of the total $45,000 management
      fees.
 
 ·
              Expenses
      related to professional fees decreased by $180,000.  This was
      partially due to a decrease in accounting fees of $162,000 related to the
      measures undertaken by our manager to contain costs, including an
      enhancement of its internal accounting
  capabilities.
 
 These
decreases were offset by the increase in interest expenses, which included a
defeasance fee of $435,000 related to the note payoff on the building that was
sold in November 2006.
  - 32
-
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 Non-operating
income:  For the year ended December 31, 2006, total income for
other non-operating income totaled $132,000, consisting of dividend income from
marketable securities-related party and bank interest income, compared to
$33,000 for the year ended December 31, 2005, which consisted of bank interest
income.
 
 Total Income from Real Estate Held
for Sale:  During November 2006, we sold our only investment in
real property, which consisted of an approximately 42,000 square foot office
building located at 8379 West Sunset Road in Las Vegas, Nevada, for a gain of
approximately $2.6 million.  We used the building sales proceeds
primarily to invest approximately $8.5 million in real estate
loans.  There were no similar transactions during the year ended
December 31, 2005.
 
 Distributions to
Members:  The following is a schedule of distributions made to
members for the years ended December 31, 2006 and 2005.
 
 For
      the Year Ended December 31, 2006
                    
                    
                    For
      the Year Ended December 31, 2005Distributions
      of Net Income Available for Distribution
                    
                    $
                    2,544,000
                    
                    
                    $
                    2,544,000Distributions
      in Excess of Net Income Available for Distribution Generated During the
      Period
                    
                    
                    --
                    
                    
                    
                    11,000Total
      Distributions
                    
                    $
                    2,544,000
                    
                    
                    $
                    2,555,000
 
 Net
Income Available for Distributions is a non-GAAP financial measure that is
defined in our Operating Agreement as cash flows from operations, less certain
reserves, and may exceed net income as calculated in accordance with
GAAP.  We have presented net income available for distribution because
management believes this financial measure is useful and important to
members.  Although we generally do not plan to make distributions in
excess of net income available for distribution, we may do so from time to
time.  Any such distribution will be treated as a return of capital
for income tax purposes.  In addition, cash flows from operations,
which are the significant component of net income available for distribution,
affect the capital available for investment in new loans.  This
non-GAAP financial measure should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP or as an
alternative to cash flows from operating activities as a measure of our
liquidity.  We compensate for these limitations by relying primarily
on our GAAP results and using net income available for distribution only
supplementally.
 
 The most
directly comparable GAAP measure to net income available for distribution is
cash flows from operating activities.  The following table reconciles
net income available for distribution to cash flows from operating activities
and presents the two other major categories of our statement of cash
flows:
 
 For
      the Year Ended December 31, 2006
                    
                    
                    For
      the Year Ended December 31, 2005Distribution
      of net income available for distribution
                    
                    $
                    2,544,000
                    
                    
                    $
                    2,544,000Additions
      to working capital reserves (amount not distributed)
                    
                    
                    2,490,000
                    
                    
                    
                    --Gain
      on sale of building
                    
                    
                    (2,624,000
                    )
                    
                    
                    --Change
      in operating assets and liabilities:Interest
      receivable
                    
                    
                    (76,000
                    )
                    
                    
                    (67,000
                    )Deferred
      rent receivable - related party
                    
                    
                    (123,000
                    )
                    
                    
                    (168,000
                    )Accounts
      payable
                    
                    
                    (63,000
                    )
                    
                    
                    156,000Due
      from Vestin Originations
                    
                    
                    (10,000
                    )
                    
                    
                    --Due
      to Manager
                    
                    
                    26,000
                    
                    
                    
                    (130,000
                    )Other
      assets
                    
                    
                    (6,000
                    )
                    
                    
                    --Net
      cash provided by operating activities
                    
                    $
                    2,158,000
                    
                    
                    $
                    2,335,000Net
      cash provided (used) by investing activities
                    
                    $
                    6,943,000
                    
                    
                    $
                    (9,431,000
                    )Net
      cash (used) provided by financing activities
                    
                    $
                    (9,449,000
                    )
                    
                    $
                    1,977,000
 
  - 33
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 Stated Unit Value
Adjustment:  Following a periodic review by our manager as
required pursuant to the Operating Agreement, as a result of the gain on sale of
our real estate held for investment, effective December 15, 2006 we adjusted the
stated unit value from $10.50 per unit to $11.00 per unit to reflect the
estimated net unit value of each unit at that date.  The periodic
review of the estimated net unit value includes an analysis of unrealized gains
that our manager reasonably believes exist at the time of the review, but that
cannot be added to net asset value under GAAP.
 
 Redemptions:  In
accordance with the terms of our Operating Agreement and the Internal Revenue
Code, we may redeem no more than 10% of the aggregate Members’ capital in any
calendar year.  As of December 31, 2006, the total of redemptions made
from inception was approximately $3.2 million.  Balances in Members’
capital accounts as of January 1, 2006 were approximately $29.2 million, which
limited redemptions to approximately $2.9 million for calendar
2006.  Total redemptions during the year ended December 31, 2006 were
approximately $2.9 million.  The remaining requests to redeem, as of
December 31, 2006, were approximately $2.9 million in 2007, $2.5 million in
2008, $1.8 million in 2009 and $47,000 in 2010 subject to unit valuation
adjustments.  On March 8, 2007, we redeemed 137,766 units totaling
approximately $1.5 million.
 
 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 members unless they have
elected to reinvest their distributions.  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.
 
 During
the year ended December 31, 2008, net cash flows provided by operating
activities approximated $0.7 million.  In addition, we incurred
approximately $3.3 million in write-downs on real estate held for sale and
approximately $5.9 million in provisions for loan losses, during the year ended
December 31, 2008.  These write-downs and provisions represent the
decreases in the fair value of these properties, which will affect the amount of
proceeds we will receive from future sales of these assets.  Cash
flows related to investing activities consisted of cash provided by loan payoffs
and sales of real estate loans of approximately $2.0 million and cash used for
new investments of real estate loans of approximately $0.7
million.  Cash flows used for financing activities consisted of cash
used for members’ distributions, net of reinvestments, of approximately $0.7
million and members’ redemptions of approximately $2.8 million.
 
 At
December 31, 2008, we had approximately $1.5 million in cash, $0.4 million in
marketable securities – related party and approximately $13.4 million in total
assets.  We intend to meet short-term working capital needs through a
combination of proceeds from loan payoffs, loan sales, sales of real estate held
for sale and/or borrowings.  We believe we have sufficient working
capital to meet our operating needs in the near term.  In addition to
the foregoing assets, as of December 31, 2008, we had approximately $1.0 million
in restricted cash, which relates to a cash deposit held as collateral by a
banking institution to support rent payments on the property we sold during
November 2006.  The requirement for the deposit expires at the end of
the lease on August 31, 2014.  In the event that our current cash
resources prove insufficient, we have no facility in place to raise additional
funds and we believe that, given current market conditions, it might be very
difficult for us to increase our capital resources, either from lenders or
equity investors.
 
 We rely
primarily upon repayment of outstanding loans and proceeds from sales of real
estate held for sale to provide capital for investment in new
loans.  The significant level of defaults on outstanding loans has
reduced the funds we have available for investment in new
loans.  Resulting foreclosure proceedings may not generate full
repayment of our loans and may result in significant delays in the return of
invested funds.  This has diminished our capital resources and
impaired our ability to invest in new loans.
 
  - 34
-
 Table of Contents
  Non-performing
assets included loans in non-accrual status, net of allowance for loan losses,
and real estate held for sale totaling approximately $5.5 million and $2.7
million, respectively, as of December 31, 2008, compared to approximately $5.5
million and $0.6 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.  We
believe that the continued weakness in real estate markets may result in
additional losses on our real estate held for sale.
 
 As of
March 4, 2009, one performing loan, totaling $0.2 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 As a
commercial real estate lender willing to invest in riskier loans, rates of
delinquencies, foreclosures and losses on our loans could be higher than those
generally experienced in the commercial mortgage lending industry during periods
of economic slowdown or recession.  Problems in the sub-prime
residential mortgage market have adversely affected the general economy and the
availability of funds for commercial real estate developers.  We
believe this lack of available funds has led to an increase in defaults on our
loans.  Furthermore, problems experienced in U.S. credit markets since
the summer of 2007 have reduced the availability of credit for many prospective
borrowers.  These problems have made it more difficult for our
borrowers to obtain the anticipated re-financing necessary in many cases to pay
back our loans.  Thus, we have had to work with some of our borrowers
to either modify, restructure and/or extend their loans in order to keep or
restore the loans to performing status.  Our manager will continue to
evaluate our loan portfolio in order to minimize risk associated with current
market conditions.
 
 We have
no current plans to sell any new units.  In addition, any significant
level of redemptions by our members would reduce the capital we have available
for investment.  In order to comply with our Operating Agreement and
the Internal Revenue Code, we may redeem no more than 10% of the aggregate
Members’ capital in any calendar year and no more than $100,000 per members’
account in any calendar year subject to our manager’s discretion.  As
of December 31, 2008, the total redemptions made from inception were
approximately $9.0 million.  Balances in Members’ capital accounts as
of January 1, 2008 were approximately $26.3 million, including deferred income
of approximately $1.0 million, which limited redemptions to approximately $2.6
million for calendar 2008.  Total redemptions during the year ended
December 31, 2008, were approximately $2.8 million.  For additional
information regarding members redemptions, see Note E – Members’ Equity of the Notes
to the Financial Statements included in Part II, Item 8 Financial Statements and
Supplementary Data of this Report Form 10-K.
 
 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 have
no current plans to expand our capital resources through borrowings from
institutional lenders or through securitization of our loan portfolio or similar
arrangements.  We currently do not have in place any commitments to
borrow any funds or securitize any of our assets.  No assurance can be
given that, if we should seek to borrow funds or to securitize our assets we
would be able to do so on commercially attractive terms.  Given the
state of our loan portfolio and current conditions in the credit markets, we
believe it would be very difficult for us to expand our capital resources
through borrowings or securitization arrangements.
 
 Investments
in Real Estate Loans Secured by Real Estate Portfolio
 
 We offer
five real estate loan products consisting of commercial property, construction,
acquisition and development, land, and residential loans.  The
effective interest rates on all product categories range from 6 % to
15%.  Revenue by product will fluctuate based upon relative balances
during the period.  We had investments in 18 real estate loans, as of
December 31, 2008, with a balance of approximately $13.3 million as compared to
investments in 26 real estate loans, as of December 31, 2007, with a balance of
approximately $21.9 million.
  - 35
-
 Table of Contents
  
 As of
December 31, 2008, we had nine 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 $5.5 million, net of
allowance for loan losses of approximately $4.8 million, which does not include
the allowances of approximately $0.7 million relating to the decrease in the
property value for performing loans as of December 31, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  Our manager has evaluated these
loans and, based on current estimates, believes that the value of the underlying
collateral is sufficient to protect us from loss of
principal.  However, such estimates may change, or the value of the
underlying collateral may deteriorate, in which case further losses may be
incurred.  During January 2009, we foreclosed upon one non-performing
loan, Redwood Place, LLC, and classified it as real estate held for
sale.  As of March 4, 2009, we had eight loans considered
non-performing.
 
 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 December 31, 2008, we have
provided a specific reserve of approximately $5.4 million, related to seven
non-performing loans and seven performing loans, based on updated appraisals and
evaluation of the borrower obtained by our manager.  Our manager
evaluated these loans and concluded that the remaining underlying collateral was
sufficient to protect us against further losses of principal or
interest.  Our manager will continue to evaluate these loans in order
to determine if any other allowance for loan losses should be
recorded.  For additional information on our investments in real
estate loans, refer to Note D – Investments In Real Estate
Loans of the Notes to the Financial Statements included in Part II, Item
8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 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 year ended December
31, 2008, refer to Note D – Investments In Real Estate
Loans of the Notes to the Financial Statements included in Part II, Item
8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
  - 36
-
 Table of Contents
  
 Investments
in Real Estate Held for Sale
 
 At
December 31, 2008, we held seven properties with a total carrying value of
approximately $2.7 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.  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 Financial Statements included in Part II, Item 8
Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any interests in off-balance sheet special purpose entities nor do we have
any interests in non-exchange traded commodity contracts.
 
 CONTRACTUAL
OBLIGATIONS
 
 As of
December 31, 2008, we had no contractual obligations nor do we have any
interests in non-exchange traded commodity contracts.
 
 RELATED
PARTY TRANSACTIONS
 
 From time
to time, we may acquire or sell investments in real estate loans from/to our
manager or other related parties pursuant to the terms of our Management
Agreement without a premium.  No gain or loss is recorded on these
transactions, as it is not our intent to make a profit on the purchase or sale
of such investments.  The purpose is generally to diversify our
portfolio by syndicating loans, thereby providing us with additional capital to
make additional loans.  For further information regarding related
party transactions, refer to Note G – Related Party Transactions in
the notes to our consolidated financials statements in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
 
 CRITICAL
ACCOUNTING ESTIMATES
 
 Revenue
Recognition
 
 Interest
income on loans is accrued by the effective interest method.  We do
not accrue interest income from loans once they are determined to be
non-performing.  A loan is considered non-performing when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement or when
the payment of interest is 90 days past due.
 
 The
following table presents a sensitivity analysis, averaging the balance of our
loan portfolio at the end of the last six quarters, to show the impact on our
financial condition at December 31, 2008, from fluctuations in weighted average
interest rate charged on loans as a percentage of the loan
portfolio:
 
 Changed Assumption
                    
                    Increase
      (Decrease) in Interest IncomeWeighted
      average interest rate assumption increased by 1.0% or 100 basis
      points
                    
                    $
                    179,000Weighted
      average interest rate assumption increased by 5.0% or 500 basis
      points
                    
                    $
                    896,000Weighted
      average interest rate assumption decreased by 1.0% or 100 basis
      points
                    
                    $
                    (179,000
                    )Weighted
      average interest rate assumption decreased by 5.0% or 500 basis
      points
                    
                    $
                    (896,000
                    )
 
 The
purpose of this analysis is to provide an indication of the impact that the
weighted average interest rate fluctuations would have on our financial
results.  It is not intended to imply our expectation of future
revenues or to estimate earnings.  We believe that the assumptions
used above are appropriate to illustrate the possible material impact on the
financial statements.
  - 37
-
 Table of Contents
  
 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 December 31, 2008, from increases and decreases to our
allowance for loan losses as a percentage of the loan portfolio:
 
 Changed Assumption
                    
                    Increase
      (Decrease) in Allowance for Loan LossesAllowance
      for loan losses assumption increased by 1.0% of loan
    portfolio
                    
                    $
                    133,000Allowance
      for loan losses assumption increased by 5.0% of loan
    portfolio
                    
                    $
                    666,000Allowance
      for loan losses assumption decreased by 1.0% of loan
    portfolio
                    
                    $
                    (133,000
                    )Allowance
      for loan losses assumption decreased by 5.0% of loan
    portfolio
                    
                    $
                    (666,000
                    )
 
 Estimating
allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency
and cooperation of the related borrower and specific legal issues that affect
loan collections or taking possession of the property.  As a
commercial real estate lender willing to invest in loans to borrowers who may
not meet the credit standards of other financial institutional lenders, the
default rate on our loans could be higher than those generally experienced in
the mortgage lending industry.  We, our manager and Vestin
Originations generally approve loans more quickly than other real estate lenders
and, due to our expedited underwriting process, there is a risk that the credit
inquiry we perform will not reveal all material facts pertaining to a borrower
and the security.
 
 We may
discover additional facts and circumstances as we continue our efforts in the
collection and foreclosure processes.  This additional information
often causes management to reassess its estimates.  In recent years,
we have revised estimates of our allowance for loan
losses.  Circumstances that may cause significant changes in our
estimated allowance include, but are not limited to:
 
 ·
              Declines
      in real estate market conditions that can cause a decrease in expected
      market value;
 
 ·
              Discovery
      of undisclosed liens for community improvement bonds, easements and
      delinquent property taxes;
 
 ·
              Lack
      of progress on real estate developments after we advance
      funds.  We customarily utilize disbursement agents to monitor
      the progress of real estate developments and approve loan
      advances.  After further inspection of the related property,
      progress on construction occasionally does not substantiate an increase in
      value to support the related loan
advances;
 
 ·
              Unanticipated
      legal or business issues that may arise subsequent to loan origination or
      upon the sale of foreclosed upon property;
and
 
 ·
              Appraisals,
      which are only opinions of value at the time of the appraisal, may not
      accurately reflect the value of the
property.
 
  - 38
-
 Table of Contents
  Real Estate Held For
Sale
 
 Real
estate held for sale includes real estate acquired through foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior
indebtedness, or the property's estimated fair value, less estimated costs to
sell, with fair value based on appraisals and knowledge of local market
conditions.  While pursuing foreclosure actions, we seek to identify
potential purchasers of such property.  It is not our intent to invest
in or own real estate as a long-term investment.  In accordance with
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.
 
 ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVEDISCLOSURES ABOUT MARKET
      RISK
 
 We are
exposed to market risk, primarily from changes in interest rates.  We
do not deal in any foreign currencies and do not own any options, futures or
other derivative instruments.  We do not have a significant amount of
debt.
 
 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 December 31, 2008, our aggregate investment in real
estate loans was approximately $7.9 million, net of allowance of approximately
$5.4 million, with a weighted average effective interest rate of
11.46%.  The weighted average interest rate of 11.46% is based on the
contractual terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of December 31, 2008, was 10.4%.  Most of the real estate loans had
an initial term of 12 months.  The weighted average term of
outstanding loans, including extensions, at December 31, 2008, was 21
months.  All but one of the outstanding real estate loans at December
31, 2008, was a fixed rate loan.  The variable interest rate loan was
considered non-performing as of December 31, 2008, see Note D – Investments in Real Estate
Loans in the Notes to the Financial Statements included in Part II, Item
8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.  All of
the real estate loans are held for investment purposes; none are held for
sale.  We intend to hold such real estate loans to
maturity.  As of December 31, 2008, none of our loans had a prepayment
penalty, although 13 of our loans, totaling approximately $8.0 million, had an
exit fee.  Out of the 13 loans with an exit fee, 5 loans, totaling
approximately $5.4 million, were considered non-performing as of December 31,
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
distribution to our members.  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.
  - 39
-
 Table of Contents
  
 The
following table contains information about the investment of real estate loans
in our portfolio as of December 31, 2008.  The presentation aggregates
the investment in real estate loans by their maturity dates for maturities
occurring in each of the years 2009 through 2013 and thereafter and separately
aggregates the information for all maturities arising after 2013.  The
carrying values of these assets approximate their fair value as of December 31,
2008.
 
 Interest
      Earning Assets
                      Aggregated
      by Maturity at December 31, 2008Interest
      Earning Assets
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    Thereafter
                    
                    
                    Total(a)Investments
      In Real Estate Loans
                    
                    $
                    12,643,000
                    
                    
                    $
                    669,000
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    13,312,000Weighted
      Average Interest Rates
                    
                    
                    11.61%
                    
                    
                    
                    8.69%
                    
                    
                    
                    0.00%
                    
                    
                    
                    0.00%
                    
                    
                    
                    0.00%
                    
                    
                    
                    0.00%
                    
                    
                    
                    11.46%
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to December 31,
2008.
 
 At
December 31, 2008, we also had approximately $1.8 million invested in cash and
marketable securities – related party (VRM II).  Approximately 3% of
our assets will be held in such accounts as a cash reserve; additional deposits
in such accounts will be made as funds are received from investors and repayment
of loans pending the deployment of such funds in new real estate
loans.  We believe that these financial assets do not give rise to
significant interest rate risk due to their short-term nature.
 
 ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARYDATA
 
 
 INDEX
TO FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
 
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
              41FINANCIAL STATEMENTSBalance Sheets
              42Statements of Operations
              43Statements of Members’ Equity and Other Comprehensive
      Income (Loss)
              44Statements of Cash Flows
              45Notes to the Financial Statements
              47SUPPLEMENTARY INFORMATION
              75Investments in Real Estate Loans:Real Estate Loan Roll Forward
              75Real Estate Loans by Type of
Property
              76Real Estate Loans by Lien Position
              76Real Estate Loans that Exceed Three Percent of the
      Portfolio
              77
 
  - 40
-
 Table of Contents
  
 REPORT
OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
 
 
 To the
Members of Vestin Fund III, LLC:
 
 We have
audited the accompanying balance sheets of Vestin Fund III, LLC (“the Company”)
as of December 31, 2008 and 2007 and related statements of operations, members’
equity and other comprehensive income (loss) for each of the three years in the
period ended December 31, 2008.  Our audits also included the
financial statement schedules listed in the Index at Item 15.  These
financial statements and schedules are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Vestin Fund III, LLC as of December
31, 2008 and 2007 and the results of its operations and cash flows for each of
the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.  Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
 
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
California
 March 26,
2009
 
 
  - 41
-
 Table of Contents
  FINANCIAL
STATEMENTS
 
 VESTIN
      FUNDIII, LLCBALANCE
      SHEETSASSETSDecember
      31, 2008
                      
                      
                      December
      31, 2007AssetsCash
      and cash equivalents
                      
                      $
                      1,484,000
                      
                      
                      $
                      2,720,000Cash
      - restricted
                      
                      
                      985,000
                      
                      
                      
                      985,000Marketable
      securities - related party
                      
                      
                      360,000
                      
                      
                      
                      1,113,000Interest
      and other receivables, net of allowance for doubtful accounts of $25,000
      at December 31, 2008 and $0 at December 31, 2007
                      
                      
                      18,000
                      
                      
                      
                      198,000Real
      estate held for sale
                      
                      
                      2,734,000
                      
                      
                      
                      546,000Investment
      in real estate loans, net of allowance for loan loss of $5,446,000 at
      December 31, 2008 and $1,026,000 at December 31, 2007
                      
                      
                      7,866,000
                      
                      
                      
                      20,825,000Other
      assets
                      
                      
                      --
                      
                      
                      
                      3,000Total
      assets
                      
                      $
                      13,447,000
                      
                      
                      $
                      26,390,000LIABILITIES
      AND MEMBERS' EQUITYLiabilitiesAccounts
      payable and accrued liabilities
                      
                      $
                      135,000
                      
                      
                      $
                      125,000Due
      to related parties
                      
                      
                      67,000
                      
                      
                      
                      1,000Deferred
      income
                      
                      
                      985,000
                      
                      
                      
                      985,000Total
      liabilities
                      
                      
                      1,187,000
                      
                      
                      
                      1,111,000Commitments
      and contingenciesMembers'
      equityMembers'
      units - authorized 10,000,000 units, 2,248,825 issued and outstanding at
      December 31, 2008 and 2,525,561 units issued and outstanding at December
      31, 2007
                      
                      
                      12,344,000
                      
                      
                      
                      25,818,000Accumulated
      other comprehensive loss
                      
                      
                      (84,000
                      )
                      
                      
                      (539,000
                      )Total
      members' equity
                      
                      
                      12,260,000
                      
                      
                      
                      25,279,000Total
      liabilities and members' equity
                      
                      $
                      13,447,000
                      
                      
                      $
                      26,390,000
 
 
  The
accompanying notes are an integral part of these statements.
 - 42
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF OPERATIONSFor
      the Years Ended12/31/2008
                      
                      
                      12/31/2007
                      
                      
                      12/31/2006RevenuesInterest
      income from investment in real estate loans
                      
                      $
                      925,000
                      
                      
                      $
                      2,477,000
                      
                      
                      $
                      2,410,000Rental
      income - related party
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      944,000Other
                      
                      
                      20,000
                      
                      
                      
                      25,000
                      
                      
                      
                      9,000Total
      revenues
                      
                      
                      945,000
                      
                      
                      
                      2,502,000
                      
                      
                      
                      3,363,000Operating
      expensesManagement
      fees - related party
                      
                      
                      --
                      
                      
                      
                      7,000
                      
                      
                      
                      45,000Interest
      expense
                      
                      
                      --
                      
                      
                      
                      119,000
                      
                      
                      
                      777,000Provision
      for loan loss
                      
                      
                      5,945,000
                      
                      
                      
                      953,000
                      
                      
                      
                      --Depreciation
      and amortization
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      204,000Professional
      fees
                      
                      
                      278,000
                      
                      
                      
                      190,000
                      
                      
                      
                      207,000Professional
      fees - related party
                      
                      
                      7,000
                      
                      
                      
                      10,000
                      
                      
                      
                      20,000Provision
      for doubtful accounts related to receivable
                      
                      
                      29,000
                      
                      
                      
                      --
                      
                      
                      
                      --Loan
      fees - related party
                      
                      
                      56,000
                      
                      
                      
                      --
                      
                      
                      
                      --Other
                      
                      
                      70,000
                      
                      
                      
                      44,000
                      
                      
                      
                      24,000Total
      operating expenses
                      
                      
                      6,385,000
                      
                      
                      
                      1,323,000
                      
                      
                      
                      1,277,000Income
      (loss) from operations
                      
                      
                      (5,440,000
                      )
                      
                      
                      1,179,000
                      
                      
                      $
                      2,086,000Non-operating
      income (loss)Interest
      income from banking institutions
                      
                      
                      65,000
                      
                      
                      
                      95,000
                      
                      
                      
                      85,000Dividend
      income - related party
                      
                      
                      56,000
                      
                      
                      
                      144,000
                      
                      
                      
                      47,000Loss
      on sale of investment in real estate loan
                      
                      
                      (30,000
                      )
                      
                      
                      --
                      
                      
                      
                      --Impairment
      of marketable securities - related party
                      
                      
                      (1,208,000
                      )
                      
                      
                      --
                      
                      
                      
                      --Total
      non-operating income (loss)
                      
                      
                      (1,117,000
                      )
                      
                      
                      239,000
                      
                      
                      
                      132,000Income
      (loss) from real estate held for saleGain
      on sale of building
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      2,624,000Net
      loss on sale of real estate held for sale
                      
                      
                      (38,000
                      )
                      
                      
                      --
                      
                      
                      
                      --Write
      down of real estate held for sale
                      
                      
                      (3,287,000
                      )
                      
                      
                      (29,000
                      )
                      
                      
                      --Expenses
      related to real estate held for sale
                      
                      
                      (131,000
                      )
                      
                      
                      (64,000
                      )
                      
                      
                      (12,000
                      )Total
      income (loss) from real estate held for sale
                      
                      
                      (3,456,000
                      )
                      
                      
                      (93,000
                      )
                      
                      
                      2,612,000NET
      INCOME (LOSS)
                      
                      $
                      (10,013,000
                      )
                      
                      $
                      1,325,000
                      
                      
                      $
                      4,830,000Net
      income (loss) allocated to members
                      
                      $
                      (10,013,000
                      )
                      
                      $
                      1,325,000
                      
                      
                      $
                      4,830,000Net
      income (loss) allocated to members per weighted average membership
      unit
                      
                      $
                      (4.30
                      )
                      
                      $
                      0.51
                      
                      
                      $
                      1.67Weighted
      average membership units
                      
                      
                      2,330,146
                      
                      
                      
                      2,579,314
                      
                      
                      
                      2,896,025
 
  The
accompanying notes are an integral part of these statements.
 - 43
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)FOR
      THE YEAR ENDED DECEMBER 31, 2008Units
                    
                    
                    AmountMembers'
      equity at December 31, 2005
                    
                    
                    2,974,419
                    
                    
                    $
                    29,159,000Comprehensive
      income:Net
      income
                    
                    
                    
                    
                    
                    
                    4,830,000Unrealized
      loss on marketable securities
                    
                    
                    
                    
                    
                    
                    (17,000
                    )Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    4,813,000Distributions
                    
                    
                    
                    
                    
                    
                    (2,544,000
                    )Reinvestments
      of distributions
                    
                    
                    77,730
                    
                    
                    
                    816,000Members'
      redemptions
                    
                    
                    (276,773
                    )
                    
                    
                    (2,891,000
                    )Capital
      contribution by manager for forgiveness of debt
                    
                    
                    
                    
                    
                    
                    64,000Members'
      equity at December 31, 2006
                    
                    
                    2,775,376
                    
                    
                    $
                    29,417,000Comprehensive
      income:Net
      income
                    
                    
                    
                    
                    
                    
                    1,325,000Unrealized
      loss on marketable securities
                    
                    
                    
                    
                    
                    
                    (523,000
                    )Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    802,000Distributions
                    
                    
                    
                    
                    
                    
                    (2,193,000
                    )Reinvestments
      of distributions
                    
                    
                    25,602
                    
                    
                    
                    282,000Members'
      redemptions
                    
                    
                    (275,417
                    )
                    
                    
                    (3,029,000
                    )Members'
      equity at December 31, 2007
                    
                    
                    2,525,561
                    
                    
                    $
                    25,279,000Comprehensive
      loss:Net
      loss
                    
                    
                    
                    
                    
                    
                    (10,013,000
                    )Recognition
      of unrealized loss on marketable securities – related
party
                    
                    
                    
                    
                    
                    
                    539,000Unrealized
      loss on marketable securities
                    
                    
                    
                    
                    
                    
                    (84,000
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    (9,558,000
                    )Distributions
                    
                    
                    
                    
                    
                    
                    (689,000
                    )Members'
      redemptions
                    
                    
                    (276,736
                    )
                    
                    
                    (2,772,000
                    )Members'
      equity at December 31, 2008
                    
                    
                    2,248,825
                    
                    
                    $
                    12,260,000
  The
accompanying notes are an integral part of these statements.
 - 44
-
 Table of Contents
  
 VESTIN
      FUNDIII, LLCSTATEMENTS
      OF CASH FLOWSFor
      the Years Ended12/31/08
                      
                      
                      12/31/07
                      
                      
                      12/31/06Cash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      (10,013,000
                      )
                      
                      $
                      1,325,000
                      
                      
                      $
                      4,830,000Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for doubtful accounts related to receivable
                      
                      
                      29,000
                      
                      
                      
                      --
                      
                      
                      
                      --Depreciation
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      193,000Amortization
      of capitalized loan fees
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      11,000Provision
      for loan loss
                      
                      
                      5,945,000
                      
                      
                      
                      953,000
                      
                      
                      
                      --Loss
      on sale of investment in real estate loan
                      
                      
                      30,000
                      
                      
                      
                      --
                      
                      
                      
                      --Write
      downs on real estate held for sale
                      
                      
                      3,287,000
                      
                      
                      
                      29,000
                      
                      
                      
                      --Loss
      on real estate held for sale
                      
                      
                      38,000
                      
                      
                      
                      --
                      
                      
                      
                      --Impairment
      of marketable securities - related party
                      
                      
                      1,208,000
                      
                      
                      
                      --
                      
                      
                      
                      --Amortized
      interest income
                      
                      
                      (16,000
                      )
                      
                      
                      --
                      
                      
                      
                      --Gain
      on sale of building
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (2,624,000
                      )Change
      in operating assets and liabilities:Interest
      receivable
                      
                      
                      151,000
                      
                      
                      
                      72,000
                      
                      
                      
                      (76,000
                      )Deferred
      rent receivable - related party
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (123,000
                      )Accounts
      payable and accrued liabilities
                      
                      
                      10,000
                      
                      
                      
                      32,000
                      
                      
                      
                      (63,000
                      )Due
      to related parties
                      
                      
                      66,000
                      
                      
                      
                      11,000
                      
                      
                      
                      16,000Other
      assets
                      
                      
                      3,000
                      
                      
                      
                      3,000
                      
                      
                      
                      (6,000
                      )Net
      cash provided by operating activities
                      
                      
                      738,000
                      
                      
                      
                      2,425,000
                      
                      
                      
                      2,158,000Cash
      flows from investing activities:Investments
      in real estate loans
                      
                      
                      (696,000
                      )
                      
                      
                      (5,456,000
                      )
                      
                      
                      (22,695,000
                      )Purchase
      of investments in real estate loans from:VRM
      II
                      
                      
                      --
                      
                      
                      
                      (1,154,000
                      )
                      
                      
                      (6,000,000
                      )Our
      manager
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (700,000
                      )Proceeds
      from loan payoff
                      
                      
                      1,878,000
                      
                      
                      
                      9,131,000
                      
                      
                      
                      19,183,000Sale
      of investments in real estate loans to:VRM
      II
                      
                      
                      --
                      
                      
                      
                      1,300,000
                      
                      
                      
                      4,900,000Our
      manager
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      700,000Third
      parties
                      
                      
                      102,000
                      
                      
                      
                      1,400,000
                      
                      
                      
                      --Purchase
      of marketable securities - related party
                      
                      
                      --
                      
                      
                      
                      (807,000
                      )
                      
                      
                      (846,000
                      )Proceeds
      related to investment in real estate held for sale
                      
                      
                      29,000
                      
                      
                      
                      --
                      
                      
                      
                      2,000Proceeds
      from sale of real estate held for sale
                      
                      
                      174,000
                      
                      
                      
                      --
                      
                      
                      
                      --Sale
      of investment in real property
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      13,386,000Cash
      - restricted
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (985,000
                      )Net
      cash provided by investing activities
                      
                      $
                      1,487,000
                      
                      
                      $
                      4,414,000
                      
                      
                      $
                      6,945,000
 
  The
accompanying notes are an integral part of these statements.
 - 45
-
 Table of Contents
  
 VESTIN
      FUND III, LLCSTATEMENTS
      OF CASH FLOWSFor
      the Years Ended12/31/08
                        
                        
                        12/31/07
                        
                        
                        12/31/06Cash
      flows from financing activities:Payments
      on notes payable
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        (4,830,000
                        )Capital
      contribution by Manager
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --Members'
      redemptions
                        
                        
                        (2,772,000
                        )
                        
                        
                        (3,029,000
                        )
                        
                        
                        (2,891,000
                        )Members'
      distributions, net of reinvestments
                        
                        
                        (627,000
                        )
                        
                        
                        (1,751,000
                        )
                        
                        
                        (1,634,000
                        )Members'
      distributions - related party
                        
                        
                        (62,000
                        )
                        
                        
                        (160,000
                        )
                        
                        
                        (94,000
                        )Net
      cash used in financing activities
                        
                        
                        (3,461,000
                        )
                        
                        
                        (4,940,000
                        )
                        
                        
                        (9,449,000
                        )NET
      CHANGE IN CASH
                        
                        
                        (1,236,000
                        )
                        
                        
                        1,899,000
                        
                        
                        
                        (346,000
                        )Cash,
      beginning of period
                        
                        
                        2,720,000
                        
                        
                        
                        821,000
                        
                        
                        
                        1,167,000Cash,
      end of period
                        
                        $
                        1,484,000
                        
                        
                        $
                        2,720,000
                        
                        
                        $
                        821,000Supplemental
      disclosures of cash flows information:Interest
      paid during the period
                        
                        $
                        --
                        
                        
                        $
                        119,000
                        
                        
                        $
                        777,000Non-cash
      investing and financing activities:Capital
      contribution by Manager through forgiveness of liability
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        64,000Deferred
      income related to sale of building
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        985,000Adjustment
      to allowance for loan loss related to sale of investment in real estate
      loan
                        
                        $
                        144,000
                        
                        
                        $
                        --
                        
                        
                        $
                        --Adjustment
      to interest receivable and related allowance associated with sale of
      investment in real estate loan
                        
                        $
                        3,000
                        
                        
                        $
                        --
                        
                        
                        $
                        --Loan
      rewritten with same or similar collateral
                        
                        $
                        586,000
                        
                        
                        $
                        3,219,000
                        
                        
                        $
                        --Loans
      funded through secured borrowings
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        5,841,000Payoff
      of loans funded through secured borrowings
                        
                        $
                        --
                        
                        
                        $
                        4,430,000
                        
                        
                        $
                        1,938,000Real
      estate held for sale acquired through foreclosure
                        
                        $
                        5,716,000
                        
                        
                        $
                        --
                        
                        
                        $
                        577,000Recapture
      of accumulated depreciation due to sale of building
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        480,000Recapture
      of Amortized closing costs due to sale of building
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        27,000Recapture
      of capitalized loan fees due to sale of building
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        115,000Recapture
      of Deferred Rent Receivable due to sale of building
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        291,000Recognition
      of unrealized loss on marketable securities – related
party
                        
                        $
                        539,000
                        
                        
                        $
                        --
                        
                        
                        $
                        --Unrealized
      gain (loss) on marketable securities - related party
                        
                        $
                        (84,000
                        )
                        
                        $
                        (523,000
                        )
                        
                        $
                        17,000
 
 
 
  The
accompanying notes are an integral part of these statements.
 - 46
-
 Table of Contents
  
 VESTIN
FUNDIII, LLC
 
 NOTES
TO FINANCIAL STATEMENTS
 
 DECEMBER
31, 2008
 
 
 NOTE
A — ORGANIZATION
 
 Vestin
Fund III, LLC was organized in April 2003 as a Nevada limited liability company
for the purpose of investing in commercial real estate loans (hereafter referred
to as “real estate loans”) and income-producing real property.  On
March 5, 2007, a majority of our members approved the Third Amended and Restated
Operating Agreement, which limits the Company’s investment objectives to
investments in real estate loans.  Prior to adopting this amendment,
we also invested in revenue-generating commercial real estate.  We
sold our real estate investment in November 2006.  In this report, we
refer to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”,
“us”, or “our”.
 
 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 Operating
Agreement as “Mortgage Assets”).  We commenced operations in February
2004.  Under our Operating Agreement, we would continue our operations
until December 2023 unless dissolved prior thereto or extended by vote of the
members under the provisions of our Operating Agreement.  However, our
manager is considering a proposal to the members to wind up our operations in
view of our limited operating assets.
 
 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 company investing in real estate loans we are
subject to the North American Securities Administration Association Mortgage
Program Guidelines (the “NASAA Guidelines”) promulgated by the state securities
administrators.  Prior to March 5, 2007, we also invested in real
estate and were subject to the North American Securities Administration
Association Real Estate Guidelines.
 
 On
November 7, 2003, our Registration Statement as filed with the United States
Securities and Exchange Commission (“SEC”) became effective for the initial
public offering of up to 10,000,000 units at $10 per unit
(“unit”).  On November 7, 2005, we discontinued the offering of our
units; however, members continued to purchase additional units through our
Distribution Reinvestment Plan whereby the members’ distributions were used to
purchase additional units at the current value.  As of December 31,
2008, we had sold approximately 3,113,166 units, which includes 247,245 units
purchased through our Distribution Reinvestment Plan.  On April 2,
2007, our manager decided to terminate our Distribution Reinvestment Plan
effective May 7, 2007, pursuant to Section 8.5 of our Operating
Agreement.  A letter was sent on April 2, 2007 to our members
notifying them of the Distribution Reinvestment Plan’s termination.
 
 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, 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.
 
  - 47
-
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  Pursuant
to our Operating Agreement, our manager implements our business strategies on a
day-to-day basis, manages and provides services to us.  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.  The Operating Agreement also
provides that the members have certain rights, including the right to terminate
our manager subject to a majority vote of the members.
 
 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 Realty Mortgage
II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund
II) and inVestin Nevada, Inc., (“inVestin”) a company wholly owned by our
manager’s CEO.  These entities have been formed to invest in real
estate loans.
 
 NOTE
B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Management
Estimates
 
 The
preparation of 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 financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include interest-bearing and non-interest-bearing bank
deposits, money market accounts, short-term certificates of deposit with
original maturities of three months or less, and short-term instruments with a
liquidation provision of one month or less.
 
 Restricted
Cash
 
 We have
restricted cash, which relates to a cash deposit held as collateral by a banking
institution for an irrevocable stand by letter of credit to support rent
payments on the property we sold during November 2006.  The
requirement for the deposit expires at the end of the lease on August 31,
2014.
 
 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 Operating
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.
 
  - 48
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  Investments
in real estate loans are secured by deeds of trust or
mortgages.  Generally, our real estate loans require interest only
payments with a balloon payment of the principal at maturity.  We have
both the intent and ability to hold real estate loans until maturity and
therefore, real estate loans are classified and accounted for as held for
investment and are carried at amortized cost.  Loans sold to or
purchased from affiliates are accounted for at the principal balance and no gain
or loss is recognized by us or any affiliate.  Loan-to-value ratios
are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received or when management’s assessment of
the value has changed, to reflect subsequent changes in value
estimates.  Such appraisals are generally dated within 12 months of
the date of loan origination and may be commissioned by the
borrower.
 
 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.
 
  - 49
-
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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
Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or
Disposal of Long Lived Assets(“FAS 144”), we seek to sell properties
acquired through foreclosure as quickly as circumstances permit.  The
carrying values of real estate held for sale are assessed on a regular basis
from updated appraisals, comparable sales values or purchase
offers.
 
 Management
classifies real estate held for sale when the following criteria are
met:
 
 ·
              Management
      commits to a plan to sell the
properties;
 
 ·
              The
      property is available for immediate sale in its present condition subject
      only to terms that are usual and
customary;
 
 ·
              An
      active program to locate a buyer and other actions required to complete a
      sale have been initiated;
 
 ·
              The
      sale of the property is probable;
 
 ·
              The
      property is being actively marketed for sale at a reasonable price;
      and
 
 ·
              Withdrawal
      or significant modification of the sale is not
  likely.
 
 Classification of Operating
Results from Real Estate Held for Sale
 
 FAS 144
generally requires operating results from long lived assets held for sale to be
classified as discontinued operations as a separately stated component of net
income.  Our operations related to real estate held for sale are
separately identified in the accompanying statements of income.
 
 Secured
Borrowings
 
 Secured
borrowings provide an additional source of capital for our lending
activity.  Secured borrowings allow us to increase the diversification
of our loan portfolio and to invest in loans that we might not otherwise invest
in.  We do not receive any fees for entering into secured borrowing
arrangements; however, we may receive revenue for any differential of the
interest spread, if applicable.  Loans in which unaffiliated investors
have participated through inter-creditor agreements (“Inter-creditor
Agreements”) are accounted for as secured borrowings in accordance with
Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“FAS
140”).
 
 The
Inter-creditor Agreements provide us additional funding sources for real estate
loans whereby an unaffiliated investor (the “Investor”) may participate on a
non-pari passu basis in certain real estate loans with us and/or VRM I and/or
VRM II (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.
  - 50
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 Investment in Marketable
Securities – Related Party
 
 Investment
in marketable securities – related party consists of stock in VRM
II.  The securities are stated at fair value as determined by the
closing market price as of December 31, 2008.  All securities are
classified as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”).
 
 We
evaluate our available-for-sale investment for other-than-temporary impairment
charges in accordance with Emerging Issues Task Force, or EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and it’s Application to Certain Investments.  FAS
115 and EITF 03-1 require us to determine when an investment is considered
impaired (i.e., decline in fair value below its amortized cost), and evaluate
whether the impairment is other than temporary (i.e., investment value will not
be recovered over its remaining life), and, if the impairment is other than
temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value.
 
 According
to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M -
Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, there
are numerous factors to be considered in such an evaluation and their relative
significance will vary from case to case.  The following are a few
examples of the factors, which individually or in combination, indicate that a
decline is other than temporary and that a write down of the carrying value is
required:
 
 ·
              The
      length of the time and the extent to which the market value has been less
      than cost;
 
 ·
              The
      financial condition and near-term prospects of the issuer, including any
      specific events which may influence the operations of the issuer such as
      changes in technology that may impair the earnings potential of the
      investment or the discontinuance of a segment of the business that may
      affect the future earnings potential;
or
 
 ·
              The
      intent and ability of the holder to retain its investment in the issuer
      for a period of time sufficient to allow for any anticipated recovery in
      market value.
 
 Fair Value
Disclosures
 
 On
January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115 (“FAS 159”).  FAS 159 permits companies to choose to
measure certain financial assets and liabilities at fair value (the “fair value
option”).  If the fair value option is elected, any upfront costs and
fees related to the item must be recognized in earnings and cannot be deferred,
e.g. debt issue costs.  The fair value election is irrevocable and may
generally be made on an instrument-by-instrument basis, even if a company has
similar instruments that it elects not to fair value.  At the adoption
date, unrealized gains and losses on existing items for which fair value has
been elected are reported as a cumulative adjustment to beginning retained
earnings.
 
 We chose
not to elect the fair value option for our financial assets and liabilities
existing on January 1, 2008, and did not elect the fair value option for
financial assets and liabilities transacted during the year ended December 31,
2008.  Therefore, the adoption of FAS 159 had no impact on our
financial statements.
 
 On
January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements (“FAS
157”), as required for financial assets and liabilities, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements
for non-financial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis.  The adoption of FAS
157 for our financial assets and liabilities did not have a material impact on
our financial statements.  We do not expect the adoption of FAS 157 as
it pertains to non-financial assets and liabilities to have a material impact on
our financial statements.
  - 51
-
 Table of Contents
  
 Under FAS
157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. “the exit price”) in an orderly
transaction between market participants at the measurement date.  In
determining fair value, the Company uses various valuation approaches, including
quoted market prices and discounted cash flows.  FAS 157 also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when
available.  Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources.  Unobservable inputs are inputs
that reflect a company’s judgment concerning the assumptions that market
participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.  The fair value
hierarchy is broken down into three levels based on the reliability of inputs as
follows:
 
 ·
              Level
      1 – Valuations based on quoted prices in active markets for identical
      instruments that the Company is able to access.  Since
      valuations are based on quoted prices that are readily and regularly
      available in an active market, valuation of these products does not entail
      a significant degree of judgment.
 
 ·
              Level
      2 – Valuations based on quoted prices in active markets for instruments
      that are similar, or quoted prices in markets that are not active for
      identical or similar instruments, and model-derived valuations in which
      all significant inputs and significant value drivers are observable in
      active markets.
 
 ·
              Level
      3 – Valuations based on inputs that are unobservable and significant to
      the overall fair value measurement, which utilize the Company’s estimates
      and assumptions.
 
 Net Income Allocated to
Members Per Weighted Average Membership Unit
 
 Net
income allocated to members per weighted average membership unit is computed by
dividing net income calculated in accordance with GAAP by the weighted average
number of membership units outstanding for the period.
 
 Segments
 
 We
operate as one business segment.
 
 Income
Taxes
 
 Income
tax effects resulting from our operations pass through to our members
individually and, accordingly, no provision for income taxes is included in the
financial statements.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior periods’ 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,
marketable securities related party and loans secured by deeds of
trust.
 
 We
maintain cash deposit accounts and certificates of deposit, which at times may
exceed federally insured limits.  We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
related to cash deposits based on management review of these financial
institutions.  As of December 31, 2008 and December 31, 2007, we had
approximately $1.7 million and $3.6 million, respectively, in excess of the
federally insured limits.
 
  - 52
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  As of
December 31, 2008, 40%, 20%, 20% and 11% of our loans were in Nevada, Arizona,
Oregon and California, respectively, compared to 46%, 18%, 15% and 10%, at
December 31, 2007, respectively.  As a result of this geographical
concentration of our real estate loans, the downturn in the local real estate
markets in these states has had a material adverse effect on us.
 
 At
December 31, 2008 and December 31, 2007, the loan to our largest borrower
represented 11% and 7%, respectively, of our total investment in real estate
loans.  This commercial property real estate loan is located in
Oregon, with a first lien position and an outstanding balance of approximately
$1.5 million.  As of December 31, 2008, this loan was considered
non-performing.
 
 The
success of a borrower’s ability to repay its real estate loan obligation in a
large lump-sum payment may be dependent upon the borrower’s ability to refinance
the obligation or otherwise raise a substantial amount of cash.  As
the economy weakens and credit has become more difficult to obtain, many of our
borrowers who develop and sell commercial real estate projects have been unable
to complete their projects, obtain takeout financing or have been otherwise
adversely impacted.  In addition, an increase in interest rates over
the loan rate applicable at origination of the loan may have an adverse effect
on our borrower’s ability to refinance.
 
 Common
Guarantors
 
 As of
December 31, 2008, two loans totaling approximately $2.7 million, representing
approximately 20.1% of our portfolio’s total value, had a common
guarantor.  Both loans were considered non-performing as of December
31, 2008.  As of December 31, 2007, we had three loans totaling
approximately $3.3 million with this guarantor, representing approximately 15.1%
of our portfolio’s total value, had a common guarantor.  All three
loans were considered performing as of December 31, 2007.
 
 As of
December 31, 2008, five loans totaling approximately $1.7 million, representing
approximately 13.1% of our portfolio’s total value, had a common
guarantor.  All five loans were considered performing as of December
31, 2008.  Subsequent to December 31, 2008, these loans have been
modified, whereby the interest rate reduced from 10.5% to 8% starting in January
2009.  Interest payments will be payable monthly, ranging from 3.0% to
4.25%, beginning January 25, 2009, and accrued at a range of 3.75% to 5.0%
payable at the end of the loan.  All these loans required payments
have been received as of March 11, 2009, and are considered
performing.  As of December 31, 2007, we had five loans totaling
approximately $1.8 million with this guarantor, representing approximately 8.3%
of our portfolio’s total value.  All five loans were considered
performing as of December 31, 2007.
 
 As of
December 31, 2008, two loans totaling approximately $2.4 million, representing
approximately 18.0% of our portfolio’s total value, had a common
guarantor.  Both loans were considered non-performing as of December
31, 2008.  As of December 31, 2007, these two loans represented
approximately 11.0% of our portfolio’s total value.  Both loans were
considered performing as of December 31, 2007.
 
 For
additional information regarding the above non-performing loans see
“Non-Performing Loans” in Note D – Investments In Real Estate
Loans of the Notes to the Financial Statements included in Part II, Item
8 Financial Statement and
Supplementary Data of this Report Form 10-K.
 
 NOTE
D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of
December 31, 2008, and 2007, all of our loans provided for payments of interest
only with a “balloon” payment of principal payable in full at the end of the
term.
 
 In
addition, we may invest in real estate loans that require borrowers to maintain
interest reserves funded from the principal amount of the loan for a period of
time.  At December 31, 2008, we had approximately $1.1 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 $24.0
million.  These loans had interest reserves of approximately $1.5
million, of which our portion was $35,000.  At December 31, 2007, we
had approximately $6.2 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 $78.6 million.  These loans had interest
reserves of approximately $3.7 million, of which our portion was approximately
$0.3 million.
  - 53
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 On
December 12, 2008, we, VRM I, and VRM II, sold the Silver Star Destinations, LLC
loan, which was considered non-performing, to an unrelated third party for
approximately $9.9 million, of which our portion was $102,000.  At the
time of the sale, the loan was carried at $132,000, which included an allowance
for loan loss of $144,000.  The sale resulted in us recognizing a net
loss of $30,000.
 
 As of
December 31, 2008, we had five real estate loan products consisting of
commercial, construction, acquisition and development, land and
residential.  The effective interest rates on all product categories
range from 6% to 15%.  Revenue by product will fluctuate based upon
relative balances during the period.
 
 Loan
Portfolio
 
 Investments
in real estate loans as of December 31, 2008, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average Interest Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and Development
                      
                      
                      --
                      
                      
                      $
                      --
                      
                      
                      
                      --%
                      
                      
                      
                      --%
                      
                      
                      
                      --%Commercial
                      
                      
                      10
                      
                      
                      
                      7,815,000
                      
                      
                      
                      11.24%
                      
                      
                      
                      58.71%
                      
                      
                      
                      95.54%Construction
                      
                      
                      4
                      
                      
                      
                      1,622,000
                      
                      
                      
                      10.50%
                      
                      
                      
                      12.18%
                      
                      
                      
                      102.60%Land
                      
                      
                      4
                      
                      
                      
                      3,875,000
                      
                      
                      
                      12.31%
                      
                      
                      
                      29.11%
                      
                      
                      
                      94.76%Total
                      
                      
                      18
                      
                      
                      $
                      13,312,000
                      
                      
                      
                      11.46%
                      
                      
                      
                      100.00%
                      
                      
                      
                      96.60%
 
 Investments
in real estate loans as of December 31, 2007, were as follows:
 
 Loan
      Type
                      
                      Number
      of Loans
                      
                      
                      Balance
      *
                      
                      
                      Weighted
      Average Interest Rate
                      
                      
                      Portfolio
      Percentage
                      
                      
                      Current
      Weighted Average Loan-To-Value, Net of Allowance for Loan
      LossesAcquisition
      and Development
                      
                      
                      3
                      
                      
                      $
                      3,138,000
                      
                      
                      
                      12.77%
                      
                      
                      
                      14.36%
                      
                      
                      
                      62.80%Commercial
                      
                      
                      10
                      
                      
                      
                      9,108,000
                      
                      
                      
                      11.17%
                      
                      
                      
                      41.68%
                      
                      
                      
                      81.84%Construction
                      
                      
                      6
                      
                      
                      
                      2,501,000
                      
                      
                      
                      11.17%
                      
                      
                      
                      11.45%
                      
                      
                      
                      73.31%Land
                      
                      
                      7
                      
                      
                      
                      7,104,000
                      
                      
                      
                      12.67%
                      
                      
                      
                      32.51%
                      
                      
                      
                      65.54%Total
                      
                      
                      26
                      
                      
                      $
                      21,851,000
                      
                      
                      
                      11.89%
                      
                      
                      
                      100.00%
                      
                      
                      
                      72.70%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
“Weighted Average Interest Rate” as shown above is based on the contractual
terms of the loans for the entire portfolio including non-performing
loans.  The weighted average interest rate on performing loans only,
as of December 31, 2008 and December 31, 2007, was 10.40% and 11.61%,
respectively.  Please see “Non-Performing Loans” and “Asset Quality
and Loan Reserves” below for further information regarding performing and
non-performing loans.
 
 Loan-to-value
ratios are generally based on the most recent appraisals and may not reflect
subsequent changes in value and include allowances for loan
losses.  Recognition of allowance for loan losses will result in a
maximum loan-to-value ratio of 100% per loan.
 
  - 54
-
 Table of Contents
  The
following is a schedule of priority of real estate loans as of December 31, 2008
and December 31, 2007:
 
 Loan
      Type
                    
                    Number
      of Loans
                    
                    
                    December
      31, 2008 Balance *
                    
                    
                    Portfolio
                      Percentage
                    
                    
                    Number
      of Loans
                    
                    
                    December
      31, 2007
                      Balance
      *
                    
                    
                    Portfolio
                      PercentageFirst
      deeds of trust
                    
                    
                    14
                    
                    
                    $
                    12,326,000
                    
                    
                    
                    92.59%
                    
                    
                    
                    25
                    
                    
                    $
                    21,551,000
                    
                    
                    
                    98.63%Second
      deeds of trust
                    
                    
                    4
                    
                    
                    
                    986,000
                    
                    
                    
                    7.41%
                    
                    
                    
                    1
                    
                    
                    
                    300,000
                    
                    
                    
                    1.37%Total
                    
                    
                    18
                    
                    
                    $
                    13,312,000
                    
                    
                    
                    100.00%
                    
                    
                    
                    26
                    
                    
                    $
                    21,851,000
                    
                    
                    
                    100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 The
following is a schedule of contractual maturities of investments in real estate
loans as of December 31, 2008:
 
 Non-performing
      and past due loans (a)
                    
                    $
                    11,857,000January
      2009 – March 2009
                    
                    
                    468,000April
      2009 - June 2009
                    
                    
                    200,000July
      2009 - September 2009
                    
                    
                    --October
      2009 - December 2009
                    
                    
                    118,000January
      2010 – March 2010
                    
                    
                    469,000Thereafter
                    
                    
                    200,000Total
                    
                    $
                    13,312,000
 
 (a)
              Amounts
      include the balance of non-performing loans and loans that have been
      extended subsequent to December 31,
2008.
 
 The
following is a schedule by geographic location of investments in real estate
loans as of December 31, 2008 and December 31, 2007:
 
 December
      31, 2008 Balance *
                      
                      
                      Portfolio
      Percentage
                      
                      
                      December
      31, 2007 Balance *
                      
                      
                      Portfolio
      PercentageArizona
                      
                      $
                      2,672,000
                      
                      
                      
                      20.07%
                      
                      
                      $
                      3,864,000
                      
                      
                      
                      17.68%California
                      
                      
                      1,400,000
                      
                      
                      
                      10.52%
                      
                      
                      
                      2,150,000
                      
                      
                      
                      9.84%Nevada
                      
                      
                      5,370,000
                      
                      
                      
                      40.34%
                      
                      
                      
                      10,140,000
                      
                      
                      
                      46.40%Oklahoma
                      
                      
                      1,000,000
                      
                      
                      
                      7.51%
                      
                      
                      
                      1,000,000
                      
                      
                      
                      4.58%Oregon
                      
                      
                      2,670,000
                      
                      
                      
                      20.06%
                      
                      
                      
                      3,297,000
                      
                      
                      
                      15.09%Texas
                      
                      
                      200,000
                      
                      
                      
                      1.50%
                      
                      
                      
                      1,400,000
                      
                      
                      
                      6.41%Total
                      
                      $
                      13,312,000
                      
                      
                      
                      100.00%
                      
                      
                      $
                      21,851,000
                      
                      
                      
                      100.00%
 
 *
              Please
      see Balance Sheet
      Reconciliation below.
 
 Balance Sheet
      Reconciliation
 
 The
following table reconciles the balance of the loan portfolio to the amount shown
on the accompanying Balance Sheets.
 
 December
      31, 2008 Balance (a)
                    
                    
                    December
      31, 2007 BalanceBalance
      per loan portfolio
                    
                    $
                    13,312,000
                    
                    
                    $
                    21,851,000Less:Allowance
      for loan losses (b)
                    
                    
                    (5,446,000
                    )
                    
                    
                    (1,026,000
                    )Balance
      per balance sheet
                    
                    $
                    7,866,000
                    
                    
                    $
                    20,825,000
 
  - 55
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 (a)
              We
      recognized an impairment loss of $47,000, which was applied to the 2503
      Panorama, LLC loan balance, related to the restructuring of a loan,
      whereby the interest rate was reduced from 12% to 6% starting in May
      2008.  As of December 31, 2008, we, VRM I and VRM II recognized
      an allowance for loan loss of approximately $4.0 million, of which our
      portion was approximately $0.3 million, related to this
    loan.
 
 (b)
              Please
      refer to Specific
      Reserve Allowance below.
 
 Non-Performing
Loans
 
 As of
December 31, 2008, we had nine 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 $5.5 million, net of
allowance for loan losses of approximately $4.8 million, which does not include
the allowances of approximately $0.7 million relating to the decrease in the
property value for performing loans as of December 31, 2008.  These
loans have been placed on non-accrual of interest status and are the subject of
pending foreclosure proceedings.  At December 31, 2008, the following
loans were non-performing:
 
 ·
              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 $1.0
      million.  As of December 31, 2008, this loan has been considered
      non-performing for the last twenty-eight months.  Our manager
      brought foreclosure and other legal proceedings to protect our interest in
      the collateral.  The borrowers have alleged that our lien on the
      Oklahoma City apartment complex was extinguished as a result of our
      foreclosure of a Deed of Trust and sale of other collateral located in
      Kansas City, Missouri securing the non-performing loan.  We
      filed a Petition to set aside the sale of the Missouri collateral, which
      the court dismissed.  We appealed the dismissal and are awaiting
      a decision.  We are vigorously contesting Monterrey’s position;
      however, we cannot determine at this time the outcome of these legal
      proceedings.  As of December 31, 2008, based on our manager’s
      evaluation, our manager has provided a specific allowance for the full
      amount of the loan totaling approximately $4.4 million, of which our
      portion is approximately $1.0
million.
 
 ·
              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 $1.0 million and is
      secured by a first lien on the property and guaranteed by the principals
      of the borrower.  As of December 31, 2008, this loan has been
      considered non-performing for the last eight months.  On October
      29, 2008, the borrower filed for bankruptcy protection.  Our
      manager was successful in lifting the automatic stay from bankruptcy, and
      has commenced both foreclosure proceedings and litigation against the
      personal guarantors in order to enforce the personal
      guarantees.  The foreclosure sale is scheduled for March 30,
      2009.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance totaling approximately $2.0 million, of which our portion is
      approximately $0.3 million.
 
 ·
              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
      $1.2 million and is secured by a first lien on the property and guaranteed
      by the principals of the borrower.  As of December 31, 2008,
      this loan has been considered non-performing for the last eight
      months.  Our manager has commenced foreclosure proceedings and
      has been awarded a default judgment against the guarantors for
      approximately $24.4 million, although it cannot be determined at this time
      how much, if any, can be recovered from the guarantors.  On
      September 26, 2008, the borrower filed for bankruptcy
      protection.  As of December 31, 2008, based on our manager’s
      evaluation and an updated appraisal, our manager has provided a specific
      allowance of approximately $15.0 million, of which our portion is
      approximately $1.0 million.  On March 23, 2008, we, VRM I and
      VRM II, sold the Peoria 180, LLC loan to an unrelated third party for $3.0
      million.  The sale resulted in no gain or
  loss.
  - 56
-
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 ·
              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 $1.3 million.  The loan matured on
      April 5, 2008, and the borrower failed to either pay the loan or extend
      the term.  As of December 31, 2008, this loan has been
      considered non-performing for the last eight months.  Our
      manager has commenced both foreclosure proceedings and litigation against
      the personal guarantors in order to enforce the personal
      guarantees.  On August 27, 2008, the borrower filed for
      bankruptcy protection.  On September 30, 2008, we, VRM I, and
      VRM II reached a tentative settlement agreement with the borrower to
      foreclose upon the property.  The guarantors entered into a
      confession of judgment for an amount of $1.1 million and agreed to pay
      annual deficiency payments starting on September 30, 2009, monthly
      interest payments starting on November 1, 2008 and accrued property taxes
      due on or before November 28, 2008.  The guarantors are
      currently in default under the settlement agreement, and we intend to
      proceed against them, however it cannot be determined at this time how
      much, if any, will be collected.  As of December 31, 2008, based
      on our manager’s evaluation and pending sales agreement, our manager has
      provided a specific allowance of approximately $7.0 million, of which our
      portion is approximately $0.6 million.  On January 16, 2009, we,
      VRM I, and VRM II foreclosed upon Redwood Place, LLC and classified the
      property as real estate held for sale.  During February 2009,
      our manager received a sales agreement to purchase the property for
      approximately $8.7 million, of which our portion would be approximately
      $0.7 million.  There can be no assurance that the sale will be
      completed.
 
 ·
              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 $1.4 million.  As of December 31, 2008,
      this loan has been considered non-performing for the last seven
      months.  On October 29, 2008, the borrower filed for bankruptcy
      protection.  Our manager was successful in lifting the automatic
      stay, and has commenced both foreclosure proceedings and litigation to
      enforce the personal guarantees.  As of December 31, 2008, based
      on our manager’s evaluation and an updated appraisal, our manager has
      provided a specific allowance of approximately $4.1million, of which our
      portion is approximately $0.7
million.
 
 ·
              Babuski,
      LLC is a loan to provide financing for 9.23 acres of land in Las Vegas,
      NV.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $9.5 million, of which our portion is approximately
      $0.3 million.  The borrowers defaulted and the loan became
      non-performing.  On October 16, 2008, we, VRM I and VRM II
      entered into a forbearance agreement to postpone the foreclosure date on
      the property.  The guarantor paid $250,000 for cost and interest
      due related to the loan.  As of December 31, 2008, this loan has
      been considered non-performing for the last seven months.  Our
      manager has commenced foreclosure proceedings, and is proceeding with
      legal action to enforce the personal guarantees.  As of December
      31, 2008, based on our manager’s evaluation and an updated appraisal, our
      manager has concluded that the current value of the underlying collateral
      should be sufficient to protect us from loss of principal.  No
      specific allowance was deemed necessary as of December 31,
      2008.
 
 ·
              Barger
      Road Cottages, LLC is a commercial loan to provide financing for the
      Alpine Meadow Retirement Community, consisting of 23 cottage units with
      garages, community building and surplus land, located in Eugene,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is $6.0 million, of which our portion is approximately
      $1.5 million.  As of December 31, 2008, this loan has been
      considered non-performing for the last seven months.  Our
      manager has commenced foreclosure proceedings, and is proceeding with
      legal action to enforce the personal guarantees.  On January 7,
      2009, the main principal of the borrower filed for bankruptcy protection
      and has filed a motion to enjoin us from proceeding to
      foreclose.  Our legal counsel is opposing the motion and is
      confident that we will prevail in our position.  As of December
      31, 2008, based on our manager’s evaluation and an updated appraisal, our
      manager has concluded that the current value of the underlying collateral
      should be sufficient to protect us from loss of principal.  No
      specific allowance was deemed necessary as of December 31,
      2008.
  - 57
-
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 ·
              Lohrey
      Investments, LLC is a commercial loan to provide financing for income
      producing property located in Gilroy, CA.  The loan is secured
      by a first lien on the property, and is guaranteed by principals of the
      borrower.  The outstanding balance on the loan is $16.0 million,
      of which our portion is $1.4 million.  As of December 31, 2008,
      this loan has been considered non-performing for the last six
      months.  Our manager has commenced foreclosure proceedings, and
      has been awarded a default judgment against the guarantors for
      approximately $21.3 million, although it cannot be determined at this time
      how much, if any, can be recovered from the guarantors.  During
      October 2008, the tenant, who is a related party to the borrower, filed
      for bankruptcy protection and then on January 6, 2009 the borrower filed
      for bankruptcy protection.  On February 11, 2009, the guarantors
      filed for bankruptcy protection.  The property is not currently
      generating any income.  As of December 31, 2008, based on our
      manager’s evaluation and an updated appraisal, our manager has provided a
      specific allowance of approximately $7.2 million, of which our portion is
      approximately $0.6 million.
 
 ·
              Cascadia
      Canyon, LLC is a commercial loan to provide financing for 12.39 acres of
      land plus the SUMCO North Campus, SUMCO South Campus located in Salem,
      OR.  The loan is secured by a first lien on the property, and is
      guaranteed by principals of the borrower.  The outstanding
      balance on the loan is approximately $19.5 million, of which our portion
      is approximately $1.2 million.  As of December 31, 2008, this
      loan has been considered non-performing for the last five
      months.  Our manager has commenced foreclosure proceedings, and
      is proceeding with legal action to enforce the personal
      guarantees.  As of December 31, 2008, based on our manager’s
      evaluation, an updated appraisal and current sales price, our manager has
      provided a specific allowance totaling approximately $10.3 million, of
      which our portion is approximately $0.6
million.
 
 The
following schedule summarizes the non-performing loans as of December 31,
2008:
 
 Loan
      Name
                      
                      Balance
      at
                        December
      31, 2008
                      
                      Allowance
      for Loan Loss **
                      
                      Net
      Balance at
                        December
      31, 2008
                      
                      Maturity
      Date
                      
                      Number
      of Months Non-Performing
                      
                      Percentage
      of Total Loan BalanceMonterrey
      Associates, L.P.
                      $
                      1,000,000
                      $
                      (1,000,000)
                      $
                      --
                      
                      9/1/2006
                      
                      28
                      
                      23%World
      Capital Durango Alpha (2)
                      
                      1,000,000
                      
                      (282,000)
                      
                      718,000
                      
                      5/16/2008
                      
                      8
                      
                      14%Peoria
      180, LLC
                      
                      1,182,000
                      
                      (985,000)
                      
                      197,000
                      
                      6/30/2008
                      
                      8
                      
                      7%Redwood
      Place, LLC
                      
                      1,290,000
                      
                      (601,000)
                      
                      689,000
                      
                      4/5/2008
                      
                      8
                      
                      9%WCP
      Warm Springs Holdings 1, LLC
                      
                      1,400,000
                      
                      (673,000)
                      
                      727,000
                      
                      5/10/2008
                      
                      7
                      
                      16%Babuski,
      LLC
                      
                      293,000
                      
                      --
                      
                      293,000
                      
                      6/17/2008
                      
                      7
                      
                      3%Barger
      Road Cottages, LLC
                      
                      1,520,000
                      
                      --
                      
                      1,520,000
                      
                      12/5/2008
                      
                      7
                      
                      25%Lohrey
      Investments, LLC
                      
                      1,400,000
                      
                      (630,000)
                      
                      770,000
                      
                      10/29/2008
                      
                      6
                      
                      9%Cascadia
      Canyon, LLC
                      
                      1,150,000
                      
                      (606,000)
                      
                      544,000
                      
                      2/12/2009
                      
                      5
                      
                      6%Total
                      $
                      10,235,000
                      $
                      (4,777,000)
                      $
                      5,458,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesbelow.
 
 Our
manager periodically reviews and makes a determination as to whether the
allowance for loan losses is adequate to cover any potential
losses.  Management’s evaluation may include, but is not limited to,
appraisals, real estate broker comps, the borrower’s current financial standing
and other market conditions.  Additions to the allowance for loan
losses are made by charges to the provision for loan
losses.  Recoveries of previously charged off amounts are credited to
the allowance for loan losses or included as income when the asset is
disposed.  As of December 31, 2008, we have provided specific
reserves, related to seven non-performing loans and seven performing loans, of
approximately $5.4 million.  Our manager evaluated the loans and,
based on current estimates regarding the value of the remaining underlying
collateral or the borrowers’ ability to pay, believes that such collateral is
sufficient to protect us against further losses of
principal.  However, such estimates could change or the value of
underlying real estate could decline.  Our manager will continue to
evaluate these loans in order to determine if any other allowance for loan
losses should be recorded in future periods.
  - 58
-
 Table of Contents
  
 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 members.
 
 Specific Reserve
      Allowances
 
 The
following table is a roll-forward of the allowance for loan losses for the year
ended December 31, 2008.  Following the table is a discussion of the
status of each identified loan and the reasons for the recording of additional
reserves during the year ended December 31, 2008.
 
 Description
                      
                      Balance
      at
                        December
      31, 2007
                      
                      
                      Specific
      Reserve Allocation
                      
                      
                      Sales
      &
                        Transfers
      to REO
                      
                      
                      Balance
      at
                        December
      31, 2008Monterrey
      Associates, L.P.
                      
                      $
                      545,000
                      
                      
                      $
                      455,000
                      
                      
                      $
                      --
                      
                      
                      $
                      1,000,000Brawley
      CA 122, LLC
                      
                      
                      255,000
                      
                      
                      
                      --
                      
                      
                      
                      (255,000
                      )
                      
                      
                      --Peoria
      180, LLC
                      
                      
                      108,000
                      
                      
                      
                      877,000
                      
                      
                      
                      --
                      
                      
                      
                      985,000Terravita,
      LLC (a)
                      
                      
                      118,000
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      118,000V
      & M Homes at the Palms, Inc.
                      
                      
                      --
                      
                      
                      
                      839,000
                      
                      
                      
                      (839,000
                      )
                      
                      
                      --Redwood
      Place, LLC
                      
                      
                      --
                      
                      
                      
                      601,000
                      
                      
                      
                      --
                      
                      
                      
                      601,0002503
      Panorama, LLC (a)
                      
                      
                      --
                      
                      
                      
                      322,000
                      
                      
                      
                      --
                      
                      
                      
                      322,000MRPE,
      LLC
                      
                      
                      --
                      
                      
                      
                      240,000
                      
                      
                      
                      (240,000
                      )
                      
                      
                      --Silver
      Star Destinations, LLC
                      
                      
                      --
                      
                      
                      
                      144,000
                      
                      
                      
                      (144,000
                      )
                      
                      
                      --WCP
      Warm Springs Holdings 1, LLC
                      
                      
                      --
                      
                      
                      
                      673,000
                      
                      
                      
                      --
                      
                      
                      
                      673,000Lohrey
      Investments, LLC
                      
                      
                      --
                      
                      
                      
                      630,000
                      
                      
                      
                      --
                      
                      
                      
                      630,000World
      Capital Durango Alpha (2)
                      
                      
                      --
                      
                      
                      
                      282,000
                      
                      
                      
                      --
                      
                      
                      
                      282,000Wolfpack
      Properties, LLC (a)
                      
                      
                      --
                      
                      
                      
                      71,000
                      
                      
                      
                      --
                      
                      
                      
                      71,000ExecuSuite
      Properties, LLC (a)
                      
                      
                      --
                      
                      
                      
                      34,000
                      
                      
                      
                      --
                      
                      
                      
                      34,000SE
      Property Investments, LLC (a)
                      
                      
                      --
                      
                      
                      
                      26,000
                      
                      
                      
                      --
                      
                      
                      
                      26,000Devonshire,
      LLC (a)
                      
                      
                      --
                      
                      
                      
                      91,000
                      
                      
                      
                      --
                      
                      
                      
                      91,000Building
      A, LLC & Building C, LLC (a)
                      
                      
                      --
                      
                      
                      
                      7,000
                      
                      
                      
                      --
                      
                      
                      
                      7,000Cascadia
      Canyon, LLC
                      
                      
                      --
                      
                      
                      
                      606,000
                      
                      
                      
                      --
                      
                      
                      
                      606,000Total
                      
                      $
                      1,026,000
                      
                      
                      $
                      5,898,000
                      
                      
                      $
                      (1,478,000
                      )
                      
                      $
                      5,446,000
 
 (a)
              As
      of December 31, 2008, these loans were considered
    performing.
 
 Monterrey Associates, L.P. –
As of December 31, 2008, our manager has provided a specific reserve allowance
for the outstanding balance of the loan, related to a non-performing commercial
loan on a 248-unit apartment complex in Oklahoma City, OK, of approximately $4.4
million, of which our portion was $1.0 million.  This specific reserve
allowance was based on our manager’s evaluation and an updated appraisal of the
underlying collateral for this loan, obtained by our manager during January
2008, and our manager’s evaluation.  Our manager will continue to
evaluate our position in the loan.
 
 Peoria 180, LLC – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a land loan on property located in Glendale, AZ, of approximately
$15.0 million, of which our portion was approximately $1.0
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan obtained by our manager
during February 2009.  As of December 31, 2008, the loan was
considered non-performing.  On March 23, 2008, we, VRM I and VRM II,
sold the Peoria 180, LLC loan to an unrelated third party for $3.0
million.  The sale resulted in no gain or loss.
  - 59
-
 Table of Contents
  
 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 $0.1 million.  This specific reserve allowance was
based on an updated appraisal of the underlying collateral for this loan and
evaluation of the borrower, obtained by our manager during January
2008.  During February 2008, the loans on the Terravita LLC property,
with first and second positions were rewritten into one loan, which included a
principal pay down of $6.6 million, with a second position totaling
approximately $3.1 million of which our portion is approximately $0.5
million.  The terms of the rewritten loan remain the same as those of
the original loans and the loan was performing as required as of December 31,
2008.  Our manager will continue to evaluate our position in the
loan.
 
 Redwood Place, LLC – As of
December 31, 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 $7.0 million, of which our portion was approximately $0.6
million.  This specific reserve allowance was based on our manager’s
evaluation and pending sales agreement, obtained by our manager during February
2009.  Our manager will continue to evaluate our position in the
loan.  On January 16, 2009, we, VRM I, and VRM II foreclosed upon
Redwood Place, LLC and classified the property as real estate held for
sale.  During February 2009, our manager received a sales agreement to
purchase the property for approximately $8.7 million, of which our portion would
be approximately $0.7 million.  There can be no assurance that the
sale will be completed.
 
 2503 Panorama, LLC – As of
December 31, 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 $4.0 million,
of which our portion is approximately $0.3 million.  This specific
reserve allowance was based on an updated appraisal of the underlying collateral
for this loan, obtained by our manager during February 2009.  In
addition, we recognized an impairment loss of $47,000, which was applied to the
loan balance, related to the restructuring of the loan, whereby the interest
rate was reduced from 12% to 6% starting in May 2008.  Our manager
will continue to evaluate our position in the loan.
 
 WCP Warm Springs Holdings 1,
LLC – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a non-performing loan on 10 acres of vacant land
located in Las Vegas, NV, of approximately $4.1 million, of which our portion is
approximately $0.7 million.  This specific reserve allowance was based
on an updated appraisal of the underlying collateral for this loan, obtained by
our manager during September 2008.  Our manager will continue to
evaluate our position in the loan.
 
 Lohrey Investments, LLC – As
of December 31, 2008, our manager has provided a specific reserve allowance,
related to a non-performing loan on income producing property located in Gilroy,
CA, of approximately $7.2 million, of which our portion is approximately $0.6
million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during October 2008.  Our manager will continue to evaluate our
position in the loan.
 
 World Capital Durango Alpha,
– As of December 31, 2008, our manager has provided a specific reserve
allowance, related to a non-performing loan on 9.27 acres of land located in Las
Vegas, NV, of approximately $2.0 million, of which our portion is approximately
$0.3 million.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 Casciadia Canyon, LLC, – As
of December 31, 2008, our manager has provided a specific reserve allowance,
related to an non-performing loan on 12.39 acres of land plus the SUMCO North
Campus, SUMCO South Campus located in Salem, OR, of approximately $10.3 million,
of which our portion is approximately $0.6 million.  This specific
reserve allowance was based on the current sales price of the underlying
collateral for this loan.  Our manager will continue to evaluate our
position in the loan.
 
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  Wolfpack Properties, LLC, –
As of December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on a 22,000 SqFt Class A Office Building "B" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.2 million, of which our portion is $71,000.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 ExecuSuite Properties, LLC, –
As of December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "D" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $0.6 million, of which our portion is $34,000.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 SE Property Investments, LLC,
– As of December 31, 2008, our manager has provided a specific reserve
allowance, related to a performing loan on 22,000 SqFt Class A Office Building
"E" of Village Business Park located on 1.48 acres of land located in Las Vegas,
NV, of approximately $0.4 million, of which our portion is
$26,000.  This specific reserve allowance was based on an updated
appraisal of the underlying collateral for this loan, obtained by our manager
during January 2009.  Our manager will continue to evaluate our
position in the loan.
 
 Devonshire, LLC, – As of
December 31, 2008, our manager has provided a specific reserve allowance,
related to a performing loan on 22,000 SqFt Class A Office Building "F" of
Village Business Park located on 1.48 acres of land located in Las Vegas, NV, of
approximately $1.6 million, of which our portion is $91,000.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 Building A, LLC & Building C,
LLC, – As of December 31, 2008, our manager has provided a specific
reserve allowance, related to a second lien position performing loan on 3.18
acres of land lying within the Village Business Park and a 45,622 SqFt Office
Building "C" of Village Business Park located on 1.48 acres of land located in
Las Vegas, NV, of $106,000, of which our portion is $7,000.  This
specific reserve allowance was based on an updated appraisal of the underlying
collateral for this loan, obtained by our manager during January
2009.  Our manager will continue to evaluate our position in the
loan.
 
 As of
December 31, 2008, our manager had granted extensions on 13 loans, totaling
approximately $134.0 million, of which our portion was approximately $10.8
million, pursuant to the terms of the original loan agreements, which permit
extensions by mutual consent.  Such extensions are generally provided
on loans where the original term was 12 months or less and where a borrower
requires additional time to complete a construction project or negotiate
take-out financing.  However, our manager generally grants extensions
when a borrower is in compliance with the material terms of the loan, including,
but not limited to the borrower’s obligation to make interest payments on the
loan.  In addition, if circumstances warrant, our manager may extend a
loan that is in default as part of a work out plan to collect interest and
principal.  Subsequent to their extension, 8 of the 13 loans have
become non-performing.  The loans, which became non-performing after
their extension, had a total principal amount at December 31, 2008 of
approximately $98.0 million, of which our portion is approximately $8.7
million.  Subsequent to December 31, 2008, we modified five loans with
a common guarantor that became delinquent.  As part of the
modifications, these loans were extended.  For further information
regarding these loans, see Common Guarantors in Note C – Financial Instruments and
Concentrations of Credit Risk.
 
 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.
 
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  The
conclusion that a real estate loan is uncollectible or that collectibility is
doubtful is a matter of judgment.  On a quarterly basis, our manager
evaluates our real estate loan portfolio for impairment.  The fact
that a loan is temporarily past due does not necessarily mean that the loan is
impaired.  Rather, all relevant circumstances are considered by our
manager to determine impairment and the need for specific
reserves.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters:
 
 ·
              Prevailing
      economic conditions;
 
 ·
              Historical
      experience;
 
 ·
              The
      nature and volume of the loan
portfolio;
 
 ·
              The
      borrowers’ financial condition and adverse situations that may affect the
      borrowers’ ability to pay;
 
 ·
              Evaluation
      of industry trends; and
 
 ·
              Estimated
      net realizable value of any underlying collateral in relation to the loan
      amount.
 
 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 December 31, 2008 and
December 31, 2007:
 
 As
      of December 31, 2008Balance
                    
                    
                    Allowance
      for loan losses *
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    1,813,000
                    
                    
                    $
                    --
                    
                    
                    $
                    1,813,000Non-performing
      loans – related allowance
                    
                    
                    8,422,000
                    
                    
                    
                    (4,777,000
                    )
                    
                    
                    3,645,000Subtotal
      nonperforming loans
                    
                    
                    10,235,000
                    
                    
                    
                    (4,777,000
                    )
                    
                    
                    5,458,000Performing
      loans – no related allowance
                    
                    
                    400,000
                    
                    
                    
                    --
                    
                    
                    
                    400,000Performing
      loans – related allowance
                    
                    
                    2,677,000
                    
                    
                    
                    (669,000
                    )
                    
                    
                    2,008,000Subtotal
      performing loans
                    
                    
                    3,077,000
                    
                    
                    
                    (669,000
                    )
                    
                    
                    2,408,000Total
                    
                    $
                    13,312,000
                    
                    
                    $
                    (5,446,000
                    )
                    
                    $
                    7,866,000
 
 *
              Please
      refer to Specific
      Reserve Allowancesabove.
 
 As
      of December 31, 2007Balance
                    
                    
                    Allowance
      for loan losses
                    
                    
                    Balance,
      net of allowanceNon-performing
      loans – no related allowance
                    
                    $
                    4,088,000
                    
                    
                    $
                    --
                    
                    
                    $
                    4,088,000Non-performing
      loans – related allowance
                    
                    
                    1,750,000
                    
                    
                    
                    (800,000
                    )
                    
                    
                    950,000Subtotal
      nonperforming loans
                    
                    
                    5,838,000
                    
                    
                    
                    (800,000
                    )
                    
                    
                    5,038,000Performing
      loans – no related allowance
                    
                    
                    13,231,000
                    
                    
                    
                    --
                    
                    
                    
                    13,231,000Performing
      loans – related allowance
                    
                    
                    2,782,000
                    
                    
                    
                    (226,000
                    )
                    
                    
                    2,556,000Subtotal
      performing loans
                    
                    
                    16,013,000
                    
                    
                    
                    (226,000
                    )
                    
                    
                    15,787,000Total
                    
                    $
                    21,851,000
                    
                    
                    $
                    (1,026,000
                    )
                    
                    $
                    20,825,000
 
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  Our
manager evaluated our loans and, based on current estimates with respect to the
value of the underlying collateral, believes that such collateral is sufficient
to protect us against further losses of principal or
interest.  However, such estimates could change or the value of the
underlying real estate could decline.  Our manager will continue to
evaluate our loans in order to determine if any other allowance for loan losses
should be recorded.
 
 NOTE
E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
 
 As of
December 31, 2008, we owned 114,117 shares of VRM II’s common stock,
representing approximately 0.83% of their total outstanding common
stock.
 
 During
the year ended December 31, 2008, in accordance with FAS 115 and FSP FAS 115-1
and FAS 124-1, we evaluated our investment in VRM II’s common stock and
determined there was an other-than-temporary impairment as of September 30,
2008.  Based on this evaluation we have reversed our unrealized other
comprehensive losses and realized losses on our investment to its fair value, as
of September 30, 2008, to $3.89 per share totaling approximately $0.4 million
dollars and recognizing an impairment of approximately $1.2
million.
 
 As of
December 31, 2008, our manager evaluated the near-term prospects of VRM II in
relation to the severity and duration of the unrealized loss since September 30,
2008.  Based on that evaluation and our ability and intent to hold
this investment for a reasonable period of time sufficient for a forecasted
recovery of fair value, we do not consider our investment in VRM II to be
other-than-temporarily impaired at December 31, 2008.  We will
continue to evaluate our investment in marketable securities on a quarterly
basis.  There were no other-than-temporary impairments made during the
year ended December 31, 2007.
 
 NOTE
F — REAL ESTATE HELD FOR SALE
 
 At
December 31, 2008, we held seven properties with a total carrying value of
approximately $2.7 million, which were acquired through foreclosure and recorded
as investments in real estate held for sale.  None of these properties
generated income from rentals or other sources during the year ended December
31, 2008.  Expenses incurred during the year ended December 31, 2008,
related to our real estate held for sale totaled approximately $3.5
million.  These expenses included approximately $3.3 million in
write-downs on real estate held for sale.  The summary below includes
our percentage of ownership in each of the properties.  Our
investments in real estate held for sale are accounted for at the lower of cost
or fair value less costs to sell with fair value based on appraisals and
knowledge of local market conditions.  It is not our intent to invest
in or own real estate as a long-term investment.  We seek to sell
properties acquired through foreclosure as quickly as circumstances
permit.  Set forth below is a roll-forward of investments in real
estate held for sale during the year ended December 31, 2008, followed by a
discussion of the basis for recording additional write-downs during the year
ended December 31, 2008:
 
 Description
                        Date
      Acquired
                        
                        Percentage
      of Ownership
                        
                        
                        Balance
      at December 31, 2007
                        
                        
                        Acquisitions
                        
                        
                        Write
      Downs
                        
                        
                        Cash
      Reductions
                        
                        
                        Net
      Cash Proceeds on Sales
                        
                        
                        Gain
      (Loss) on Sale of Real Estate
                        
                        
                        Balance
      at December 31, 2008Rio
      Vista Nevada, LLC (1)
                        12/21/2006
                        
                        
                        2%
                        
                        
                        $
                        546,000
                        
                        
                        $
                        --
                        
                        
                        $
                        (502,000
                        )
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        44,000Pirates
      Lake, LTD(2)
                        2/5/2008
                        
                        
                        16%
                        
                        
                        
                        --
                        
                        
                        
                        1,400,000
                        
                        
                        
                        (1,068,000
                        )
                        
                        
                        (29,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        303,000Forest
      Development, LLC (3)
                        3/7/2008
                        
                        
                        12%
                        
                        
                        
                        --
                        
                        
                        
                        301,000
                        
                        
                        
                        (89,000
                        )
                        
                        
                        --
                        
                        
                        
                        (174,000
                        )
                        
                        
                        (38,000
                        )
                        
                        
                        --Brawley
      CA 122, LLC(4)
                        5/1/2008
                        
                        
                        33%
                        
                        
                        
                        --
                        
                        
                        
                        495,000
                        
                        
                        
                        (189,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        306,000V
      & M Homes at the Palms, Inc. (5)
                        7/15/2008
                        
                        
                        36%
                        
                        
                        
                        --
                        
                        
                        
                        549,000
                        
                        
                        
                        (131,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        418,000MRPE,
      LLC (6)
                        8/11/2008
                        
                        
                        8%
                        
                        
                        
                        --
                        
                        
                        
                        1,160,000
                        
                        
                        
                        (630,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        530,000Jeffrey's
      Court, LLC(7)
                        9/3/2008
                        
                        
                        20%
                        
                        
                        
                        --
                        
                        
                        
                        1,000,000
                        
                        
                        
                        (275,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        725,000Cliff
      Shadows Properties, LLC(8)
                        9/8/2008
                        
                        
                        4.8%
                        
                        
                        
                        --
                        
                        
                        
                        811,000
                        
                        
                        
                        (403,000
                        )
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        408,000Total
                        
                        
                        
                        
                        
                        
                        $
                        546,000
                        
                        
                        $
                        5,716,000
                        
                        
                        $
                        (3,287,000
                        )
                        
                        $
                        (29,000
                        )
                        
                        $
                        (174,000
                        )
                        
                        $
                        (38,000
                        )
                        
                        $
                        2,734,000
 
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 (1)
              Rio Vista Nevada, LLC –
      During December 2006, we, VRM I and VRM II 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, 2008, our manager evaluated the carrying value
      of real estate acquired through foreclosure located in Cathedral City,
      California.  Based on our manager’s evaluation and an updated
      appraisal obtained during February 2009, the property was written down
      approximately $25.95 million, of which our portion was approximately $0.5
      million, during the year ended December 31,
  2008.
 
 (2)
              Pirates Lake, LTD –
      During February 2008, we, VRM I and VRM II 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 October 2008 and
      the current sales price, the property was written down approximately $6.5
      million, of which our portion was approximately $1.1
      million.  During June 2008, we received a deposit refund
      totaling $29,000.  The property is currently listed for sale at
      $2.0 million, which approximates the total book value, plus selling costs,
      for this property held by us, VRM I and VRM
II.
 
 (3)
              Forest Development, LLC
      – During March 2008, we, VRM I and VRM II acquired through foreclosure
      proceedings two 4,000 square foot single family residences, together with
      the four remaining lots in a subdivision, located on Mt. Charleston,
      NV.  Our manager has evaluated the carrying value of the
      property and based on that evaluation the property was written down
      approximately $0.8 million, of which our portion was approximately $0.1
      million.  During September 2008, we, VRM I and VRM II sold this
      property for approximately $1.4 million, of which our portion was
      approximately $0.2 million.  The sale resulted in a net loss of
      approximately $0.4 million, of which our portion was
    $38,000.
 
 (4)
              Brawley CA 122, LLC –
      During May 2008, we, VRM I, and VRM II 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 December 2008, the property was written down
      approximately $0.6 million, of which our portion was approximately $0.2
      million, during the year ended December 31, 2008.  The property
      is currently listed for sale.
 
 (5)
              V & M Homes at the Palms,
      Inc. – During July 2008, we, VRM I, and VRM II acquired through
      foreclosure proceedings an 80 acre parcel of land in Florence,
      AZ.  Our manager has evaluated the carrying value of the
      property and based on an updated appraisal obtained in February 2009, the
      property was written down approximately $0.4 million, of which our portion
      was approximately $0.1 million, during the year ended December 31,
      2008.  The property is currently listed for
  sale.
 
 (6)
              MRPE, LLC – During
      August 2008, we, VRM I, and VRM II acquired through foreclosure
      proceedings 132.03 acres of land within the Wolf Creek Estates Master
      Planned Community, located in Mesquite, NV.  Our manager has
      evaluated the carrying value of the property and based on its analysis,
      updated appraisal obtained in January 2009, and current sales price, the
      property was written down approximately $7.6 million, of which our portion
      was approximately $0.6 million, during the year ended December 31,
      2008.  The property is currently listed for sale at
      approximately $7.0 million, which approximates the total book value, plus
      selling costs, for this property held by us, VRM I and VRM
    II.
 
 (7)
              Jeffrey's Court, LLC –
      During September 2008, we, VRM I, and VRM II acquired through foreclosure
      proceedings 4.92 acres of land to be developed into 119 condominium units
      in Las Vegas, NV.  Our manager has evaluated the carrying value
      of the property and based on its analysis, updated appraisal obtained in
      January 2009, and current sales price, the property was written down
      approximately $1.4 million, of which our portion is approximately $0.3
      million, during the year ended December 31, 2008.  The property
      is currently listed for sale.
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 (8)
              Cliff Shadows Properties,
      LLC – During September 2008, we, VRM I, and VRM II acquired through
      foreclosure proceedings a 106 Unit Townhouse Project known as Cliff
      Shadows Townhomes located in Las Vegas, NV.  Our manager has
      evaluated the carrying value of the property and based on an updated
      appraisal obtained in September 2008 and the current purchase agreement,
      the property was written down approximately $8.4 million, of which our
      portion was approximately $0.4 million, during the year ended December 31,
      2008.  During January 2009, our manager received a sales
      agreement to purchase the property for approximately $9.6 million, of
      which our portion would be approximately $0.5 million.  On March
      6, 2009, we, VRM I, and VRM II completed the sale of 98 units, with the
      remaining units pending final
escrow.
 
 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
Operating Agreement, such acquisitions and sales are made without any mark up or
mark down.  No gain or loss is recorded on these transactions, as it
is not our intent to make a profit on the purchase or sale of such
investments.  The purpose is generally to diversify our portfolio by
syndicating loans, thereby providing us with additional capital to make
additional loans.
 
 Transactions with the
Manager
 
 Our
manager is entitled to receive from us a management (acquisition and advisory)
fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
income.  For the years ended December 31, 2007 and 2006, we recorded
fees to our manager of $7,000 and $45,000, respectively.  No
management fees were recorded during the year ended December 31,
2008.  We paid our manager $56,000 for unpaid fees owed to our manager
from our borrowers.  These unpaid fees became due and payable on
demand from us.
 
 We paid
pro rata distributions owed to our manager totaling $15,000, $46,000 and
$48,000, during the years ended December 31, 2008, 2007 and 2006, respectively,
based upon 54,863 units owned by our manager.
 
 During
November 2006, we sold a portion of a loan to our manager for $700,000 and
repurchased the same portion for $700,000.  No gain or loss was
recognized on this transaction.  There were no similar transaction
during the years ended December 31, 2008 and 2007.
 
 We
recognized approximately $0.9 million in rental income for the years ended
December 31, 2006, from Vestin Group related to an office building located in
Las Vegas, Nevada.  During November 2006, we sold this building to an
unrelated third party for a cash sales price of $14,250,000 and recognized a
gain of approximately $2.6 million, net of sales expenses, which included a 3.0%
sales commission to our manager of $428,000.  No similar sales were
recorded during the years ended December 31, 2008 and 2007.  This
building is leased to our parent corporation Vestin Group and the lease
agreement governing this property expires in August 2014.
 
 In
connection with the sale of such building, we arranged for a $985,000 letter of
credit in favor of the purchaser of the building (the “Purchaser”), which may be
drawn upon by the Purchaser should Vestin Group default on its lease
obligations.  Vestin Group is currently engaged in a dispute with the
Purchaser and has not paid certain amounts allegedly due under its lease
totaling approximately $0.3 million, as of March 1, 2009.  Vestin
Group has provided us with a written agreement to fully indemnify and hold us
harmless in the event that the Purchaser draws upon the letter of credit and we
incur an obligation to reimburse the bank which issued the letter of
credit.
 
 During
September 2008, we, VRM I and VRM II sold the Forest Development, LLC property
to an unrelated third party.  As part of the sale, we, VRM I and Fund
III paid our manager a commission of $46,000, shared pro-rata between us, VRM I
and VRM II.
 
 As of
December 31, 2008, we owed our manager $58,000.  As of December 31,
2007, we owed our manager $1,000.
 
  - 65
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  Transactions with Other
Related Parties
 
 During
the year ended December 31, 2007, we sold $1.3 million in real estate loans to
VRM II and purchased approximately $1.2 million in real estate loans from VRM
II.  During the year ended December 31, 2006, we sold $4.9 million in
real estate loans to VRM II and purchased $6.0 million in real estate loans from
VRM II.  There was no gain or loss associated with these
transactions.  During the year ended December 31, 2008, we had no
similar transactions with VRM II.
 
 As of
December 31, 2008, we owned 114,117 common shares of VRM II, representing
approximately 0.83% of their total outstanding common stock.  For the
years ended December 31, 2008, 2007 and 2006, we recorded $56,000, $144,000 and
$47,000, respectively, in dividend income based on the number of shares we held
on the dividend record dates.
 
 As of
December 31, 2008, we owed VRM II $9,000.  We had no intercompany
balance with VRM II as of December 31, 2007.
 
 We paid
pro rata distributions owed to inVestin totaling $10,000, $29,000 and $30,000,
during the years ended December 31, 2008, 2007 and 2006, respectively, based
upon 34,856 units owned by inVestin.
 
 We paid
pro rata distributions owed to Shustek Investments, a company wholly owned by
our manager’s CEO, totaling $37,000, $85,000 and $16,000, during the years ended
December 31, 2008, 2007 and 2006, respectively, based upon units owned by
Shustek Investments.  As of December 31, 2008, 2007 and 2006, Shustek
investments owned 160,857, 110,349 and 55,088, respectively.
 
 During
the years ended December 31, 2008, 2007 and 2006, we incurred $7,000, $10,000
and $20,000, respectively, for legal fees to the law firm of Levine, Garfinkel
& Katz in which the Secretary of Vestin Group has an equity ownership
interest in the law firm.
 
 NOTE
H — MEMBERS’ EQUITY
 
 Allocations
and Distributions
 
 In
accordance with our Operating Agreement, profits, gains and losses are to be
credited to and charged against each member’s capital account in proportion to
their respective capital accounts as of the close of business on the last day of
each calendar month.
 
 Distributions
are paid monthly to members; however, on August 27, 2008, we suspended payment
of distributions as a result of our current losses.  For the year
ended December 31, 2008, distributions to members were approximately $0.7
million.
 
 Working
Capital Reserves
 
 We are
required by our Operating Agreement to maintain working capital reserves of
approximately 3% of the aggregate capital accounts of the
members.  This reserve is available to pay any future expenses in
excess of revenues, satisfy obligations of underlying secured properties, expend
money to satisfy our unforeseen obligations and other permitted uses of our
working capital.  Working capital reserves up to 3% in cash, cash
equivalents, certificates of deposit, short-term investments and marketable
securities are excluded from the funds committed to investments in determining
what proportion of the offering proceeds and reinvested distributions have been
invested in real estate loans or real property.
 
  - 66
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 Table of Contents
  Value
of Members’ Capital Accounts
 
 In
accordance with Section 7.8 of our Operating Agreement, our manager reviewed the
value of our assets during the three months ended December 31,
2008.  Based on this review the value of members’ capital accounts was
adjusted from $7.55 per unit to $5.89 per unit, as of January 1,
2009.  The change in valuation is primarily for tax and capital
account purposes and does not reflect the change in the value of the units
calculated in accordance with GAAP.  Accordingly, unit prices
calculated under GAAP may be different than the adjusted price per
unit.
 
 Redemption
Limitation
 
 Under our
Operating Agreement, our members have limited withdrawal rights.  The
withdrawal rights are subject to various limitations set forth in our Operating
Agreement intended to protect our financial health and our status under the
Internal Revenue Code.  These limitations provide, among other things,
that withdrawals may not exceed 10% of the aggregate Members’ capital in any
calendar year and no more than $100,000 per members’ account in any calendar
year, subject to our manager’s discretion which may be exercised in accordance
to our Operating Agreement.  As of December 31, 2008, the total
redemptions made from inception were approximately $9.0
million.  Balances in Members’ capital accounts as of January 1, 2008
were approximately $26.3 million, including deferred income of approximately
$1.0 million, which limited redemptions to approximately $2.6 million for
calendar 2008.  Total redemptions during the year ended December 31,
2008, were approximately $2.8 million.  The remaining requests to
redeem, as of December 31, 2008, were estimated at approximately, $1.3 million
in 2009, $1.2 million in 2010, $1.3 million in 2011, $0.5 million in 2012, $0.4
million in 2013, $0.2 million in 2014, $0.2 million in 2015, $0.4 million in
2016, $0.1 million in 2017, $0.1 million in 2018 and $44,000 in 2019, subject to
unit valuation adjustments and results of operations.
 
 Our
manager is currently considering a proposal for submission to our members that
would seek approval to conduct an orderly liquidation of our
operations.  If our manager proceeds with such proposal, a special
meeting will be scheduled and proxy materials describing the proposed
liquidation plan and the reasons therefore will be disseminated to all holders
of record of our limited liability company units.
 
 NOTE
I — FAIR VALUE
 
 As of
December 31, 2008, financial assets and liabilities utilizing Level 1 inputs
included investment in marketable securities - related party.  We had
no assets or liabilities utilizing Level 2 inputs and assets and liabilities
utilizing Level 3 inputs included investments in real estate loans.
 
 To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment.  Accordingly, our degree of judgment exercised in
determining fair value is greatest for instruments categorized in Level
3.  In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy.  In such cases, FAS
157 requires that an asset or liability be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair
value.
 
 Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure.  Therefore, even when market assumptions are
not readily available, our own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement
date.  We use prices and inputs that are current as of the measurement
date, including during periods of market dislocation, such as the recent
illiquidity in the auction rate securities market.  In periods of
market dislocation, the observability of prices and inputs may be reduced for
many instruments.  This condition may cause, our financial instruments
to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
 
 FAS 157
requires that the valuation techniques used by us be consistent with at least
one of the three possible approaches: the market approach, income approach
and/or cost approach.  Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active
securities exchanges.  Our Level 2 inputs are primarily based on the
market approach of quoted prices in active markets or current transactions in
inactive markets for the same or similar collateral that do not require
significant adjustment based on unobservable inputs.  Our Level 3
inputs are primarily based on the income and cost approaches, specifically,
discounted cash flow analyses, which utilize significant inputs based on our
estimates and assumptions.
  - 67
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 The
following table presents the valuation of our financial assets and liabilities
as of December 31, 2008 measured at fair value on a recurring basis by the input
levels prescribed by FAS 157:
 
 Quoted
      Prices in Active Markets For Identical Assets (Level 1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservable Inputs (Level 3)
                    
                    
                    Balance
      at 12/31/2008AssetsInvestment
      in marketable securities - related party
                    
                    $
                    360,000
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    360,000Investment
      in real estate loans
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    7,863,000
                    
                    
                    $
                    7,863,000
 
 The
following table presents the changes in our financial assets and liabilities
that are measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from January 1, 2008 to December 31,
2008.  There were no liabilities measured at fair value on a recurring
basis using significant unobservable inputs as of January 1, 2008 and December
31, 2008.
 
 AssetsInvestment
      in real estate loansBalance
      on January 1, 2008
                    
                    $
                    20,770,000Change
      in temporary valuation adjustment included in net lossIncrease
      in allowance for loan losses
                    
                    
                    (5,898,000
                    )Change
      in impairment on restructured loans
                    
                    
                    (31,000
                    )Loss
      on sale of investment in real estate loan
                    
                    
                    (30,000
                    )Purchase
      and additions of assetsTransfer
      of real estate loans to real estate held for sale
                    
                    
                    (7,050,000
                    )Transfer
      of allowance on real estate loans to real estate held for
    sale
                    
                    
                    1,334,000New
      mortgage loans and mortgage loans bought
                    
                    
                    696,000Sales,
      pay downs and reduction of assetsCollections
      of principal and sales of investment in real estate loans
                    
                    
                    (2,124,000
                    )Reduction
      of allowance for loan loss related to sale of investment in real estate
      loan
                    
                    
                    144,000Temporary
      change in estimated fair value based on future cash flows
                    
                    
                    52,000Transfer
      to Level 1
                    
                    
                    --Transfer
      to Level 2
                    
                    
                    --Balance
      on December 31, 2008, net of temporary valuation
adjustment
                    
                    $
                    7,863,000
 
 NOTE
J — RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
January 2009, the FASB issued FASB Staff Position (“FSP”) EITF 99-20-1 – Amendments to the Impairment
Guidance of EITF Issue No. 99-20.  This FSP affects all
entities with certain beneficial interests in securitized financial assets
within the scope of EITF Issue No. 99-20.  In determining
other-than-temporary-impairment, Issue 99-20 requires reliance on market
participant assumptions about future cash flows.  While FAS 115 –
Accounting for Certain
Investments in Debt and Equity Securities” (“FAS 115”) uses these same
assumptions, it permits the use of reasonable management judgment on the
probability that the holder will be unable to collect all amounts
due.  This FSP brings the impairment model on beneficial interest held
by a transferor in securitized financial assets, to be similar to the impairment
model of FAS 115.  The FSP is effective for interim and annual
reporting periods ending after December 15, 2008.  The adoption of
this standard did not have a material impact on our financial position or
results of operations.
 
  - 68
-
 Table of Contents
  In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8 –
Disclosures about Transfers of
Financial Assets and Interests in Variable Interest Entities (“FSP 140-4
and 46(R)-8”).  This FSP requires additional disclosures by public
entities with continuing involvement in transfers of financial assets to special
purpose entities and with variable interests in VIEs, including sponsors that
have a variable interest in a VIE.  Additionally, this FSP requires
certain disclosures to be provided by a public entity that is (1) a sponsor of a
qualifying special-purpose entity (“SPE”) that holds a variable interest in the
qualifying SPE but was not the transferor (non-transferor) of financial assets
to the qualifying SPE, and (2) a servicer of a qualifying SPE that holds a
significant variable interest in the qualifying SPE but was not the transferor
(non-transferor) of financial assets to the qualifying SPE.  This FSP
is effective for the first reporting period (interim or annual) that ends after
December 15, 2008.  The adoption of this standard did not have a
material impact on our financial position or results of operations.
 
 NOTE
K— LEGAL MATTERS INVOLVING THE MANAGER
 
 The
United States Securities and Exchange Commission (the “Commission”), conducted
an investigation of certain matters related to us, our manager, Vestin Capital,
VRM I and VRM II.  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 our units and units in Fund II, the
predecessor to VRM II.  The Respondents consented to the entry of a
cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr.
Shustek’s suspension from association with any broker or dealer for a period of
six months, which expired in March 2007.  In addition, the Respondents
agreed to implement certain undertakings with respect to future sales of
securities.  We are not a party to the Order.
 
 On
November 21, 2005, Desert Land filed a complaint in the state District Court of
Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
complaint is substantially similar to a complaint previously filed by Desert
Land in the United States District Court, which complaint was dismissed by the
United States Court of Appeals for the Ninth Circuit, which dismissal was upheld
when the United States Supreme Court denied Desert Land’s Writ of
Certiorari.  The action is based upon allegations that Del Mar
Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans
arranged by them in 1999, prior to the formation of Fund II.  On March
6, 2006, Desert Land amended the state court complaint to name VRM
I.  Desert Land alleges that one or more of the defendants have
transferred assets to other entities without receiving reasonable value
therefore; alleges plaintiffs are informed and believe that defendants have made
such transfers with the actual intent to hinder, delay or defraud Desert Land;
that such transfers made the transferor insolvent and that sometime between
February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I
for that purpose.
 
 The state
court complaint further alleges that Desert Land is entitled to void such
transfers and that pursuant to NRS 112.20, Desert Land is entitled to an
injunction to enjoin defendants from further disposition of
assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin
Group and Vestin Mortgage for any losses and expenses in connection with the
action, and Mr. Shustek has guaranteed the indemnification.  In
December 2008, this lawsuit was settled.  The settlement has no effect
on us.
 
 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, Inc. and VRM II alleging that these Vestin
entities improperly influenced the former RightStar trustees to transfer trust
funds to VRM II.
 
  - 69
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 Table of Contents
  On May 9,
2007, VRM I, VRM II, 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, VRM II and Vestin Mortgage in part to fund the
trusts statutory minimum balances.  VRM I, VRM II, 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.  VRM I, VRM II,
Vestin Mortgage and the State of Hawaii have received offers and are currently
requesting, entertaining, and reviewing bids on the RightStar
properties.  The final outcome of this auction cannot be determined at
this time.
 
 VRM I and
Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The court certified a class of all former Fund I unit holders
who voted against the merger of Fund I into Vestin Realty Mortgage I,
Inc.  The trial is currently scheduled to begin on June 19,
2009.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s Operating Agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM II
and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
class action filed in San Diego Superior Court by certain plaintiffs who allege,
among other things, that they were wrongfully denied appraisal rights in
connection with the merger of Fund II into Vestin Realty Mortgage II,
Inc.  The court certified a class of all former Fund II unit holders
who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc.,
and a subclass of all class members who were over the age of 60 and Nevada
residents at the time of the merger.  The trial is currently scheduled
to begin on June 19, 2009.  The Defendants believe that the
allegations are without merit and that they have adequate
defenses.  The Defendants intend to undertake a vigorous
defense.  The terms of VRM II’s management agreement and Fund II’s
Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and
Michael V. Shustek may be eligible for indemnification by VRM II with respect to
the above actions.
 
 VRM I,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund I into
VRM I.  The action seeks monetary damages, punitive damages, and
rescission .  The trial is currently scheduled to begin on April 19,
2010.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM I’s management
agreement and Fund I’s operating agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM I with respect to the above actions.
 
 VRM II,
Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
civil action filed by 88 sets of plaintiffs representing approximately 138
individuals (“Plaintiffs”),in
District Court for Clark County, Nevada.  The Plaintiffs allege, among
other things, that Defendants: breached certain alleged contractual obligations
owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and
misrepresented or omitted material facts regarding the conversion of Fund II
into VRM II.  The action seeks monetary damages, punitive damages and
rescission.  The trial is currently scheduled to begin on April 19,
2010.  The Defendants believe that the allegations are without merit
and that they have adequate defenses.  The Defendants intend to
undertake a vigorous defense.  The terms of VRM II’s management
agreement and Fund II’s operating agreement contain indemnity provisions whereby
Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by
VRM II with respect to the above actions.  VRM II, Vestin Mortgage,
Inc. and Michael Shustek have entered into confidential settlement agreements
with individual plaintiffs who collectively held approximately 10% of the total
shares at issue in the action.  In addition, four individual
plaintiffs have voluntarily withdrawn their claims against us, Vestin Mortgage,
Inc. and Michael Shustek with prejudice.
 
  - 70
-
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  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.  Our manager believes that it is not a party to any other
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 the manager’s net income in any particular
period.
 
 NOTE
L — LEGAL MATTERS INVOLVING THE COMPANY
 
 From time
to time, we may become involved in litigation in the ordinary course of
business.  We do not believe that any pending legal proceedings are
likely to have a material adverse effect on our financial condition or results
of operations or cash flows.  It is not possible to predict the
outcome of any such proceedings.
 
 NOTE
M — SEGMENT INFORMATION
 
 In
November 2006, we sold our investment in real property to an unrelated third
party.  As of December 31, 2008, 2007 and 2006, we had no investments
in real property.  A Special Meeting of our members was held on March
5, 2007 to vote on approval of the Third Amended and Restated Operating
Agreement, which limits the Company’s investment objectives to investment in
real estate loans.  Accordingly, we now operate as one business
segment.
 
 Operating
segments are components of an enterprise in which separate financial information
is available that is regularly reviewed by the chief operating decision makers
in assessing performance and deciding how to allocate
resources.  Reportable segments consist of one or more operating
segments with similar economic characteristics, products and services,
production processes, type of customer, distribution system and regulatory
environment.
 
 The
information provided for Segment Reporting is based on internal reports utilized
by management.  The presentation and allocation of overhead and the
net contribution for the operating segments may not reflect the actual economic
costs, contribution or results of operations of the segments as stand-alone
businesses.  If a different basis of allocation were utilized, the
relative contributions of the segments might differ, but the relative trends in
segments would, in management’s view, likely not be impacted.
 
 Financial
information concerning our reportable segments is presented as follows for the
year ended December 31, 2006:
  - 71
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 For
      the Year Ended December 31, 2006
                    
                    
                    Investment
      in Real Estate Loans
                    
                    
                    Investment
      in Real EstateRevenuesInterest
      income from investments in real estate loans
                    
                    $
                    2,292,000
                    
                    
                    $
                    2,292,000
                    
                    
                    $
                    --Interest
      income from secured borrowings
                    
                    
                    118,000
                    
                    
                    
                    118,000
                    
                    
                    
                    --Rental
      income
                    
                    
                    944,000
                    
                    
                    
                    --
                    
                    
                    
                    944,000Gain
      on sale of building
                    
                    
                    2,624,000
                    
                    
                    
                    --
                    
                    
                    
                    2,624,000Dividend
      Income
                    
                    
                    47,000
                    
                    
                    
                    47,000
                    
                    
                    
                    --Other
                    
                    
                    94,000
                    
                    
                    
                    94,000
                    
                    
                    
                    --Total
      revenues
                    
                    
                    6,119,000
                    
                    
                    
                    2,551,000
                    
                    
                    
                    3,568,000Operating
      expensesManagement
      fees
                    
                    
                    45,000
                    
                    
                    
                    34,000
                    
                    
                    
                    11,000Professional
      fees
                    
                    
                    207,000
                    
                    
                    
                    161,000
                    
                    
                    
                    46,000Professional
      fees-related party
                    
                    
                    20,000
                    
                    
                    
                    16,000
                    
                    
                    
                    4,000Expenses
      related to real estate held for sale
                    
                    
                    12,000
                    
                    
                    
                    12,000
                    
                    
                    
                    --Other
                    
                    
                    24,000
                    
                    
                    
                    21,000
                    
                    
                    
                    3,000Total
      operating expenses
                    
                    
                    308,000
                    
                    
                    
                    244,000
                    
                    
                    
                    64,000EBITDA*
                    
                    
                    5,811,000
                    
                    
                    
                    2,307,000
                    
                    
                    
                    3,504,000Less:Depreciation
      and Amortization
                    
                    
                    204,000
                    
                    
                    
                    --
                    
                    
                    
                    204,000Interest
      expense related to secured borrowings
                    
                    
                    116,000
                    
                    
                    
                    116,000
                    
                    
                    
                    --Interest
      expense related to investment in real estate
                    
                    
                    661,000
                    
                    
                    
                    --
                    
                    
                    
                    661,000NET
      INCOME
                    
                    $
                    4,830,000
                    
                    
                    $
                    2,191,000
                    
                    
                    $
                    2,639,000
 
 *EBITDA
represents Earnings Before Interest, Taxes, Depreciation, and
Amortization.  We present EBITDA because we consider it an important
supplemental measure of our performance but it does not represent cash
flows.  EBITDA is a measure of our performance that is not required
by, or presented in accordance with, GAAP.  EBITDA is not a
measurement of our financial performance under GAAP and should not be considered
as an alternative to net earnings, operating income or any other performance
measures derived in accordance with GAAP or as an alternative to cash flow from
operating activities as a measure of our liquidity.  We compensate for
these limitations by relying primarily on our GAAP results and using EBITDA only
supplementally.  A reconciliation of EBITDA to net income is set forth
above.
 
 Although
depreciation and amortization are non-cash charges, the assets being depreciated
or amortized often will have to be replaced in the future, and EBITDA does not
reflect any cash requirements for such replacements.  Other companies
in our industry may calculate EBITDA differently than we do, limiting its
usefulness as a comparative measure.  In addition, EBITDA does not
reflect the impact of earnings or charges resulting from matters we consider not
to be indicative of our ongoing operations.
 
 Although
depreciation and amortization are non-cash charges, the assets being depreciated
or amortized often will have to be replaced in the future, and EBITDA does not
reflect any cash requirements for such replacements.  Other companies
in our industry may calculate EBITDA differently than we do, limiting its
usefulness as a comparative measure.  In addition, EBITDA does not
reflect the impact of earnings or charges resulting from matters we consider not
to be indicative of our ongoing operations.
 
  - 72
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  NOTE
N — SELECTED QUARTERLY FINANCIAL DATED (UNAUDITED)
 
 The
following schedule is a selected quarterly financial data for the fiscal year
ended December 31, 2008:
 
 For
      the Year Ended December 31, 20081st
      Quarter
                    
                    
                    2nd
      Quarter
                    
                    
                    3rd
      Quarter
                    
                    
                    4th
      Quarter
                    
                    
                    YearTotal
      revenues
                    
                    $
                    425,000
                    
                    
                    
                    280,000
                    
                    
                    
                    151,000
                    
                    
                    
                    89,000
                    
                    
                    $
                    945,000Total
      operating expenses
                    
                    
                    76,000
                    
                    
                    
                    2,432,000
                    
                    
                    
                    1,040,000
                    
                    
                    
                    2,837,000
                    
                    
                    
                    6,385,000Total
      non-operating income (loss)
                    
                    
                    53,000
                    
                    
                    
                    44,000
                    
                    
                    
                    (1,195,000
                    )
                    
                    
                    (19,000
                    )
                    
                    
                    (1,117,000
                    )Total
      loss from real estate held for sale
                    
                    
                    (617,000
                    )
                    
                    
                    (614,000
                    )
                    
                    
                    (1,352,000
                    )
                    
                    
                    (873,000
                    )
                    
                    
                    (3,456,000
                    )NET
      LOSS
                    
                    $
                    (215,000
                    )
                    
                    $
                    (2,722,000
                    )
                    
                    $
                    (3,436,000
                    )
                    
                    $
                    (3,640,000
                    )
                    
                    $
                    (10,013,000
                    )Net
      loss allocated to members
                    
                    $
                    (215,000
                    )
                    
                    $
                    (2,722,000
                    )
                    
                    $
                    (3,436,000
                    )
                    
                    $
                    (3,640,000
                    )
                    
                    $
                    (10,013,000
                    )Net
      loss allocated to members per weighted average membership
      units
                    
                    $
                    (0.09
                    )
                    
                    $
                    (1.19
                    )
                    
                    $
                    (1.51
                    )
                    
                    $
                    (1.62
                    )
                    
                    $
                    (4.30
                    )Weighted
      average membership units
                    
                    
                    2,522,875
                    
                    
                    
                    2,278,865
                    
                    
                    
                    2,271,557
                    
                    
                    
                    2,248,825
                    
                    
                    
                    2,330,146Annualized
      rate of return to members (a)
                    
                    
                    -3.39%
                    
                    
                    
                    -47.48%
                    
                    
                    
                    -59.48%
                    
                    
                    
                    -63.82%
                    
                    
                    
                    -42.59%Cash
      distributions
                    
                    $
                    392,000
                    
                    
                    
                    258,000
                    
                    
                    
                    39,000
                    
                    
                    
                    --
                    
                    
                    $
                    689,000Cash
      distributions per weighted average membership units
                    
                    $
                    0.16
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.30Weighted
      average term of outstanding loans
                    
                    17
      months
                    
                    
                    18
      months
                    
                    
                    21
      months
                    
                    
                    21
      months
                    
                    
                    21
      months
 
 (a)
              The
      annualized rate of return to members in 2008 is calculated based upon the
      net GAAP income allocated to members per weighted average units as of
      December 31, 2008 divided by the number of days during the period (91, 91,
      92, 92 and 366 for the first quarter, second quarter, third quarter,
      fourth quarter and year, respectively) and multiplied by three hundred and
      sixty six (366) days, then divided by (the weighted average cost per unit)
      $10.09.
 
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  The
following schedule is a selected quarterly financial data for the fiscal year
ended December 31, 2007:
 
 For
      the Year Ended December 31, 20071st
      Quarter
                  
                  
                  2nd
      Quarter
                  
                  
                  3rd
      Quarter
                  
                  
                  4th
      Quarter
                  
                  
                  YearTotal
      revenues
                  
                  $
                  786,000
                  
                  
                  $
                  672,000
                  
                  
                  $
                  508,000
                  
                  
                  $
                  536,000
                  
                  
                  $
                  2,502,000Total
      operating expenses
                  
                  
                  134,000
                  
                  
                  
                  110,000
                  
                  
                  
                  110,000
                  
                  
                  
                  969,000
                  
                  
                  
                  1,323,000Total
      non-operating income
                  
                  
                  38,000
                  
                  
                  
                  49,000
                  
                  
                  
                  84,000
                  
                  
                  
                  68,000
                  
                  
                  
                  239,000Total
      loss from real estate held for sale
                  
                  
                  (3,000
                  )
                  
                  
                  (62,000
                  )
                  
                  
                  (22,000
                  )
                  
                  
                  (6,000
                  )
                  
                  
                  (93,000
                  )NET
      INCOME (LOSS)
                  
                  $
                  687,000
                  
                  
                  $
                  549,000
                  
                  
                  $
                  460,000
                  
                  
                  $
                  (371,000
                  )
                  
                  $
                  1,325,000Net
      income (loss)allocated to members
                  
                  $
                  687,000
                  
                  
                  $
                  549,000
                  
                  
                  $
                  460,000
                  
                  
                  $
                  (371,000
                  )
                  
                  $
                  1,325,000Net
      income (loss) allocated to members per weighted average membership
      units
                  
                  $
                  0.25
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.18
                  
                  
                  $
                  (0.15
                  )
                  
                  $
                  0.51Weighted
      average membership units
                  
                  
                  2,745,524
                  
                  
                  
                  2,523,618
                  
                  
                  
                  2,525,561
                  
                  
                  
                  2,525,561
                  
                  
                  
                  2,579,314Annualized
      rate of return to members (a)
                  
                  
                  10.06%
                  
                  
                  
                  8.65%
                  
                  
                  
                  7.16%
                  
                  
                  
                  -5.78%
                  
                  
                  
                  5.09%Cash
      distributions
                  
                  $
                  618,000
                  
                  
                  $
                  546,000
                  
                  
                  $
                  521,000
                  
                  
                  $
                  508,000
                  
                  
                  $
                  2,193,000Cash
      distributions per weighted average membership units
                  
                  $
                  0.23
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.85Weighted
      average term of outstanding loans
                  
                  14
      months
                  
                  
                  15
      months
                  
                  
                  16
      months
                  
                  
                  17
      months
                  
                  
                  17
      months
 
 (a)
              The
      annualized rate of return to members in 2007 is calculated based upon the
      net GAAP income allocated to members per weighted average units as of
      December 31, 2007 divided by the number of days during the period (90, 91,
      92, 92 and 365 for the first quarter, second quarter, third quarter,
      fourth quarter and year, respectively) and multiplied by three hundred and
      sixty five (365) days, then divided by (the weighted average cost per
      unit) $10.09.
 
 NOTE
O — SUBSEQUENT EVENTS
 
 On
January 16, 2009, we, VRM I, and VRM II foreclosed upon Redwood Place, LLC and
classified the property as real estate held for sale.  During February
2009, our manager received a sales agreement to purchase the property for
approximately $8.7 million, of which our portion would be approximately $0.7
million.
 
 As of
March 4, 2009, one performing loan, totaling $0.2 million, subsequently became
delinquent in interest payments.  Our manager has commenced
foreclosure proceedings, and is proceeding with legal action to enforce the
personal guarantees.  However, no assurance can be given at this time
that full payment will be received on this newly delinquent loan.
 
 During
January 2009, our manager received a sales agreement to purchase the Cliff
Shadows Properties, LLC property for approximately $9.6 million of which our
portion would be approximately $0.5 million.  On March 6, 2009, we,
VRM I, and VRM II completed the sale of 98 units, with the remaining units
pending final escrow.
 
 On March
23, 2008, we, VRM I and VRM II, sold the Peoria 180, LLC loan to an unrelated
third party for $3.0 million.  The sale resulted in no gain or
loss.
 
  - 74
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 Table of Contents
  
 SUPPLEMENTARY
INFORMATION
 
 ScheduleIVESTIN
      FUND III, LLCREAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOAN ROLL FORWARDBalance,
      December 31, 2005
                    
                    $
                    23,037,000Additions
      during the periodNew
      real estate loans and additions
                    
                    
                    22,696,000Real
      estate loans bought
                    
                    
                    6,700,000Deductions
      during the periodCollections
      of principal and reductions
                    
                    
                    19,184,000Foreclosed
      loans (Real estate held for sale)
                    
                    
                    577,000Real
      estate loans sold
                    
                    
                    5,600,000Net
      Change in 2006
                    
                    
                    4,035,000Balance,
      December 31, 2006
                    
                    $
                    27,072,000Additions
      during the periodNew
      real estate loans and additions
                    
                    
                    5,456,000Real
      estate loans bought
                    
                    
                    1,154,000Deductions
      during the periodCollections
      of principal and reductions
                    
                    
                    9,131,000Foreclosed
      loans (Real estate held for sale)
                    
                    
                    --Real
      estate loans sold
                    
                    
                    2,700,000Net
      Change in 2007
                    
                    
                    (5,221,000
                    )Balance,
      December 31, 2007
                    
                    $
                    21,851,000Additions
      during the periodNew
      real estate loans and additions
                    
                    
                    665,000Real
      estate loans bought
                    
                    
                    -Deductions
      during the periodCollections
      of principal and reductions
                    
                    
                    1,879,000Foreclosed
      loans (Real estate held for sale)
                    
                    
                    7,049,000Real
      estate loans sold
                    
                    
                    276,000Net
      Change in 2008
                    
                    
                    (8,539,000
                    )Balance,
      December 31, 2008
                    
                    $
                    13,312,000
 
 
  - 75
-
 Table of Contents
  
 
 ScheduleIIVESTIN
      FUND III, LLCREAL
      ESTATE LOANS ON REAL ESTATE *REAL
      ESTATE LOANS BY TYPE OF PROPERTYAs
      of December 31, 2008:Type
      of Property
                            
                            Interest
      Rate
                            
                            
                            Face
      Amount of Loan
                            
                            
                            Carrying
      Amount of Loan
                            
                            
                            Maturity
      Date
                            
                            
                            Amount
      Subject to DelinquencyAcquisition
      and Development
                            
                            
                            --
                            
                            
                            $
                            --
                            
                            
                            $
                            --
                            
                            
                            
                            --
                            
                            
                            $
                            --Commercial
                            
                            
                            6%-15
                            %
                            
                            $
                            110,559,000
                            
                            
                            $
                            7,815,000
                            
                            
                            09/06-04/10
                            
                            
                            $
                            6,360,000Construction
                            
                            
                            10.5
                            %
                            
                            $
                            28,910,000
                            
                            
                            $
                            1,622,000
                            
                            
                            
                            10/08
                            
                            
                            $
                            -Land
                            
                            
                            11%-13
                            %
                            
                            $
                            43,150,000
                            
                            
                            $
                            3,875,000
                            
                            
                            05/08-06/08
                            
                            
                            $
                            3,875,000Total
                            
                            
                            
                            
                            
                            $
                            182,619,000
                            
                            
                            $
                            13,312,000
                            
                            
                            
                            
                            
                            
                            $
                            10,235,000As
      of December 31, 2007:Type
      of Property
                            
                            Interest
      Rate
                            
                            
                            Face
      Amount of Loan
                            
                            
                            Carrying
      Amount of Loan
                            
                            
                            Maturity
      Date
                            
                            
                            Amount
      Subject to DelinquencyAcquisition
      and Development
                            
                            
                            12%-13.75
                            %
                            
                            $
                            11,270,000
                            
                            
                            $
                            3,138,000
                            
                            
                            07/07-08/07
                            
                            
                            $
                            3,137,000Commercial
                            
                            
                            10%-14
                            %
                            
                            $
                            126,155,000
                            
                            
                            $
                            9,108,000
                            
                            
                            09/06-12/08
                            
                            
                            $
                            1,000,000Construction
                            
                            
                            10.5%-12
                            %
                            
                            $
                            49,395,000
                            
                            
                            $
                            2,501,000
                            
                            
                            10/06-07/08
                            
                            
                            $
                            301,000Land
                            
                            
                            10.5%-14
                            %
                            
                            $
                            79,525,000
                            
                            
                            $
                            7,104,000
                            
                            
                            06/07-07/08
                            
                            
                            $
                            1,400,000Total
                            
                            
                            
                            
                            
                            $
                            266,345,000
                            
                            
                            $
                            21,851,000
                            
                            
                            
                            
                            
                            
                            $
                            5,838,000
 
 
 ScheduleIIIVESTIN
      FUND III, LLCREAL
      ESTATE LOANS ON REAL ESTATE *REAL
      ESTATE LOANS BY LIEN POSITIONAs
      of December 31, 2008:Lien
      Position
                          
                          Face
      Amount of Loan
                          
                          
                          Interest
      Rate
                          
                          
                          Carrying
      Amount of Loan
                          
                          Maturity
      Date
                          
                          Amount
      Subject to Delinquency1st
                          
                          $
                          139,964,000
                          
                          
                          
                          6%-13
                          %
                          
                          $
                          12,326,000
                          
                          09/06-02/10
                          
                          $
                          10,235,0002nd
                          
                          $
                          42,655,000
                          
                          
                          
                          10.5%-15
                          %
                          
                          $
                          986,000
                          
                          02/09-04/10
                          
                          $
                          --Total
                          
                          $
                          182,619,000
                          
                          
                          
                          
                          
                          
                          $
                          13,312,000
                          
                          
                          
                          $
                          10,235,000As
      of December 31, 2007:Lien
      Position
                          
                          Face
      Amount of Loan
                          
                          
                          Interest
      Rate
                          
                          
                          Carrying
      Amount of Loan
                          
                          Maturity
      Date
                          
                          Amount
      Subject to Delinquency1st
                          
                          $
                          265,345,000
                          
                          
                          
                          10%-14
                          %
                          
                          $
                          21,551,000
                          
                          09/06-12/08
                          
                          $
                          5,838,0002nd
                          
                          $
                          1,000,000
                          
                          
                          
                          10.5
                          %
                          
                          $
                          300,000
                          
                          09/06-12/08
                          
                          $
                          --Total
                          
                          $
                          266,345,000
                          
                          
                          
                          
                          
                          
                          $
                          21,851,000
                          
                          
                          
                          $
                          5,838,000
 
 
  - 76
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 Table of Contents
  
 ScheduleIVVESTIN
      FUND III, LLCREAL
      ESTATE LOANS ON REAL ESTATEREAL
      ESTATE LOANS THAT EXCEED THREE PERCENT OF THE PORTFOLIOAs
      of December 31, 2008:Description
      of Loan
                        
                        Interest
      Rate
                        
                        Final
      Maturity Date
                        Periodic
      Payment Terms
                        Lien
      Position
                        
                        Face
      Amount of Loan
                        
                        
                        Carrying
      Amount of Loan
                        
                        
                        Amount
      Subject to DelinquencyCommercial
                        
                        
                        10.50%
                        
                        02/28/09
                        Fixed
      Interest only, Balloon Payment $468,000
                        2nd
                        
                        $
                        3,147,000
                        
                        
                        $
                        468,000
                        
                        
                        $
                        --Commercial
                        
                        
                        12.00%
                        
                        09/01/06
                        Fixed
      Interest only, Balloon Payment $1,000,000
                        1st
                        
                        $
                        4,394,000
                        
                        
                        $
                        1,000,000
                        
                        
                        $
                        1,000,000Commercial
                        
                        
                        12.00%
                        
                        12/05/08
                        Fixed
      Interest only, Balloon Payment $1,520,000
                        1st
                        
                        $
                        6,000,000
                        
                        
                        $
                        1,520,000
                        
                        
                        $
                        1,520,000Commercial
                        
                        
                        6.00%
                        
                        02/02/10
                        Fixed
      Interest only, Balloon Payment $469,000
                        1st
                        
                        $
                        7,080,000
                        
                        
                        $
                        469,000
                        
                        
                        $
                        --Commercial
                        
                        
                        11.50%
                        
                        04/05/08
                        Fixed
      Interest only, Balloon Payment $1,290,000
                        1st
                        
                        $
                        14,977,000
                        
                        
                        $
                        1,290,000
                        
                        
                        $
                        1,290,000Commercial
                        
                        
                        10.00%
                        
                        10/29/08
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        16,000,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        1,400,000Commercial
                        
                        
                        12.00%
                        
                        02/12/09
                        Fixed
      Interest only, Balloon Payment $1,150,000
                        1st
                        
                        $
                        19,453,000
                        
                        
                        $
                        1,150,000
                        
                        
                        $
                        1,150,000Construction
                        
                        
                        10.50%
                        
                        10/30/08
                        Fixed
      Interest only, Balloon Payment $404,000
                        1st
                        
                        $
                        7,185,000
                        
                        
                        $
                        404,000
                        
                        
                        $
                        --Construction
                        
                        
                        10.50%
                        
                        10/30/08
                        Fixed
      Interest only, Balloon Payment $403,000
                        1st
                        
                        $
                        7,210,000
                        
                        
                        $
                        403,000
                        
                        
                        $
                        --Construction
                        
                        
                        10.50%
                        
                        10/30/08
                        Fixed
      Interest only, Balloon Payment $404,000
                        1st
                        
                        $
                        7,225,000
                        
                        
                        $
                        404,000
                        
                        
                        $
                        --Construction
                        
                        
                        10.50%
                        
                        10/30/08
                        Fixed
      Interest only, Balloon Payment $410,000
                        1st
                        
                        $
                        7,290,000
                        
                        
                        $
                        410,000
                        
                        
                        $
                        --Land
                        
                        
                        13.00%
                        
                        05/16/08
                        Fixed
      Interest only, Balloon Payment $1,000,000
                        1st
                        
                        $
                        7,150,000
                        
                        
                        $
                        1,000,000
                        
                        
                        $
                        1,000,000Land
                        
                        
                        13.00%
                        
                        05/10/08
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        8,500,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        1,400,000Land
                        
                        
                        11.00%
                        
                        06/30/08
                        Variable
      Interest only, Balloon Payment $1,182,000
                        1st
                        
                        $
                        18,000,000
                        
                        
                        $
                        1,182,000
                        
                        
                        $
                        1,182,000Total
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        133,611,000
                        
                        
                        $
                        12,500,000
                        
                        
                        $
                        9,942,000
 
  - 77
-
 Table of Contents
  
 As
      of December 31, 2007:Description
      of Loan
                        
                        
                        Interest
      Rate
                        
                        Final
      Maturity Date
                        Periodic
      Payment Terms
                        Lien
      Position
                        
                        Face
      Amount of Loan
                        
                        
                        Carrying
      Amount of Loan
                        
                        
                        Amount
      Subject to DelinquencyA/D
                        
                        
                        
                        12.00%
                        
                        08/01/07
                        Fixed
      Interest only, Balloon Payment $750,000
                        1st
                        
                        $
                        2,270,000
                        
                        
                        $
                        750,000
                        
                        
                        $
                        750,000A/D
                        
                        
                        
                        13.75%
                        
                        08/16/07
                        Variable
      Interest only, Balloon Payment $1,387,000
                        1st
                        
                        $
                        3,900,000
                        
                        
                        $
                        1,387,000
                        
                        
                        $
                        1,387,000A/D
                        
                        
                        
                        12.00%
                        
                        07/17/07
                        Fixed
      Interest only, Balloon Payment $1,000,000
                        1st
                        
                        $
                        5,100,000
                        
                        
                        $
                        1,000,000
                        
                        
                        $
                        1,000,000Commercial
                        
                        
                        
                        12.00%
                        
                        09/01/06
                        Fixed
      Interest only, Balloon Payment $1,000,000
                        1st
                        
                        $
                        4,431,000
                        
                        
                        $
                        1,000,000
                        
                        
                        $
                        1,000,000Commercial
                        
                        
                        
                        11.50%
                        
                        04/05/08
                        Fixed
      Interest only, Balloon Payment $1,294,000
                        1st
                        
                        $
                        15,026,147
                        
                        
                        $
                        1,294,000
                        
                        
                        $
                        --Commercial
                        
                        
                        
                        10.50%
                        
                        06/14/08
                        Fixed
      Interest only, Balloon Payment $1,300,000
                        1st
                        
                        $
                        8,750,000
                        
                        
                        $
                        1,300,000
                        
                        
                        $
                        --Commercial
                        
                        
                        
                        10.00%
                        
                        02/29/08
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        16,000,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        --Commercial
                        
                        
                        
                        10.50%
                        
                        07/12/08
                        Fixed
      Interest only, Balloon Payment $1,500,000
                        1st
                        
                        $
                        25,588,000
                        
                        
                        $
                        1,500,000
                        
                        
                        $
                        --Commercial
                        
                        
                        
                        12.00%
                        
                        12/05/08
                        Fixed
      Interest only, Balloon Payment $1,520,000
                        1st
                        
                        $
                        6,000,000
                        
                        
                        $
                        1,520,000
                        
                        
                        $
                        --Construction
                        
                        
                        
                        12.00%
                        
                        03/16/08
                        Fixed
      Interest only, Balloon Payment $811,000
                        1st
                        
                        $
                        16,985,000
                        
                        
                        $
                        811,000
                        
                        
                        $
                        --Land
                        
                        
                        
                        13.00%
                        
                        06/30/07
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        10,000,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        1,400,000Land
                        
                        
                        
                        11.00%
                        
                        06/30/08
                        Variable
      Interest only, Balloon Payment $1,182,000
                        1st
                        
                        $
                        18,000,000
                        
                        
                        $
                        1,182,000
                        
                        
                        $
                        --Land
                        
                        
                        
                        13.00%
                        
                        02/10/08
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        8,500,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        --Land
                        
                        
                        
                        13.00%
                        
                        02/16/08
                        Fixed
      Interest only, Balloon Payment $1,000,000
                        1st
                        
                        $
                        7,150,000
                        
                        
                        $
                        1,000,000
                        
                        
                        $
                        --Land
                        
                        
                        
                        14.00%
                        
                        01/27/08
                        Fixed
      Interest only, Balloon Payment $1,400,000
                        1st
                        
                        $
                        17,000,000
                        
                        
                        $
                        1,400,000
                        
                        
                        $
                        --Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        164,700,147
                        
                        
                        $
                        18,344,000
                        
                        
                        $
                        5,537,000
 
  - 78
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 Table of Contents
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
 
 None.
 
 ITEM
      9A.
              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 manager, including our manager’s 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-K, our manager carried out an
evaluation, under the supervision and with the participation of our manager’s
CEO and CFO, as of December 31, 2008, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) under the Exchange Act.  Based upon our manager’s
evaluation, our manager’s CEO and CFO concluded that, as of December 31, 2008,
our disclosure controls and procedures are designed at a reasonable assurance
level and are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our manager’s 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 manager, including our manager’s CEO and CFO,
does not expect that our controls and procedures will prevent all
errors.
 
 The
certifications of the our manager’s 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.
 
 Management’s Report on
Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for our Company, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act.  Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United
States.  Internal control over financial reporting includes those
policies and procedures that: pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of our Company; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States, and that receipts and expenditures of our Company are being made
only in accordance with authorizations of management and directors of our
Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our Company's
assets that could have a material effect on our financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
 
  - 79
-
 Table of Contents
  Management
has conducted an assessment, including testing, of the effectiveness of our
internal control over financial reporting as of December 31, 2008.  In
making its assessment of internal control over financial reporting, management
used the criteria inInternal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  Based on this
assessment, management, with the participation of the Chief Executive and Chief
Financial Officers, believes that, as of December 31, 2008, the Company’s
internal control over financial reporting is effective based on those
criteria.
 
 Our
internal control over financial reporting as of December 31, 2008 have been
audited by Moore Stephens Wurth Frazer and Torbet, LLP, our independent
registered public accounting firm, as stated in its report, which appears below
in this Item 9A.
 
 Changes in Internal Control
Over Financial Reporting
 
 As
required by Rule 13a-15(d) under the Exchange Act, our management, including our
manager’s CEO and our CFO, has evaluated our internal control over financial
reporting to determine whether any changes occurred during the fourth 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 fourth fiscal quarter of 2008.
  ITEM
      9A(T).
                CONTROLS
      AND PROCEDURES
 Not
applicable.
 
 ITEM
      9B.
              OTHER
      INFORMATION
 
 None.
  - 80
-
 Table of Contents
  
 PARTIII
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVEOFFICERS AND CORPORATE
    GOVERNANCE
 
 We do not
have any directors or officers.  We are managed on a day-to-day basis
by Vestin Mortgage, a privately held company wholly owned by Vestin Group,
Inc.  Vestin Group, Inc. was previously a publicly held company and
maintained an audit committee consisting of independent
directors.  The Vestin Group audit committee previously functioned as
the equivalent of our audit committee.  Since May 2005, Vestin Group
has been a privately held company and since March 2006, it no longer has any
independent directors.  Michael Shustek, the principal executive
officer of our manager, is the sole director of Vestin Group,
Inc.  Accordingly, we do not have an audit committee or any body that
functions as the equivalent of an audit committee.  Our units are not
listed on any exchange and we are not required to have an audit committee which
consists of independent directors and meets the other requirements of Section
10A(m) of the Securities Exchange Act of 1934 and the rules promulgated
thereunder.
 
 The
following table sets forth the names, ages as of March 4, 2009 and positions of
the individuals who serve as directors, executive officers and certain
significant employees of Vestin Mortgage (our manager), Vestin Group, Vestin
Originations or our affiliates:
 
 Name
                Age
                TitleMichael
      V. Shustek
                50
                President,
      Chief Executive Officer and Chairman of Vestin GroupRocio
      Revollo
                47
                Chief
      Financial Officer of Vestin GroupMichael
      J. Whiteaker
                59
                Vice
      President of Regulatory Affairs of Vestin GroupDaniel
      B. Stubbs
                47
                Senior
      Vice President of Vestin GroupEdwin
      H. Bentzen IV
                32
                Corporate
      Controller of Vestin Group
 
 Directors,
Executive Officers and certain significant employees of Vestin Mortgage (our
manager), Vestin Group, Vestin Originations or our affiliates
 
 Michael V. Shustek has been a
director of our manager and Chairman of the board of directors, Chief Executive
Officer and a director of Vestin Group since April 1999.  In addition,
Mr. Shustek has been a Director and the CEO of VRM I and VRM II since January
2006.  In February 2004, Mr. Shustek became the President of Vestin
Group.  Mr. Shustek also serves on the loan committee of our manager
and its affiliates.  In 2003, Mr. Shustek became the Chief Executive
Officer of our manager.  In 1995, Mr. Shustek founded Del Mar
Mortgage, and has been involved in various aspects of the real estate industry
in Nevada since 1990.  In 1993, he founded Foreclosures of Nevada,
Inc., a company specializing in non-judicial foreclosures.  In 1993,
Mr. Shustek also started Shustek Investments, a company that originally
specialized in property valuations for third-party lenders or
investors.
 
 In 1997,
Mr. Shustek was involved in the initial founding of Nevada First Bank, with the
largest initial capital base of any new state charter in Nevada’s
history.  Mr. Shustek has co-authored two books, entitled “Trust Deed
Investments,” on the topic of private mortgage lending, and “If I Can Do It, So
Can You.”  Mr. Shustek is a guest lecturer at the University of
Nevada, Las Vegas, where he also has taught a course in Real Estate Law and
Ethics.  Mr. Shustek received a Bachelor of Science degree in Finance
at the University of Nevada, Las Vegas.  See Note K Legal Matters Involving The
Manager in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for information
regarding legal matters involving our manager and Mr. Shustek.
 
 Rocio Revollowas appointed as the
Chief Financial Officer of Vestin Group on March 21, 2007.  In
addition, Ms. Revollo was appointed the CFO of VRM I and VRM II on March 21,
2007.  Prior to being appointed as the CFO of VRM I, VRM II and Vestin
Group, Ms. Revollo served as the Corporate Controller of Vestin Group since June
2005.  Ms. Revollo previously served as Corporate Controller for Sobel
Westex from January 2002 through May 2005.  From April 1999 to
December 2001, Ms. Revollo was a financial consultant for Re:Source
Connections.  Ms. Revollo is a Certified Public Accountant and worked
for the accounting firm of KPMG LLP.  She received a Bachelor of
Business Administration degree in Accounting and a Bachelor of Arts degree in
Communication Studies from the University of Nevada, Las Vegas.
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 Michael J. Whiteaker has been
Vice President of Regulatory Affairs of our manager and Vestin Group since May
1999.  Mr. Whiteaker is experienced in the banking and finance
regulatory fields, having served with the State of Nevada, Financial Institution
Division from 1982 to 1999 as its Supervisory Examiner, responsible for the
financial and regulatory compliance audits of all financial institutions in
Nevada.  Mr. Whiteaker has worked extensively on matters pertaining to
both state and federal statutes, examination procedures, policy determination
and credit administration for commercial and real estate loans.  From
1973 to 1982, Mr. Whiteaker was Assistant Vice President of Nevada National
Bank, responsible for a variety of matters including loan review.  Mr.
Whiteaker has previously served on the Nevada Association of Mortgage Brokers,
Legislative Committee and is a past member of the State of Nevada, Mortgage
Advisory Council.  He currently is a director of the Private Lenders
Group, an organization devoted to creating and maintaining the highest
professional standards possible among licensed Nevada Mortgage
brokers.
 
 Daniel B. Stubbs has been the
Senior Vice President of Underwriting and Secretary of our manager since January
2000.  Mr. Stubbs heads the loan department for our manager and its
affiliates and is responsible for reviewing loan requests and performs due
diligence necessary for risk analysis in connection with the underwriting
process.  In addition, Mr. Stubbs serves on the loan committee and
acts as liaison for our manager and its affiliates with the various commercial
loan participants.  Mr. Stubbs has 15 years experience in the title
insurance industry and has received a Bachelor of Arts degree in Communication
Studies from the University of Nevada, Las Vegas.
 
 Edwin H. Bentzen IVhas been
the Corporate Controller of Vestin Group since April 2007.  Prior to
being Corporate Controller of Vestin Group, Mr. Bentzen served as a Financial
Reporting Analyst for Vestin Group since January 2006.  Mr. Bentzen
served at Ameristar Casinos Inc. as Senior Internal Auditor from June 2005
through January 2006 and an Internal Auditor from June 2003 to June
2005.  Prior to June 2003, Mr. Bentzen was engaged in public tax
accounting at a local firm in Las Vegas.  Mr. Bentzen is a Certified
Internal Auditor and received a Masters of Science in Accountancy and a Bachelor
of Science degree in Hotel Administration, with an emphasis in gaming, from the
University of Nevada, Las Vegas.
 
 Code
of Ethics
 
 As we do
not have any executive officers we have not adopted a Code of
Ethics.  However, each of the executive officers of Vestin Mortgage,
our manager, are under an obligation to follow the Code of Ethics of Vestin
Group that was filed as Exhibit 14.1 to Vestin Group’s Form 10-KSB for the year
ended December 31, 2003.  If our manager or Vestin Group makes any
substantive amendments to the Code of Ethics or if our manager grants any
waiver, including any implicit waiver, from a provision of the Code of Ethics to
its chief executive officer, chief financial officer or chief accounting
officer, we will disclose the nature of such amendment or waiver on our website
or in a Report on Form 8-K or quarterly or annual report under the Securities
and Exchange Act of 1934.
 
 ITEM
      11.
              EXECUTIVE
      COMPENSATION
 
 Not
Applicable.
 
 ITEM
      12.
              SECURITY
      OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
 
 Shown
below is certain information as of January 31, 2009, with respect to beneficial
ownership, as that term is defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), of number of membership units by
the only persons or entities known to us to be a beneficial owner of more than
5% of the outstanding membership units.  Unless otherwise noted, the
percentage ownership is calculated based on 2,248,825 membership units as of
March 4, 2009.
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 Name
      and Address of
                Beneficial
      Owner
              
              Amount
      and Nature of
                Beneficial
      Ownership
              
              Percent
      of ClassMichael
      V. Shustek
                6149
      South Rainbow Boulevard
                Las
      Vegas, NV 89118
              
              Sole
      voting and dispositive power of 250,576 units (1)
              
              11.14%
 
 The
following table sets forth the total number and percentage of our membership
units beneficially owned as of March 17, 2008 by:
 
 ·
              each
      of our manager’s directors;
 
 ·
              our
      manager’s chief executive officer and other executive officers;
      and
 
 ·
              all
      of our manager’s executive officers and directors as a
    group.
 
 Unless
otherwise noted, the percentage ownership is calculated based on 2,248,825 units
of our total outstanding membership units as of March 4, 2009.
 
 Common
      Shares Beneficially OwnedBeneficial
      Owner
                
                Address
                
                Number
                
                PercentMichael
      V. Shustek (1)
                
                6149
      S. Rainbow Blvd.
                  Las
      Vegas, NV  89118
                
                250,576
                
                11.14%Rocio
      Revollo
                
                6149
      S. Rainbow Blvd.
                  Las
      Vegas, NV  89118
                
                --
                
                --All
      directors and executive officers of our manager as a group
                
                
                
                250,576
                
                11.14%
 
 (1)
              Includes
      54,863 units held by our manager and 160,857 units held by Shustek
      Investments and 34,856 units held by inVestin.  Mr. Shustek is
      the Chairman, President and Chief Executive Officer of our manager and
      indirectly owns all of the capital stock of our manager through Vestin
      Group, Inc. a company wholly owned by Mr. Shustek.  Mr. Shustek
      is the sole owner, Chairman, President and Chief Executive Officer of
      Shustek Investments, Inc.  Mr. Shustek is the sole owner,
      Chairman, President and Chief Executive Officer of inVestin Nevada,
      Inc.  Mr. Shustek has sole voting and investment power in all
      these units.
 
 ITEM
      13.
              CERTAIN
      RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
 
 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.
 
 Please
refer to Note G – Related
Party Transactions in Part II, Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K, for information
regarding our related party transactions, which are incorporated herein by
reference.
 
 ITEM
      14.
              PRINCIPAL
      ACCOUNTINGFEES AND
SERVICES
 
 During
the years ended December 31, 2008 and 2007, Moore Stephens Wurth Frazer and
Torbet, LLP (“Moore Stephens”) provided various audit, audit related and
non-audit services to us as follows:
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 December
      31, 2008
                    
                    
                    December
      31, 2007Audit
      Fees
                    
                    $
                    105,000
                    
                    
                    $
                    98,000Audit
      Related Fees
                    
                    $
                    --
                    
                    
                    $
                    --Tax
      Fees
                    
                    $
                    --
                    
                    
                    $
                    --All
      Other Fees
                    
                    $
                    --
                    
                    
                    $
                    --
 
 Mr.
Shustek, the sole director of our manager, has considered whether provision of
the services described regarding audit related fees, tax fees and all other fees
above were compatible with maintaining the independent accountant’s independence
and has determined that such services did not adversely affect Moore Stephens’
independence.
 
 Our
manager has direct responsibility to review and approve the engagement of the
independent auditors to perform audit services or any permissible non-audit
services.  All audit and non-audit services to be provided by the
independent auditors must be approved in advance by our manager.  Our
manager may not engage the independent auditors to perform specific non-audit
services proscribed by law or regulation.  All services performed by
independent auditors under engagements entered into on or after January 21,
2005, were approved by our manager pursuant to their pre-approval policy, and
none was approved pursuant to the de minimusexception to the
rules and regulations of the Securities Exchange Act of 1934, Section
10A(i)(1)(B), on pre-approval.
 
 PARTIV
 
 ITEM
      15.
              EXHIBITS, FINANCIAL STATEMENT
  SCHEDULES
 
 The
following are filed as part of this Report:
 
 (a)
1.  Financial
Statements
 
 The list
of the financial statements contained herein are contained in Part II, Item 8
Financial Statements and
Supplementary Data on this Annual Report on Form 10-K, which is hereby
incorporated by reference.
 
 (a)
2.  Financial Statement
Schedules
 
 The list
of the financial statements schedules contained herein are contained in Part II,
Item 8 Financial Statements
and Supplementary Data on this Annual Report on Form 10-K, which is
hereby incorporated by reference.
 
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  (a)
3.  Exhibits
 
 EXHIBITINDEX
 
 
 Exhibit
      No.
              
              Description
      of Exhibits3.1(1)
              
              Articles
      of Organization3.2(2)
              
              Certificate
      of Amendment to Articles of Organization3.3(3)
              
              Amended
      and Restated Operating Agreement (included as Exhibit A to the
      prospectus)4.4(4)
              
              Distribution
      Reinvestment Plan10.9(6)
              
              Office
      lease agreement dated March 31, 2003 by and between Luke Properties, LLC
      and Vestin Group, Inc.10.10
              
              Indemnification agreement dated March 25, 2009 by
      and between Vestin Group, Inc. and Vestin Fund III,
  LLC31.1
              
              Section 302 Certification of Michael V.
      Shustek31.2
              
              Section 302 Certification of Rocio
      Revollo32
              
              Certification Pursuant to U.S.C. 18 Section
      1350
 
 (1)
              
              Incorporated
      herein by reference to our Pre-Effective Amendment No. 3 to Form S-11
      Registration Statement filed on September 2, 2003, File No.
      333-105017.(2)
              
              Incorporated
      herein by reference to our Form 10-Q filed on August 16, 2004, File No.
      333-105017.(3)
              
              Incorporated
      herein by reference to our Schedule 14A Definitive Proxy Statement filed
      on January 29, 2007 File No. 000-51301.(4)
              
              Incorporated
      herein by reference to Exhibit 4.4 of our Post-Effective Amendment No. 5
      to Form S-11 Registration Statement filed on April 28, 2006, File No.
      333-105017.(5)
              
              Incorporated
      herein by reference to our Form 10-Q filed on November 15, 2004, File No.
      333-105017.(6)
              
              Incorporated
      herein by reference to our Form 10-KSB filed on March 30, 2005, File No.
      333-105017.(7)
              
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q for the three
      months ended September 30, 2006 filed on November 8, 2006, File No.
      000-51301
 
 
 
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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
      Fund III, LLCBy:
              
              Vestin
      Mortgage, Inc., its sole ManagerBy:
              
              /s/
      Michael V. ShustekMichael
      V. ShustekChief
      Executive Officer and Sole Director of the Manager(Principal
      Executive Officer of Manager)By:
              
              /s/ Rocio
      RevolloRocio
      RevolloChief
      Financial Officer of the Manager(Principal
      Financial and Accounting Officer of the
Manager)
 
 Date:  March
26, 2009
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