Vestin Realty Mortgage II 10Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Transition Period From _______ To ________

COMMISSION FILE NUMBER 333-125121

VESTIN REALTY MORTGAGE II, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		61-1502451
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

6149 SOUTH RAINBOW BOULEVARD, LAS VEGAS, NEVADA 89118

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number: 702.227.0965

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of November 10, 2008, there were 14,569,952 shares of the Company’s Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS

		Page

Part I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	1

	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2008 and 2007	2

	Consolidated Statements of Equity and Other Comprehensive Loss (unaudited) for the Nine Months Ended September 30, 2008	3

	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2008 and 2007	4

	Notes to Consolidated Financial Statements (unaudited)	6

	Report of Independent Registered Public Accounting Firm	37

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	52

Item 4T	Controls and Procedures	53

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Submission of Matters to a Vote of Security Holders	65

Item 5.	Other Information	65

Item 6.	Exhibits	66

	SIGNATURES	67

	Exhibit 31.1

	Exhibit 31.2

	Exhibit 32

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PART I - FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

	September 30, 2008			December 31, 2007
	(Unaudited)
Assets
Cash	$	26,522,000		$	20,241,000
Certificates of deposit		--			102,000
Investment in marketable securities - related party		1,203,000			2,460,000
Interest and other receivables, net of allowance of $160,000 at September 30, 2008 and December 31, 2007		1,244,000			4,162,000
Notes receivable, net of allowance of $2,340,000 at September 30, 2008 and $2,619,000 at December 31, 2007		--			--
Real estate held for sale		41,956,000			28,563,000
Investment in real estate loans, net of allowance for loan losses of $50,686,000 at September 30, 2008 and $12,873,000 at December 31, 2007		182,459,000			278,190,000
Due from related parties		70,000			--
Investment in equity affiliate		100,000			100,000
Assets under secured borrowings		14,669,000			--
Deferred financing costs		2,650,000			2,213,000
Other assets		154,000			137,000

Total assets	$	271,027,000		$	336,168,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Accounts payable and accrued liabilities	$	2,319,000		$	2,641,000
Due to related parties		--			122,000
Secured borrowings		13,651,000			--
Junior subordinated notes payable		56,350,000			60,100,000
Note payable		94,000			--
Dividend payable		--			1,546,000

Total liabilities		72,414,000			64,409,000

Commitments and contingencies

Stockholders' equity
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued		--			--
Treasury stock, at cost (427,411 shares)		(3,004,000	)		(1,440,000	)
Common stock, $0.0001 par value; 100,000,000 shares authorized; 14,569,952 shares issued and outstanding at September 30, 2008 and 14,866,219 shares issued and outstanding at December 31, 2007		1,000			1,000
Additional paid in capital		278,550,000			278,367,000
Accumulated deficit		(76,934,000	)		(4,198,000	)
Accumulated other comprehensive loss		--			(971,000	)

Total stockholders' equity		198,613,000			271,759,000

Total liabilities and stockholders' equity	$	271,027,000		$	336,168,000

See review report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated statements.

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VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For The Three Months Ended						For The Nine Months Ended
	9/30/2008			9/30/2007			9/30/2008			9/30/2007

Revenues
Interest income from investment in real estate loans	$	3,605,000		$	6,836,000		$	16,084,000		$	19,915,000
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		--			--			--			1,044,000
Other income		82,000			103,000			675,000			902,000
Total revenues		3,687,000			6,939,000			16,759,000			21,861,000

Operating expenses
Management fees - related party		274,000			274,000			823,000			822,000
Provision for loan loss		19,966,000			1,309,000			42,253,000			1,309,000
Interest expense		1,828,000			1,362,000			4,756,000			2,008,000
Professional fees		1,359,000			1,769,000			1,954,000			2,667,000
Professional fees - related party		47,000			34,000			110,000			110,000
Provision for doubtful accounts related to receivable		--			235,000			--			235,000
Other		450,000			179,000			998,000			630,000
Total operating expenses		23,924,000			5,162,000			50,894,000			7,781,000

Income (loss) from operations		(20,237,000	)		1,777,000			(34,135,000	)		14,080,000

Non-operating income (loss)
Gain on purchase of debt		--			--			1,556,000			--
Dividend income - related party		--			73,000			86,000			200,000
Interest income from banking institutions		126,000			720,000			308,000			1,088,000
Impairment on marketable securities – related party		(2,228,000	)		--			(2,228,000	)		--
Total non-operating income (loss)		(2,102,000	)		793,000			(278,000	)		1,288,000

Income from real estate held for sale
Revenue related to real estate held for sale		--			25,000			--			34,000
Net loss on sale of real estate held for sale		(259,000	)		--			(259,000	)		--
Gain on sale of real estate held for sale - seller financed		--			--			--			808,000
Expenses related to real estate held for sale		(525,000	)		(969,000	)		(1,002,000	)		(2,781,000	)
Write downs on real estate held for sale		(17,023,000	)		(85,000	)		(29,802,000	)		(1,113,000	)
Total loss from real estate held for sale		(17,807,000	)		(1,029,000	)		(31,063,000	)		(3,052,000	)

Income (loss) before provision for income taxes		(40,146,000	)		1,541,000			(65,476,000	)		12,316,000

Provision for income taxes		--			--			--			--

NET INCOME (LOSS)	$	(40,146,000	)	$	1,541,000		$	(65,476,000	)	$	12,316,000

Basic and diluted earnings per weighted average common share	$	(2.72	)	$	0.10		$	(4.41	)	$	0.83

Dividends declared per common share	$	--		$	0.38		$	0.49		$	1.18

Weighted average common shares		14,772,583			14,894,003			14,844,070			14,926,027

See review report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated statements.

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VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

	Treasury Stock					Common Stock
	Number of Shares		Amount			Number of Shares			Amount		Additional Paid-in-Capital		Accumulated deficit			Accumulated Other Comprehensive Loss			Total
Stockholders' Equity at December 31, 2007		109,634	$	(1,440,000	)		14,866,219		$	1,000	$	278,367,000	$	(4,198,000	)	$	(971,000	)	$	271,759,000

Comprehensive Loss:

Net Loss														(65,476,000	)					(65,476,000	)

Recognition of Unrealized Loss on Marketable Securities – Related Party																	971,000			971,000

Comprehensive Loss																				(64,505,000	)

Purchase of Treasury Stock		317,777		(1,564,000	)		(317,777	)		--										(1,564,000	)

Dividends Declared to Stockholders														(7,260,000	)					(7,260,000	)

Reinvestment of Dividends							21,510			--		183,000								183,000

Stockholders' Equity at September 30, 2008 (Unaudited)		427,411	$	(3,004,000	)		14,569,952		$	1,000	$	278,550,000	$	(76,934,000	)	$	--		$	198,613,000

See review report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated statements.

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VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For The Nine Months Ended
	9/30/2008			9/30/2007
Cash flows from operating activities:
Net income (loss)	$	(65,476,000	)	$	12,316,000
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for doubtful accounts related to receivable		--			235,000
Impairment of marketable securities - related party		2,228,000
Write downs on real estate held for sale		29,802,000			1,113,000
Loss on sale of real estate held for sale		259,000			--
Gain on sale of real estate held for sale - seller financed		--			(808,000	)
Gain on purchase of debt		(1,556,000	)		--
Recovery of allowance for doubtful notes receivable included in other income		(87,000	)		(594,000	)
Provision for loan loss		42,253,000			1,309,000
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		--			(1,044,000	)
Amortized interest income		(94,000	)		(1,323,000	)
Amortized financing costs, included in interest expense		461,000			44,000
Change in operating assets and liabilities:
Interest and other receivables		2,918,000			(598,000	)
Due to/from related parties		(192,000	)		33,000
Other assets		150,000			405,000
Accounts payable and accrued liabilities		(281,000	)		5,100,000
Net cash provided by operating activities		10,385,000			16,188,000

Cash flows from investing activities:
Investments in real estate loans		(74,998,000	)		(92,019,000	)
Purchase of investments in real estate loans from:
VRM I		(1,800,000	)		--
Fund III		--			(1,300,000	)
Other related parties		--			(661,000	)
Third parties		(5,001,000	)		(14,246,000	)
Proceeds from loan payoffs		46,784,000			82,759,000
Sale of investments in real estate loans to:
VRM I		500,000			--
Third parties		42,155,000			3,319,000
Proceeds related to investment in real estate held for sale		535,000			100,000
		925,000			--
Principal payments on real estate held for sale-seller financed		--			3,651,000
Legal expenses paid and applied against loan allowance		--			(94,000	)
Proceeds from note receivable		87,000			641,000
Purchase of marketable securities - related parties		--			(731,000	)
Purchase of investments in certificates of deposit		(2,000	)		(1,026,000	)
Proceeds from investments in certificates of deposit		104,000			1,175,000
Deposit liability		--			570,000
Net cash provided (used) by investing activities	$	9,289,000		$	(17,862,000	)

See review report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated statements.

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VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For The Nine Months Ended
	9/30/2008			9/30/2007
Cash flows from financing activities:
Principal payments on notes payable	$	(114,000	)	$	(256,000	)
Proceeds from issuance of notes payable		--			2,000
Proceeds from issuance of debt		--			60,000,000
Cash used for purchase of debt		(2,194,000	)		--
Deferred financing costs		(898,000	)		(2,301,000	)
Dividends paid to stockholders, net of reinvestments		(8,367,000	)		(19,013,000	)
Dividends paid to stockholders - related party		(256,000	)		(467,000	)
Purchase of treasury stock at cost		(1,564,000	)		(1,440,000	)
Net cash provided (used) in financing activities		(13,393,000	)		36,525,000

NET CHANGE IN CASH		6,281,000			34,851,000

Cash, beginning of period		20,241,000			16,841,000

Cash, end of period	$	26,522,000		$	51,692,000


Supplemental disclosures of cash flows information:
Income taxes paid	$	--		$	--
Interest paid	$	4,756,000		$	2,008,000

Non-cash investing and financing activities:
Dividend payable	$	--		$	1,728,000
Reinvestment of dividends	$	183,000		$	407,000
Payoff of loans funded through secured borrowings	$	6,331,000		$	13,796,000
Loans funded through secured borrowing	$	19,982,000		$	--
Interest reserves related to secured borrowings	$	1,018,000		$	--
Note payable relating to prepaid E & O insurance	$	208,000		$	227,000
Real estate held for sale acquired through foreclosure	$	44,915,000		$	--
Loan rewritten with same or similar collateral	$	1,690,000		$	30,918,000
Purchase of equity investment related to junior subordinated notes payable	$	--			100,000
Unearned revenue from loans rewritten with same or similar property as collateral	$	--		$	454,000
Decrease in deposit liability related to pay off of real estate held for sale - seller financed	$	--		$	4,507,000
Adjustment to note receivable and related allowance	$	192,000		$	978,000
Prepaid amount applied to accounts payable	$	41,000		$	--
Recognition of unrealized loss on marketable securities – related party	$	971,000		$	--
Unrealized gain on marketable securities - related party	$	--		$	80,000

See review report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated statements.

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VESTIN REALTY MORTGAGE II, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(UNAUDITED)

NOTE A — ORGANIZATION

Vestin Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”). Vestin Realty Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland corporation for the sole purpose of effecting a merger with Fund II. On March 31, 2006, Fund II merged into VRM II and the members of Fund II received one share of VRM II’s common stock for each membership unit of Fund II. References in this report to the “Company”, “we”, “us” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006. Because we were a limited liability company (“LLC”) during the prior periods reflected in this report, we make reference to Fund II’s “members” rather than “stockholders” in reporting our financial results.

We invest in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Management Agreement as “Mortgage Assets”). We commenced operations in June 2001.

We operate as a real estate investment trust (“REIT”). We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we are required to have a December 31 fiscal year end.

Our manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin Group”), a Delaware corporation. Michael Shustek, the CEO and director of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries. Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property. On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”) that has continued the business of brokerage, placement and servicing of real estate loans. Vestin Originations is a wholly owned subsidiary of Vestin Group. On September 1, 2007, the servicing of real estate loans was assumed by our manager.

Pursuant to our management agreement, our manager implements our business strategies on a day-to-day basis, manages and provides services to us, and provides similar services to our subsidiaries. Without limiting the foregoing, our manager performs other services as may be required from time to time for management and other activities relating to our assets, as our manager shall deem appropriate. Consequently, our operating results are dependent upon our manager’s ability and performance in managing our operations and servicing our assets.

Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”), Vestin Fund III, LLC (“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a company wholly owned by our manager’s CEO. These entities also invest in real estate loans.

The consolidated financial statements include the accounts of us and our wholly owned taxable REIT subsidiary, TRS II, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.

See review report of Independent Registered Public Accounting Firm.

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On June 22, 2007, we completed the issuance of $60.1 million in unsecured trust preferred securities through Vestin II Capital Trust I (“VCT I”), a special purpose business trust. VCT I, is a Delaware statutory trust. Our interest in VCT I is accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that VCT I is a variable interest entity in which we are not the primary beneficiary under Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”).

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K and our quarterly reports filed on Form 10-Q for the periods ended March 31, 2008 and June 30, 2008.

Management Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.

Revenue Recognition

Interest is recognized as revenue when earned according to the terms of the loans, using the effective interest method. We do not accrue interest income on loans once they are determined to be impaired. A loan is impaired when based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due. Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction or when management does not believe our investment in the loan is fully recoverable.

Investments in Real Estate Loans

We may from time to time acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio within these parameters. Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.

Investments in real estate loans are secured by deeds of trust or mortgages. Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity. We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost. Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.

See review report of Independent Registered Public Accounting Firm.

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Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received, to reflect subsequent changes in value estimates. Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included as income.

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry. We, our manager and Vestin Originations generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:

Declines in real estate market conditions, which can cause a decrease in expected market value;

Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and

Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Real Estate Held For Sale

Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. It is not our intent to invest in or own real estate as a long-term investment. In accordance with Statement of Financial Accounting Standards (“FAS”) 144 – Accounting for the Impairment or Disposal of Long Lived Assets (“FAS 144”), we seek to sell properties acquired through foreclosure as quickly as circumstances permit. The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

See review report of Independent Registered Public Accounting Firm.

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Management classifies real estate held for sale when the following criteria are met:

Management commits to a plan to sell the properties;

The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

An active program to locate a buyer and other actions required to complete a sale have been initiated;

The sale of the property is probable;

The property is being actively marketed for sale at a reasonable price; and

Withdrawal or significant modification of the sale is not likely.

Real Estate Held For Sale – Seller Financed

We occasionally finance sales of foreclosed properties to independent third parties. In order to record a sale of real estate when the seller is providing continued financing, FAS 66 – Accounting for Sales of Real Estate ("FAS 66'') requires the buyer of the real estate to make minimum initial and continuing investments. Minimum initial investments as defined by FAS 66 range from 10% to 25% based on the type of real estate sold. In addition, FAS 66 limits commitments and contingent obligations incurred by a seller in order to record a sale.

Because we foreclose on non-performing loans with raw land or developments in progress, available financing for such properties is often limited and we frequently provide financing up to 100% of the selling price on these properties. In addition, we may make additional loans to the buyer to continue development of a property. Although sales agreements are consummated at closing, they lack adequate initial investment by the buyer to qualify as a sales transaction as defined in FAS 66. These sales agreements are not recorded as a sale until the requirements of FAS 66 are met.

These sales agreements are recorded under the deposit method or cost recovery method as defined in FAS 66. Under the deposit method, no profit is recognized and any cash received from the buyer is reported as a deposit liability on the balance sheet. Under the cost recovery method, no profit is recognized until payments by the buyer exceed the carrying basis of the property sold. Principal payments received will reduce the related receivable, and interest collections will be recorded as unrecognized gross profit on the balance sheet. The carrying values of these properties are included in real estate held for sale on the accompanying consolidated balance sheets.

In cases where the investment by the buyer is significant (generally 20% or more) and the buyer has an adequate continuing investment, the purchase money debt is not subject to future subordination, and a full transfer of risks and rewards has occurred, we will use the full accrual method. Under the full accrual method, a sale is recorded and the balance remaining to be paid is recorded as a normal note. Interest is recorded as income when received.

Classification of Operating Results from Real Estate Held for Sale

FAS 144 – Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144'') generally requires operating results from long lived assets held for sale to be classified as discontinued operations as a separately stated component of net income. Our operations related to real estate held for sale are separately identified in the accompanying consolidated statements of income.

See review report of Independent Registered Public Accounting Firm.

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Secured Borrowings

The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari passu basis in certain real estate loans with us and/or VRM I and/or Fund III (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.

Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements. In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid. Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing in accordance with FAS 140. We do not receive any revenues for entering into secured borrowing arrangements.

Investment in Marketable Securities – Related Party

Investment in marketable securities – related party consists of stock in VRM I. The securities are stated at fair value as determined by the market price as of September 30, 2008. All securities are classified as available-for-sale under the provisions of FAS 115 – Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”).

We evaluate our available-for-sale investment for other-than-temporary impairment charges in accordance with Emerging Issues Task Force, or EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and it’s Application to Certain Investments.” FAS 115 and EITF 03-1 require us to determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life), and, if the impairment is other than temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value.

According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case. The following are a few examples of the factors which, individually or in combination, indicate that a decline is other than temporary and that a write down of the carrying value is required:

The length of the time and the extent to which the market value has been less than cost;

The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or

The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

See review report of Independent Registered Public Accounting Firm.

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Fair Value Disclosures

On January 1, 2008, we adopted FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“FAS 159), but we did not make any fair value elections with respect to any of our eligible assets or liabilities as permitted under the provisions of FAS 159 as of September 30, 2008. FAS 159 permits companies to choose to measure certain financial assets and liabilities at fair value (the “fair value option”). If the fair value option is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g. debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings.

We chose not to elect the fair value option for our financial assets and liabilities existing on January 1, 2008, and did not elect the fair value option for financial assets and liabilities transacted during the nine months ended September 30, 2008. Therefore, the adoption of FAS 159 had no impact on our consolidated financial statements.

On January 1, 2008, we also adopted FAS No. 157, Fair Value Measurements, as required for financial assets and liabilities (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2, a one-year deferral of FAS 157’s fair value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of FAS 157 for our financial assets and liabilities did not have a material impact on our consolidated financial statements. We do not expect the adoption of FAS 157 as it pertains to non-financial assets and liabilities to have a material impact on our consolidated financial statements.

Under FAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. FAS 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed, in accordance with FAS 128 – Earnings per Share (“FAS 128”), by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised. We had no outstanding common share equivalents during the three and nine months ended September 30, 2008 and 2007. The following is a computation of the EPS data for the three and nine months ended September 30, 2008 and 2007:

See review report of Independent Registered Public Accounting Firm.

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	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2008			2007		2008			2007

Net income (loss) available to common stockholders	$	(40,146,000	)	$	1,541,000	$	(65,476,000	)	$	12,316,000

Weighted average number of common shares outstanding during the period		14,772,583			14,894,003		14,844,070			14,926,027

Basic and diluted earnings per weighted average common share	$	(2.72	)	$	0.10	$	(4.41	)	$	0.83

Common Stock Dividends

During the nine months ended September 30, 2008, cash dividends declared totaled approximately $0.49 per common share, representing ordinary income. There were no dividends declared during the three months ended September 30, 2008.

During June 2008, our Board of Directors decided to temporarily suspend the payment of dividends. We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated.

Treasury Stock

On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares. Subject to applicable securities laws, repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be funded from our available cash. As of September 30, 2008, we had purchased 427,411 shares of treasury stock through the repurchase program noted above. These shares are carried on our books at a cost totaling approximately $3.0 million.

Segments

We operate as one business segment.

Principles of Consolidation

The accompanying consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Our interest in VCT I (see Note I – Junior Subordinated Notes) is accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that VCT I is a variable interest entity in which we are not the primary beneficiary under FIN 46R.

See review report of Independent Registered Public Accounting Firm.

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Income Taxes

We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met. Our taxable income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income. Certain assets of ours are held in a taxable REIT subsidiary (“TRS”). The income of a TRS is subject to federal and state income taxes. The net income tax provision for the nine months ended September 30, 2008, was approximately zero.

Reclassifications

Certain reclassifications have been made to the prior periods’ consolidated financial statements to conform to the current period presentation.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments with concentration of credit and market risk include cash and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit, which at times may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk related to cash deposits based on management review of these financial institutions. As of September 30, 2008 and December 31, 2007, we had approximately $23.1 million and $19.7 million, respectively, in excess of the federally insured limits.

As of September 30, 2008, 32%, 26%, 18% and 9% of our loans were in Nevada, Arizona, Oregon and California, respectively, compared to 45%, 15%, 16% and 7%, at December 31, 2007, respectively. As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.

At September 30, 2008, the aggregate amount of loans to our three largest borrowers represented approximately 18% of our total investment in real estate loans. These real estate loans consisted of commercial loans, located in Oregon and Hawaii, with first lien positions, interest rates between 13% and 14%, with an aggregate outstanding balance of approximately $43.0 million. As of September 30, 2008, our three largest loans were considered non-performing. At December 31, 2007, the aggregate amount of loans to our three largest borrowers represented approximately 22% of our total investment in real estate loans. These real estate loans consisted of commercial loans, located in Hawaii and Oregon with first lien positions, interest rates between 10.5% and 14.0%, with an aggregate outstanding balance of approximately $63.9 million. The loans in Hawaii described above referred to the RightStar loans discussed in Note D – Investments in Real Estate Loans. We have a significant concentration of credit risk with our largest borrowers. Any additional defaults could have a material adverse effect on us.

As of September 30, 2008, five loans totaling approximately $47.6 million, representing approximately 20% of our portfolio’s total value, had a common guarantor, of these five loans; four loans totaling approximately $45.4 million were considered non-performing as of September 30, 2008. As of November 7, 2008, the borrower is delinquent on the interest payment on the performing loan. In addition, six loans totaling approximately $21.3 million, representing approximately 9% of our portfolio’s total value, have a common guarantor, of these six loans; five loans were related to our secured borrowings of approximately $14.7 million and all were performing as required as of September 30, 2008. As of November 7, 2008, the borrower is delinquent on the interest payment on a performing loan with a balance of approximately $6.1 million. The borrower is currently in negotiations to sell the property and has indicated that payment will be received upon completion of the sale; however, no assurance can be made that the sale will be completed.

See review report of Independent Registered Public Accounting Firm.

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The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash. As the economy weakens and credit has become more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2008, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At September 30, 2008, we had approximately $48.0 million in investments in real estate loans that had interest reserves where the total outstanding principal due to our co-lenders and us was approximately $70.1 million. These loans had interest reserves of approximately $6.3 million, of which our portion was approximately $5.2 million. As of September 30, 2008, one of these loans, totaling approximately $3.3 million, which had interest reserves was considered non-performing. This loan’s interest reserves, totaling approximately $0.2 million, has been suspended as of September 30, 2008. At December 31, 2007, we had approximately $108.8 million in investments in real estate loans that had interest reserves where the total outstanding principal due to our co-lenders and us was approximately $128.6 million. These loans had interest reserves of approximately $10.4 million, of which our portion was approximately $8.8 million.

As of September 30, 2008, we had five real estate loan products consisting of commercial, construction, acquisition and development, land and residential. The effective interest rates on all product categories range from 5.9% to 15%. Revenue by product will fluctuate based upon relative balances during the period.

Loan Portfolio

Investments in real estate loans as of September 30, 2008, were as follows:

Loan Type	Number Of Loans		Balance *		Weighted Average Interest Rate		Portfolio Percentage		Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses

Acquisition and development		1	$	13,000,000		13.00%		5.57%		38.15%
Commercial		21		131,681,000		12.67%		56.48%		55.56%
Construction		7		22,402,000		10.61%		9.61%		85.98%
Land		9		66,062,000		11.58%		28.34%		69.79%
		38	$	233,145,000		12.18%		100.00%		62.22%

Investments in real estate loans as of December 31, 2007, were as follows:

See review report of Independent Registered Public Accounting Firm.

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Loan Type	Number Of Loans		Balance *		Weighted Average Interest Rate		Portfolio Percentage		Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses

Acquisition and development		4	$	18,338,000		12.85%		6.30%		46.75%
Commercial		19		131,257,000		12.12%		45.10%		74.57%
Construction		9		45,883,000		11.04%		15.76%		73.84%
Land		14		95,585,000		12.12%		32.84%		62.41%
		46	$	291,063,000		12.00%		100.00%		68.52%

*	Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans. The weighted average interest rate on performing loans only, as of September 30, 2008 and December 31, 2007, was 12.07% and 11.84%, respectively. Please see Non-Performing Loans and Asset Quality and Loan Reserves below for further information regarding performing and non-performing loans.

Loan-to-value ratios are based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses. Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.

The following is a schedule of priority of real estate loans as of September 30, 2008 and December 31, 2007:

Loan Type	Number of Loans		September 30, 2008 Balance*		Portfolio Percentage		Number of Loans		December 31, 2007 Balance*		Portfolio Percentage

First deeds of trust		31	$	198,551,000		85.16%		44	$	288,665,000		99.18%
Second deeds of trust		7		34,594,000		14.84%		2		2,398,000		0.82%
		38	$	233,145,000		100.00%		46	$	291,063,000		100.00%

*	Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2008:

Non-performing and past due loans (a)	$	155,072,000
October 2008 - December 2008		15,223,000
January 2009 – March 2009		8,671,000
April 2009 - June 2009		12,600,000
July 2009 - September 2009		8,060,000
October 2009 - December 2009		15,555,000
Thereafter		17,964,000

Total	$	233,145,000

(a)	Amounts include the balance of non-performing loans and loans that have been extended subsequent to September 30, 2008.

The following is a schedule by geographic location of investments in real estate loans as of September 30, 2008 and December 31, 2007:

See review report of Independent Registered Public Accounting Firm.

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	September 30, 2008 Balance *		Portfolio Percentage		December 31, 2007 Balance *		Portfolio Percentage

Arizona	$	59,664,000		25.59%	$	43,865,000		15.07%
California		21,798,000		9.35%		19,673,000		6.76%
Hawaii		17,291,000		7.42%		17,291,000		5.94%
Nevada		75,201,000		32.26%		132,000,000		45.35%
New York		--		--%		16,981,000		5.83%
Oklahoma		2,155,000		0.92%		5,051,000		1.74%
Oregon		41,752,000		17.91%		46,620,000		16.02%
Texas		13,483,000		5.78%		7,924,000		2.72%
Washington		1,801,000		0.77%		1,658,000		0.57%
Total	$	233,145,000		100.00%	$	291,063,000		100.00%

*	Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.

	September 30, 2008 Balance (a)			December 31, 2007 Balance
Balance per loan portfolio	$	233,145,000		$	291,063,000
Less:
Allowance for loan losses (b)		(50,686,000	)		(12,873,000	)
Balance per consolidated balance sheet	$	182,459,000		$	278,190,000

(a)

We recognized an impairment cost of approximately $0.6 million, which was applied to the loan balance, related to the restructuring of a loan, whereby the interest rate was reduced from 12% to 6% starting in May 2008. In addition, we recognized an allowance for loan loss of approximately $2.2 million, of which our portion was approximately $1.7 million, related to this loan.

(b)	Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of September 30, 2008, we had 18 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). These loans are currently carried on our books at a value of approximately $98.8 million, net of allowance for loan losses of approximately $46.0 million, which does not include the allowances of approximately $4.7 million relating to the decrease in the property value for performing loans as of September 30, 2008. These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings. At September 30, 2008, the following loans were non-performing:

RightStar, Inc. (Part I & Part II), are loans secured by a lien on the business and virtually all of the property of RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii with an outstanding balance of approximately $32.3 million of which our portion is approximately $17.3 million ($8.2 million for Part I and $9.1 million for Part II). The lenders have commenced a judicial foreclosure on the loans, Part I and Part II. As of September 30, 2008, based on our manager’s evaluation and updated appraisals , our manager has provided a specific allowance of approximately $14.4 million, of which our portion is approximately $9.8 million.

See review report of Independent Registered Public Accounting Firm.

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Monterrey Associates, L.P. is a non-performing loan, which was originally secured by various real estate collateral, including a 248 unit apartment complex in Oklahoma City, Oklahoma. The outstanding balance on the loan is approximately $4.4 million, of which our portion is approximately $2.2 million. As of September 30, 2008, this loan has been considered non-performing for the last twenty-five months. Our manager brought foreclosure and other legal proceedings to protect our interest in the collateral. The borrowers have alleged that our lien on the Oklahoma City apartment complex was extinguished as a result of legal actions commenced on our behalf with respect to other collateral securing the non-performing loan. We are vigorously contesting their position; however, we cannot determine at this time the outcome of these legal proceedings. As of September 30, 2008, based on our manager’s evaluation, our manager has provided a specific allowance of approximately $2.8 million, of which our portion is approximately $1.4 million.

3900, LLC, is a second position loan that provided bridge financing for an approximate 7.66 acre neighborhood retail center, located in Tempe, Arizona. The loan is secured by a second position lien, junior to a first position lien in the amount of $6.0 million. In addition, the loan is guaranteed by principals of the borrower. The outstanding balance of the loan is approximately $3.3 million. On April 5, 2008, this loan was considered to be in default due to the default of the Redwood Place, LLC loan, as a result of cross-default provisions. As of September 30, 2008, this loan has been considered non-performing for the last five months. Our manager has commenced foreclosure, and is proceeding with legal action to enforce the personal guarantees. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of approximately $3.3 million.

World Capital La Piazza, LLC, is a loan to provide financing for the development of 8.44 net acres of land located in Henderson, NV. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is approximately $13.0 million. As of September 30, 2008, this loan has been considered non-performing for the last five months. The loan matured on June 29, 2008, and the borrower failed to either payoff the loan or extend the term. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. On October 29, 2008, the borrower filed for bankruptcy protection. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has concluded that the value of the underlying collateral is sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

World Capital Durango Alpha, is a loan to provide financing for the development of 9.27 acres of land located in Las Vegas, NV with an outstanding balance of approximately $7.1 million of which our portion is approximately $4.8 million and is secured by a first lien on the property and guaranteed by the principals of the borrower. As of September 30, 2008, this loan has been considered non-performing for the last five months. Our manager has commenced both foreclosure proceedings and litigation against the personal guarantors in order to enforce the personal guarantees. On October 29, 2008, the borrower filed for bankruptcy protection. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has concluded that the value of the underlying collateral is sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

Peoria 180, LLC, is a loan, with a variable interest rate, to provide financing for the development of 171 acres located in Glendale, Arizona with an outstanding balance of $18.0 million of which our portion is approximately $14.8 million and is secured by a first lien on the property and guaranteed by the principals of the borrower. As of September 30, 2008, this loan has been considered non-performing for the last five months. Our manager has commenced both foreclosure proceedings and litigation against the personal guarantors in order to enforce the personal guarantees. On September 26, 2008, the borrower filed for bankruptcy protection. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of approximately $9.9 million, of which our portion is approximately $8.2 million.

See review report of Independent Registered Public Accounting Firm.

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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 $11.4 million. The loan matured on April 5, 2008, and the borrower failed to either pay the loan or extend the term. As of September 30, 2008, this loan has been considered non-performing for the last five months. Our manager has commenced both foreclosure proceedings and litigation against the personal guarantors in order to enforce the personal guarantees. On August 27, 2008, the borrower filed for bankruptcy protection. On September 30, 2008, we, VRM I, and Fund III reached a tentative settlement agreement with the borrower to foreclose upon the property. The guarantors entered into a confession of judgment for an amount of $1.1 million and agreed to pay annual deficiency payments starting on September 30, 2009, monthly interest payments starting on November 1, 2008 and accrued property taxes due on or before November 28, 2008. Foreclosure on the property is scheduled for February 2009. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of approximately $4.7 million, of which our portion is approximately $3.6 million.

WCP Warm Springs Holdings 1, LLC, is a loan to provide financing for 10 acres of vacant land located in Las Vegas, NV. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $8.5 million, of which our portion is approximately $5.1 million. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. On October 29, 2008, the borrower filed for bankruptcy protection. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of approximately $1.0 million, of which our portion is approximately $0.6 million.

Babuski, LLC, is a loan to provide financing for 9.23 acres of land in Las Vegas, NV. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $9.5 million, of which our portion is approximately $7.7 million. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. On October 16, 2008, we, VRM I and Fund III entered into a forbearance agreement to postpone the foreclosure date on the property. On November 5, 2008, the guarantor paid $250,000 for cost and interest due related to the loan. Based on our manager’s evaluation and updated appraisals, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

Bright Haven Builders, LLC, is a construction loan to provide financing for 10 single family residential lots (lots 74 and 169-177) located within Cherry Meadows Subdivision located in Yelm, WA. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is approximately $2.2 million, of which our portion is approximately $1.8 million. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of $175,000, of which our portion is $144,000.

South Bay Villas, LLC, is a construction loan to provide financing for a 48 unit condominium building which is part of the Desert Sands Condominiums Phase 2 located in Laughlin, NV. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $6.0 million, of which our portion is approximately $5.0 million. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. As of September 30, 2008, based on our manager’s evaluation of completion costs for the project, our manager has provided a specific allowance of $500,000, of which our portion is $481,000.

See review report of Independent Registered Public Accounting Firm.

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Preston Hollow Assisted Living, L.P., is a commercial loan to provide financing for the Preston Hollow Assisted Living Facility located in Dallas, TX. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $3.6 million. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. Based on our manager’s evaluation and updated appraisals, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

Barger Road Cottages, LLC, is a commercial loan to provide financing for the Alpine Meadow Retirement Community, consisting of 23 cottage units with garages, community building and surplus land, located in Eugene, OR. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $6.0 million, of which our portion is $46,000. As of September 30, 2008, this loan has been considered non-performing for the last four months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. Based on our manager’s evaluation and updated appraisals, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

Lohrey Investments, LLC, is a commercial loan to provide financing for income producing property located in Gilroy, CA. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $16.0 million, of which our portion is $11.6 million. As of September 30, 2008, this loan has been considered non-performing for the last three months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. During October 2008, the tenant, which is a related party to the borrower, filed for bankruptcy protection. As of September 30, 2008, based on our manager’s evaluation and updated appraisals, our manager has provided a specific allowance of approximately $7.2 million, of which our portion is approximately $5.2 million.

Cascadia Canyon, LLC, is a commercial loan to provide financing for 12.39 acres of land plus the SUMCO North Campus, SUMCO South Campus located in Salem, OR. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is approximately $19.5 million, of which our portion is approximately $16.0 million. As of September 30, 2008, this loan has been considered non-performing for the last two months. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. Based on our manager’s evaluation and updated appraisals, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

Silver Star Destinations, LLC, is a commercial loan to provide financing for three commercial retail properties, Sunriver Mall, Marcello Building and Chrome Pony comprising approximately 17.53 gross acres located in Sunriver, OR and commonly referred to as the Sunriver Mall. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is $26.7 million, of which our portion is approximately $25.7 million. The loan matured on September 28, 2008, and the borrower failed to either pay the loan or extend the term. As of September 30, 2008, this loan has been considered non-performing for the last month. Our manager has commenced both foreclosure proceedings and litigation against the personal guarantors in order to enforce the personal guarantees. As of September 30, 2008, based on our manager’s evaluation, updated appraisals and a letter of intent to purchase the note and deed of trust dated October 22, 2008, our manager has provided a specific allowance of approximately $13.9 million, of which our portion is approximately $13.4 million. The purchase agreement of $13.0 million, which our portion would be approximately $12.3 million, is scheduled to close on or before December 19, 2008; however, there can be no assurance that the sale will be completed.

See review report of Independent Registered Public Accounting Firm.

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Trinity Theo, LLC, is a land loan to provide bridge financing for a 1.86 acre single family development custom home lot located in Las Vegas, NV. The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower. The outstanding balance on the loan is approximately $1.5 million. As of September 30, 2008, this loan has been considered non-performing for the last month. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. Based on our manager’s evaluation and updated appraisals, our manager has concluded that the current value of the underlying collateral should be sufficient to protect us from loss of principal. No specific allowance was deemed necessary as of September 30, 2008.

The following schedule summarizes the non-performing loans as of September 30, 2008:

Loan Name		Balance at September 30, 2008		Allowance for Loan Loss *		Net Balance at September 30, 2008	Maturity Date	Number of Months Non-Performing	Percentage of Total Loan Balance
RightStar, Inc. (Part I & Part II)	$	17,291,000	$	(9,757,000)	$	7,534,000	3/31/2004	54	45% of Part I 65% of Part II
Monterrey Associates, L.P.		2,155,000		(1,370,000)		785,000	9/1/2006	25	49%
3900 LLC		3,276,000		(3,276,000)		--	6/10/2008	5	100%
World Capital La Piazza, LLC		13,000,000		--		13,000,000	6/29/2008	5	100%
World Capital Durango Alpha (2)		4,846,000		--		4,846,000	5/16/2008	5	68%
Peoria 180, LLC		14,806,000		(8,176,000)		6,630,000	6/30/2008	5	82%
Redwood Place, LLC		11,388,000		(3,586,000)		7,802,000	4/5/2008	5	76%
WCP Warm Springs Holdings 1, LLC		5,114,000		(575,000)		4,539,000	5/10/2008	4	60%
Babuski, LLC		7,707,000		--		7,707,000	6/17/2008	4	81%
Bright Haven Builders, LLC		1,801,000		(144,000)		1,657,000	3/28/2008	4	82%
South Bay Villas, LLC		5,042,000		(481,000)		4,561,000	5/6/2008	4	96%
Preston Hollow Assisted Living, L.P.		3,600,000		--		3,600,000	12/31/2008	4	100%
Barger Road Cottages, LLC		46,000		--		46,000	12/5/2008	4	1%
Lohrey Investments, LLC		11,600,000		(5,223,000)		6,377,000	10/29/2008	3	73%
Cascadia Canyon, LLC		16,002,000		--		16,002,000	2/12/2009	2	82%
Silver Star Destinations, LLC		25,703,000		(13,430,000)		12,273,000	9/28/2008	1	96%
Trinity Theo, LLC		1,477,000		--		1,477,000	1/28/2009	1	100%
	$	144,854,000	$	(46,018,000)	$	98,836,000

*	Please refer to Specific Reserve Allowances below.

Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed. As of September 30, 2008, we have provided specific reserves, related to 11 non-performing loans and 3 performing loans, of approximately $50.7 million. Our manager evaluated the loans and, based on current estimates regarding the value of the remaining underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal. However, such estimates could be erroneous or the value of underlying real estate could decline. Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded in future periods.

Because any decision regarding the allowance for loan losses reflects a judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect. In such event, actual losses may exceed (or be less than) the amount of any reserve. To the extent that we experience losses greater than the amount of our reserves, we may incur a charge to our earnings that will adversely affect our operating results and the amount of any distributions payable to our stockholders.

See review report of Independent Registered Public Accounting Firm.

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Specific Reserve Allowances

The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2008. Following the table is a discussion of the status of each identified loan and the reasons for the recording of additional reserves during the nine months ended September 30, 2008.

Description	Balance at December 31, 2007		Specific Reserve Allocation		Transferred to REO			Balance at September 30, 2008
RightStar, Inc. (Part I & Part II)	$	9,757,000	$	--	$	--		$	9,757,000
Monterrey Associates, L.P.		1,174,000		196,000		--			1,370,000
Brawley CA 122, LLC		256,000		--		(256,000	)		--
Peoria 180, LLC		1,309,000		6,867,000		--			8,176,000
Terravita, LLC (a)		377,000		--		--			377,000
V & M Homes at the Palms, Inc.		--		913,000		(913,000	)		--
Redwood Place, LLC		--		3,586,000		--			3,586,000
The Laurels at Mesquite Estates, LLC		--		358,000		(358,000	)		--
2503 Panorama, LLC (a)		--		1,708,000		--			1,708,000
3900, LLC		--		3,276,000		--			3,276,000
MRPE, LLC		--		2,086,000		(2,086,000	)		--
VBP, LLC (a)		--		2,583,000		--			2,583,000
The Orleans at Mesquite Estates, LLC		--		380,000		(380,000	)		--
Silver Star Destinations, LLC		--		13,430,000					13,430,000
WCP Warm Springs Holdings 1, LLC		--		575,000		--			575,000
Bright Haven Builders, LLC		--		144,000		--			144,000
Lohrey Investments, LLC		--		5,223,000		--			5,223,000
South Bay Villas, LLC		--		481,000		--			481,000
Total	$	12,873,000	$	41,806,000	$	(3,993,000	)	$	50,686,000

(a)

As of September 30, 2008, these loans were considered performing.

RightStar Loan Allowance – RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of 2004. The lenders commenced a judicial foreclosure on the loans, part I and part II, which is secured by a lien on the business and virtually all of the property of RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii. The aggregate principal balance of the loan is approximately $32.3 million. The loans, part I and part II, are owned as follows:

	Senior Principal Amount (Part II)		Junior Principal Amount (Part I)		Total
VRM I	$	4,892,000	$	4,415,000	$	9,307,000
VRM II		9,108,000		8,183,000		17,291,000
Vestin Mortgage		--		5,657,000		5,657,000
Total	$	14,000,000	$	18,255,000	$	32,255,000

The loans are subject to an inter-creditor agreement which states the order of priority for any payments received are disbursed as follows:

First to reimburse collection and foreclosure expenses advanced by the lenders;

Second to pay past due interest on the Senior Principal Amount (Part II) (including default rate interest);

See review report of Independent Registered Public Accounting Firm.

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Third to pay past due interest on the Junior Principal Amount (Part I) (including default rate interest);

Fourth to pay Senior Principal; and

Fifth to pay Junior Principal.

We and VRM I acquired the senior portion of the loan on July 14, 2005 for approximately $15.5 million of which our portion was approximately $10.1 million (including accrued interest of approximately $1.0 million). We and VRM I acquired this balance to expedite the foreclosure process and remove the prior senior lender from its priority position, which had the potential to impair the value we may receive at the time the property is sold. In exchange for assistance in expediting the foreclosure process, the lenders jointly agreed to release the guarantors from their guaranty of the loan. In March 2007, Vestin Mortgage purchased the junior principal amount owned by the unrelated third party for $500,000. Vestin Mortgage has agreed that any monies it receives as a result of payment of the notes or proceeds from a foreclosure sale are limited to its $500,000 investment in the notes plus expenses.

In early 2006, the State of Hawaii notified the lenders of a potential statutory trust fund deficiency, estimated to be between $20 million and $30 million and claimed that this balance has priority over all lenders. The State of Hawaii is pursuing approximately $30 million in recoveries from the former trustees, prior owners of the property and other parties. The proceeds from these recoveries, if any, will be used to fund the potential deficiency in the statutory trust. The lenders dispute the amount and priority of this deficit.

In April 2006, the lenders filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii. The State of Hawaii responded by filing allegations against Vestin Mortgage and us alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to us.

On May 9, 2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated announced that an arrangement had been reached to auction the RightStar assets. On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale will be allocated in part to VRM I, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances. We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims. We, VRM I, Vestin Mortgage and the State of Hawaii have received offers and are currently requesting, entertaining, and reviewing bids on the RightStar properties. The outcome of this auction cannot be determined at this time.

During December 2007, we, VRM I, and the statutory trust fund received a settlement totaling $2.8 million, of which approximately $2.0 million was applied against outstanding trust obligations. Approximately $0.8 million, of which our portion totaling approximately $0.5 million, was applied towards the allowance for doubtful accounts on this loan and was recorded as a reimbursement of legal fees totaling approximately $0.4 million.

In June 2008, the State of Hawaii allowed us and the other lenders to put in place a new management team that replaced the previous receiver.

We have evaluated the estimated value of the underlying collateral and the expected cost and length of litigation. Based on this estimate we have maintained our total specific reserve allowance for loss. The reserve allowance includes approximately $1.0 million for estimated litigation fees and expenses that we have incurred in enforcing our rights against the underlying collateral, which were fully consumed as of December 31, 2007. We will continue to evaluate our position in the RightStar loan as the situation progresses. As of September 30, 2008, our specific reserve allowance on the RightStar loans totaled approximately $9.8 million.

See review report of Independent Registered Public Accounting Firm.

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Monterrey Associates, L.P. – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing commercial loan on a 248-unit apartment complex in Oklahoma City, OK, of approximately $2.8 million, of which our portion was approximately $1.4 million. This specific reserve allowance was based on our manager’s evaluation and an updated appraisal of the underlying collateral for this loan, obtained by our manager during January 2008, and our manager’s evaluation. Our manager will continue to evaluate our position in the loan.

Peoria 180, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a land loan on property located in Glendale, AZ, of approximately $9.9 million, of which our portion was approximately $8.2 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan and evaluation of the borrower’s financial condition, obtained by our manager during July 2008. As of September 30, 2008, the loan was considered non-performing. Our manager will continue to evaluate our position in the loan.

Terravita, LLC – During the year ended December 31, 2007, our manager provided a specific reserve allowance, related to a commercial loan on a 100 unit condominium/apartment project in North Las Vegas, NV, totaling approximately $0.7 million, of which our portion was approximately $0.4 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan and evaluation of the borrower, obtained by our manager during January 2008. During February 2008, the loans on the Terravita LLC property, with first and second positions were rewritten into one loan, which included a principal pay down of $6.6 million, with a second position totaling approximately $3.1 million of which our portion is approximately $1.7 million. The terms of the rewritten loan remain the same as those of the original loans and the loan was performing as required as of September 30, 2008. Our manager will continue to evaluate our position in the loan.

Redwood Place, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan for the acquisition and conversion to condominiums of a 186-unit apartment complex located in Phoenix, Arizona, of approximately $4.7 million, of which our portion was approximately $3.6 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2008. Our manager will continue to evaluate our position in the loan.

2503 Panorama, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a performing loan for a 5,700 square foot penthouse located on the 25th floor of Panorama Towers I in Las Vegas, NV, of approximately $2.2 million, of which our portion is approximately $1.7 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2008. In addition, we recognized an impairment cost of approximately $0.6 million, which was applied to the loan balance, related to the restructuring of the loan, whereby the interest rate was reduced from 12% to 6% starting in May 2008. Our manager will continue to evaluate our position in the loan.

3900, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on 7.66 acre neighborhood retail center, located in Tempe, AZ, of approximately $3.3 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2008 and represents the outstanding balance of the loan. Our manager will continue to evaluate our position in the loan.

VBP, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a performing loan for the development of 4.14 acres of land located in Las Vegas, NV, of approximately $2.8 million, of which our portion is approximately $2.6 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2008. Our manager will continue to evaluate our position in the loan. As of November 7, 2008, the borrower is delinquent on an interest payment due on the loan. The borrower is currently in negotiations to sell the property and has indicated that payment will be received upon completion of the sale; however, no assurance can be made that the sale will be completed.

See review report of Independent Registered Public Accounting Firm.

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Silver Star Destinations, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on three commercial retail properties, Sunriver Mall, Marcello Building and Chrome Pony comprising approximately 17.53 gross acres located in Sunriver, OR, of approximately $13.9 million, of which our portion is approximately $13.4 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during September 2008 and a letter of intent to purchase the note and deed of trust dated October 22, 2008. The purchase agreement of $13.0 million, of which our portion would be approximately $12.3 million, is scheduled to close on or before December 19, 2008; however, there can be no assurance that the sale will be completed. Our manager will continue to evaluate our position in the loan.

WCP Warm Springs Holdings 1, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on 10 acres of vacant land located in Las Vegas, NV, of approximately $1.0 million, of which our portion is approximately $0.6 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during September 2008. Our manager will continue to evaluate our position in the loan.

Bright Haven Builders, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on 10 single family residential lots (lots 74 and 169-177) located within Cherry Meadows Subdivision located in Yelm, WA, of $175,000, of which our portion is $144,000. This specific reserve allowance was based on our manager’s evaluation of the underlying collateral for this loan during September 2008. Our manager will continue to evaluate our position in the loan.

Lohrey Investments, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on income producing property located in Gilroy, CA, of approximately $7.2 million, of which our portion is approximately $5.2 million. This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during October 2008. Our manager will continue to evaluate our position in the loan.

South Bay Villas, LLC – As of September 30, 2008, our manager has provided a specific reserve allowance, related to a non-performing loan on a 48 unit condominium building part of the Desert Sands Condominiums Phase 2 located in Laughlin, NV, of $500,000, of which our portion is $481,000. This specific reserve allowance was based on completion costs of the property evaluated by our manager during September 2008. Our manager will continue to evaluate our position in the loan.

As of September 30, 2008, our manager had granted extensions on 21 loans, totaling approximately $189.4 million, of which our portion was approximately $138.7 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. However, our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. Subsequent to their extension, 10 of the 21 loans have become non-performing. The loans, which became non-performing after their extension, had a total principal amount at September 30, 2008 of approximately $130.8 million, of which our portion is approximately $104.4 million.

Asset Quality and Loan Reserves

Losses may occur from investing in real estate loans. The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.

The conclusion that a real estate loan is uncollectible or that collectibility is doubtful is a matter of judgment. On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment. The fact that a loan is temporarily past due does not necessarily mean that the loan is impaired. Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters:

See review report of Independent Registered Public Accounting Firm.

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Prevailing economic conditions;

Historical experience;

The nature and volume of the loan portfolio;

The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;

Evaluation of industry trends; and

Estimated net realizable value of any underlying collateral in relation to the loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses. Additions to the allowance for loan losses are made by charges to the provision for loan losses. The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of September 30, 2008 and December 31, 2007:

	As of September 30, 2008
	Balance		Allowance for loan losses *			Balance, net of allowance

Non-performing loans – no related allowance	$	46,678,000	$	--		$	46,678,000
Non-performing loans – related allowance		98,176,000		(46,018,000	)		52,158,000
Subtotal nonperforming loans		144,854,000		(46,018,000	)		98,836,000

Performing loans – no related allowance		76,958,000		--			76,958,000
Performing loans – related allowance		11,333,000		(4,668,000	)		6,665,000
Subtotal performing loans		88,291,000		(4,668,000	)		83,623,000

Total	$	233,145,000	$	(50,686,000	)	$	182,459,000

*	Please refer to Specific Reserve Allowances above.

	As of December 31, 2007
	Balance		Allowance for loan losses			Balance, net of allowance

Non-performing loans – no related allowance	$	10,364,000	$	--		$	10,364,000
Non-performing loans – related allowance		20,201,000		(11,187,000	)		9,014,000
Subtotal nonperforming loans		30,565,000		(11,187,000	)		19,378,000

Performing loans – no related allowance		240,603,000		--			240,603,000
Performing loans – related allowance		19,895,000		(1,686,000	)		18,209,000
Subtotal performing loans		260,498,000		(1,686,000	)		258,812,000

Total	$	291,063,000	$	(12,873,000	)	$	278,190,000

Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal or interest. However, such estimates could be erroneous or the value of the underlying real estate could decline. Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.

See review report of Independent Registered Public Accounting Firm.

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NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

As of September 30, 2008, we owned 533,675 shares of VRM I’s common stock, representing approximately 7.76% of their total outstanding common stock.

In accordance with FAS 115 and EITF 03-1, we have evaluated our investment in VRM I’s common stock and determined there is an other-than-temporary impairment as of September 30, 2008. Based on this evaluation we have written down our investment to its fair value, as of September 20, 2008, to $2.25 per share totaling approximately $1.2 million dollars and recognizing an impairment of approximately $2.2 million. We will continue to evaluate our investment in marketable securities on a quarterly basis.

NOTE F — REAL ESTATE HELD FOR SALE

At September 30, 2008, we held 11 properties with a total carrying value of approximately $42.0 million, which were acquired through foreclosure and recorded as investments in real estate held for sale. The summary below includes our percentage of ownership in each of the properties. Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions. It is not our intent to invest in or own real estate as a long-term investment. We seek to sell properties acquired through foreclosure as quickly as circumstances permit. Set forth below is a roll-forward of investments in real estate held for sale during the nine months ended September 30, 2008, followed by a discussion of the basis for recording additional write-downs during the nine months ended September 30, 2008:

Description	Date Acquired	Percentage of Ownership		Balance at December 31, 2007		Acquisitions		Write Downs		Cash Reductions		Net Cash Proceeds on Sales		Gain (Loss) on Sale of Real Estate		Balance at September 30, 2008

Marshall's Vista, LTD (1)	8/3/2004	100%	$	4,438,000	$	--	$	--	$	(450,000)	$	--	$	--	$	3,988,000
Rio Vista Nevada, LLC (2)	12/21/2006	86%		24,125,000		--		(9,872,000)		--		--		--		14,253,000
Pirates Lake, LTD (3)	2/5/2008	48%		--		4,100,000		(3,127,000)		(86,000)		--		--		887,000
Forest Development, LLC (4)	3/7/2008	64%		--		1,681,000		(497,000)		--		(925,000)		(259,000)		--
Brawley CA 122, LLC (5)	5/1/2008	33%		--		499,000		(191,000)		--		--		--		308,000
V & M Homes at the Palms, Inc. (6)	7/15/2008	39%		--		597,000		--		--		--		--		597,000
The Orleans at Mesquite Estates, LLC (7)	8/8/2008	100%		--		1,946,000		(869,000)		--		--		--		1,077,000
MRPE, LLC (8)	8/11/2008	72%		--		10,100,000		(4,656,000)		--		--		--		5,444,000
The Laurels at Mesquite Estates, LLC (9)	8/11/2008	100%		--		2,432,000		(1,217,000)		--		--		--		1,215,000
Jeffrey's Court, LLC (10)	9/3/2008	61%		--		3,073,000		--		--		--		--		3,073,000
Cliff Shadows Properties, LLC (11)	9/8/2008	95%		--		16,118,000		(6,954,000)		--		--		--		9,164,000
The Sycamore Glenn at Mesquite Estates, LLC (12)	9/8/2008	100%		--		4,369,000		(2,419,000)		--		--		--		1,950,000

			$	28,563,000	$	44,915,000	$	(29,802,000)	$	(536,000)	$	(925,000)	$	(259,000)	$	41,956,000

(1)

Marshall's Vista, LTD – During the year ended December 31, 2007, we entered into a sales contract for the sale of a partially completed golf course near Austin, Texas at a price that would not result in a material gain or loss. The sales contract required that the buyer complete the purchase on or before June 29, 2007; however, the buyer chose to extend the closing date multiple times by paying a non-refundable extension fee that was applied to the property value recorded on our books. The first extension was in June 2007, at which time we received a $100,000 non-refundable extension fee from the buyer to extend the closing date to October 2007. Since then the buyer has elected to extend the closing date to October 2008, by paying a non-refundable extension fee of $50,000 every 30 days until closing. As of September 30, 2008, we had received a total of $700,000 in extension fees. Subsequently, the buyer paid $50,000 in October 2008 to extend the closing date an extra 30 days. There can be no assurance that the sale will be completed.

See review report of Independent Registered Public Accounting Firm.

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(2)

Rio Vista Nevada, LLC – During December 2006, we, VRM I and Fund III acquired through foreclosure proceedings 480 residential building lots and two single family dwellings in Rio Vista Village Subdivision in Cathedral City, CA. During the year ended December 31, 2007, our manager evaluated the carrying value of real estate acquired through foreclosure located in Cathedral City, California. Based on our manager’s evaluation and an updated appraisal obtained during July 2008, the property was written down approximately $11.5 million, of which our portion was approximately $9.9 million.

(3)

Pirates Lake, LTD – During February 2008, we, VRM I and Fund III acquired through foreclosure proceedings approximately 46.75 acres of land in Galveston, TX. Our manager has evaluated the carrying value of the property and based on an updated appraisal obtained in April 2008 and the current sales price, the property was written down approximately $6.5 million, of which our portion was approximately $3.1 million. During June 2008, we received a deposit refund totaling $86,000. The property is currently listed for sale at $2.0 million, which approximates the total book value, plus selling costs, for this property held by us, VRM I and Fund III.

(4)

Forest Development, LLC – During March 2008, we, VRM I and Fund III acquired through foreclosure proceedings two 4,000 square foot single family residences, together with the four remaining lots in a subdivision, located on Mt. Charleston, NV. Our manager has evaluated the carrying value of the property and based on that evaluation the property was written down approximately $0.8 million, of which our portion was approximately $0.5 million. During September 2008, we, VRM I and Fund III sold this property for approximately $1.4 million, of which our portion was approximately $0.9 million. The sale resulted in a net loss of approximately $0.4 million, of which our portion was approximately $0.3 million.

(5)

Brawley CA 122, LLC – During May 2008, we, VRM I, and Fund III acquired through foreclosure proceedings a 25 acre proposed 122 single-family subdivision to be known as River Drive Subdivision in Brawley, CA. Our manager has evaluated the carrying value of the property and based on an updated appraisal obtained in May 2008, the property was written down approximately $0.6 million, of which our portion was approximately $0.2 million.

(6)

V & M Homes at the Palms, Inc. – During July 2008, we, VRM I, and Fund III acquired through foreclosure proceedings an 80 acre parcel of land in Florence, AZ. Our manager has evaluated the carrying value of the property and based on its estimate, no write down was deemed necessary as of September 30, 2008.

(7)

The Orleans at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 21.7 gross acres of Mesquite Estates Planned Unit Development with 65 "paper" lots, located in Mesquite, NV. Our manager has evaluated the carrying value of the property and based on its estimate and current sales price, the property was written down approximately $0.9 million. The property is currently listed for sale at approximately $1.2 million, which approximates the total book value, plus selling costs, for this property.

(8)

MRPE, LLC – During August 2008, we, VRM I, and Fund III acquired through foreclosure proceedings 132.03 acres of land within the Wolf Creek Estates Master Planned Community, located in Mesquite, NV. Our manager has evaluated the carrying value of the property and based on its estimate and current sales price, the property was written down approximately $6.5 million, of which our portion was approximately $4.7 million. The property is currently listed for sale at approximately $8.3 million, which approximates the total book value, plus selling costs, for this property held by us, VRM I and Fund III.

(9)

The Laurels at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 26.5 gross acres of Mesquite Estates Planned Unit Development with 60 "paper" lots, located in Mesquite, NV. Our manager has evaluated the carrying value of the property and based on its estimate, the property was written down approximately $1.2 million. The property is currently listed for sale at approximately $1.3 million, which approximates the total book value, plus selling costs, for this property.

See review report of Independent Registered Public Accounting Firm.

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(10)

Jeffrey's Court, LLC – During September 2008, we, VRM I, and Fund III acquired through foreclosure proceedings 4.92 acres of land to be developed into 119 condominium units in Las Vegas, NV. Our manager has evaluated the carrying value of the property and based on its estimate, no write down was deemed necessary as of September 30, 2008. On October 30, 2008, our manager received a sales agreement to purchase the property for approximately $6.3 million, of which our portion would be approximately $3.9 million. The sale is scheduled to close on December 8, 2008, where the buyer is to pay approximately $4.0 million down along with a one year note for the remaining $2.3 million. There can be no assurance that the sale will be completed.

(11)

Cliff Shadows Properties, LLC – During September 2008, we, VRM I, and Fund III acquired through foreclosure proceedings a 106 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las Vegas, NV. Our manager has evaluated the carrying value of the property and based on their evaluation, the property was written down approximately $7.3 million, of which our portion was approximately $7.0 million.

(12)

The Sycamore Glenn at Mesquite Estates, LLC – During September 2008, we acquired through foreclosure proceedings 32.3 gross acres of Mesquite Estates Planned Unit Development with 180 "paper" lots, located in Mesquite, NV. Our manager has evaluated the carrying value of the property and based on its estimate, the property was written down approximately $2.4 million. The property is currently listed for sale at approximately $2.1 million, which approximates the total book value, plus selling costs, for this property.

NOTE G — RELATED PARTY TRANSACTIONS

From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties. Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly. The amount of management fees paid to our manager for the three and nine months ended September 30, 2008, were $274,000 and $823,000, respectively. The amount of management fees paid to our manager for the three and nine months ended September 30, 2007, were $274,000 and $822,000, respectively.

As of September 30, 2008, our manager owned 92,699 of our common shares. For the three and nine months ended September 30, 2008, we declared $0 and $45,000, respectively, in dividends payable to our manager based on the number of shares our manager held on the dividend record dates. For the three and nine months ended September 30, 2007, we declared $35,000 and $109,000, respectively, in dividends payable to our manager based on the number of shares our manager held on the dividend record dates.

As of September 30, 2008, we did not have a balance due to or due from our manager. As of December 31, 2007, we had receivables from our manager of $1,000.

Transactions with Other Related Parties

As of September 30, 2008, we owned 533,675 common shares of VRM I, representing approximately 7.76% of their total outstanding common stock. For the three and nine months ended September 30, 2008, we recognized $0 and $86,000, respectively, in dividend income from VRM I based on the number of shares we held on the dividend record dates. For the three and nine months ended September 30, 2007, we recognized $73,000 and $200,000, respectively, in dividend income from VRM I based on the number of shares we held on the dividend record dates.

See review report of Independent Registered Public Accounting Firm.

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As of September 30, 2008, VRM I owned 225,134 of our common shares, representing approximately 1.55% of our total outstanding common stock. For the three and nine months ended September 30, 2008, we declared $0 and $110,000, respectively, in dividends payable to VRM I based on the number of shares VRM I held on the dividend record dates. For the three and nine months ended September 30, 2007, we declared $85,000 and $221,000, respectively, in dividends payable to VRM I based on the number of shares VRM I held on the dividend record dates.

During the nine months ended September 30, 2008, we sold approximately $0.5 million in real estate loans to VRM I and purchased $1.8 million in real estate loans from VRM I. No gain or loss resulted from these transactions. No similar transactions occurred during the nine months ended September 30, 2007.

As of September 30, 2008, we had receivables from VRM I of $59,000. As of December 31, 2007, we owed VRM I $123,000.

As of September 30, 2008, Fund III owned 114,117 of our common shares, representing approximately 0.78% of our total outstanding common stock. For the three and nine months ended September 30, 2008, we declared $0 and $56,000, respectively, in dividends payable to Fund III based on the number of shares Fund III held on the dividend record dates. For the three and nine months ended September 30, 2007, we declared $43,000 and $106,000, respectively, in dividends payable to Fund III based on the number of shares Fund III held on the dividend record dates.

During the nine months ended September 30, 2007, we purchased $1.3 million in real estate loans from Fund III. No gain or loss resulted from this transaction. No similar transactions occurred during the nine months ended September 30, 2008.

As of September 30, 2008, we had receivables from Fund III of $11,000. As of December 31, 2007, we did not have a balance due to or due from Fund III.

During the three and nine months ended September 30, 2008, we incurred $47,000 and $110,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in which the Secretary of Vestin Group has an equity ownership interest in the law firm. During the three and nine months ended September 30, 2007, we incurred $34,000 and $110,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz.

NOTE H — NOTES RECEIVABLE

During October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada of which our portion of the net cash proceeds was approximately $5.8 million. We originally sold this property under a 100% seller financing arrangement. The borrowers then sold the property to an unrelated third party that resulted in a payoff of the note and also allowed us to record the sale and remove the asset from real estate held for sale – seller financed. In addition, during September 2004, we received a promissory note from the guarantors of the loan in the amount of $440,000 in exchange for a release of their personal guarantees. Since payments on the note did not begin for 18 months from the date of the note, we discounted the face value of the note to $328,000, which is based on a discount rate of 8% as of that date. As of September 30, 2008, we have received $104,000 in principal payments. Payments will be recognized as income when received. The balance of $336,000 was fully reserved as of September 30, 2008.

During March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for approximately $5.5 million of which our share of the proceeds were approximately $3.8 million, which resulted in a loss of approximately $0.8 million. In addition, during June 2005, we and VRM I entered into a settlement agreement with the guarantors of the loan in the amount of $2.0 million in exchange for a release of their personal guarantees, of which our share was approximately $1.4 million. The balance is secured by a second deed of trust, with a first installment of $100,000 due in July 2005 and monthly interest only payments of 5% on $1.1 million from July 2005 through July 2008, at which time the entire balance is due. As of September 30, 2008, we have received $616,000 in principal payments. Payments will be recognized as income when received. The balance of $745,000 was fully reserved as of September 30, 2008.

See review report of Independent Registered Public Accounting Firm.

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During November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa, Arizona of which our portion of the consideration received totaled approximately $6.0 million. We and VRM I received a promissory note from the original guarantor in the amount of $478,000 of which our portion was $409,000. The promissory note is payable in interest only payments of 8% on the principal balance outstanding. From June 25, 2005 through May 25, 2006, monthly payments increased to $15,000 and were applied to principal and accrued interest. From June 25, 2006 through May 25, 2009, payments increase to $20,000 monthly. As of December 31, 2007, we received $234,000 in principal payments and the balance of $184,000 was fully reserved. Due to the uncertainty of collectability, the balance for the entire remaining balance of the promissory note was fully reserved. On August 7, 2007, we and VRM I filed a complaint against the guarantor in the U.S. District Court for District of Nevada, seeking to recover the amounts due pursuant to the promissory note. The guarantor did not answer or otherwise respond to the lawsuit. We and VRM I were granted a default judgment for all the amounts due. However, due to the current financial position of the guarantor, our Manager has determined that we would not be able to recover any amounts due from the guarantor. As of March 31, 2008, the note was fully written off.

During December 2005, we and VRM I sold the 460 acre residential subdivision in Lake Travis, TX for approximately $5.5 million, of which our portion was approximately $3.5 million. The purchase price included cash proceeds of $5 million and a $500,000 note receivable, with an imputed interest rate of 8% in July 2006. A net gain of $71,000 resulted from this transaction, of which our portion was $47,000. The purchaser defaulted on the note and our manager pursued litigation. During June 2007, we and VRM I entered into a settlement agreement, which reduced the note to $175,000, of which our portion is $115,000. On July 16, 2007, we and VRM I received a payment totaling $50,000, of which our portion was $33,000. On July 1, 2008, we and VRM I received a $113,000 payment, of which our portion was $74,000. The payment represented full settlement of the note and the remaining balance of $8,000 was written off.

During 2006, we and VRM I entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on. Our portion was approximately $1.3 million. The promissory note is payable in seven annual installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013. As of September 30, 2008, we had received $2,000 in principal payments. Payments will be recognized as income when received. The balance of approximately $1.3 million was fully reserved as of September 30, 2008.

NOTE I — JUNIOR SUBORDINATED NOTES

On June 22, 2007, we completed the issuance of $60.1 million in unsecured trust preferred securities through the special purpose business trust, VCT I to Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding LLC. These securities have a fixed interest rate equal to 8.75% through July 2012, and thereafter are subject to a variable rate equal to LIBOR plus 3.5% per annum, resetting quarterly. The securities mature on July 30, 2020 and may be called at par by us any time after July 30, 2012. We incurred approximately $2.3 million in financing costs relating to the notes. These costs are being amortized to interest expense over the term of the notes. We are obligated to pay the trust preferred securities with respect to distributions and amounts payable upon liquidation, redemption or repayment.

VCT I issued $100,000 of common securities, representing 100% of the voting common stock of VCT I to us. VCT I used the proceeds from the sale of the trust preferred securities and the common securities to purchase our junior subordinated notes. The terms of the junior subordinated notes matches the terms of the trust preferred securities. The notes are subordinated and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations.

The junior subordinated notes require quarterly interest distributions beginning July 31, 2007. For the three and nine months ended September 30, 2008, interest expense on the junior subordinated notes totaled approximately $1.3 million and $2.6 million, respectively. As of September 30, 2008, the balance outstanding was approximately $56.4 million.

See review report of Independent Registered Public Accounting Firm.

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Our interest in VCT I is accounted for using the equity method and the assets and liabilities of VCT I are not consolidated into our financial statements, in accordance with FIN 46R. Interest on the junior subordinated notes is included in interest expense on our consolidated income statement while the junior subordinated notes are presented as a separate item on our consolidated balance sheet.

As of September 30, 2008, we were not in compliance with the tangible net worth covenant related to the junior subordinated notes. On November 7, 2008, we entered into an agreement with Taberna Capital Management, LLC (“Taberna”), in its capacity as collateral manager for certain collateral debt obligation vehicles that are the holders of the junior subordinated notes, providing for an amendment of the tangible net worth covenant (the “Taberna Letter Agreement”). Our tangible net worth as of September 30, 2008 is in compliance with the revised tangible net worth covenant.

The Taberna Letter Agreement provides as follows (defined terms refer to the definitions in the indenture):

The tangible net worth covenant will be changed from not less than $225 million to not less than the lesser of $150 million or 2.5 times the then outstanding principal balance of the junior subordinated notes.

The EBITDA covenant will be changed from 2.5 times Interest Expense to 1.5 times Interest Expense, provided that, for one quarter only, the requirement will be 1.2 times Interest Expense for the four quarter period ending June 30, 2009.

The restriction on the Company redeeming notes at par prior to July 30, 2012 will be removed and no pre-payment penalty will be applied to such redemptions.

We are required to post a $3,750,000 letter of credit by November 12, 2008 and a $1,250,000 letter of credit by April 12, 2009. Taberna is entitled to draw upon such letters of credit to pay principal and interest on the junior subordinated notes if an Event of Default has occurred. The letters of credit may not be subordinated to any of our Senior Debt.

The notice and cure provisions in the indenture have been changed from 30 days to 15 days.

Taberna has been granted expanded rights to examine our books and records.

We agreed to reimburse Taberna’s fees related to the Taberna Letter Agreement in an amount not to exceed $50,000.

During the nine months ended September 30, 2008, we acquired debt securities resulting in a gain on extinguishment of debt totaling approximately $1.6 million.

NOTE J— SECURED BORROWINGS

Secured borrowings provide an additional source of capital for our lending activity. Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in. We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue in any differential of the interest spread, if applicable. Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings in accordance with Statement of Financial Accounting Standards (“FAS”) 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 140”). The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari passu basis in certain real estate loans with us and/or VRM I and/or Fund III (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.

See review report of Independent Registered Public Accounting Firm.

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During June 2008, we, our manager, and Vestin Originations entered into an intercreditor agreement with an unrelated third party related to the funding of six real estate loans. (See exhibit 10.11 Intercreditor Agreement under the Exhibit Index included in Part II – Other Information, Item 6 Exhibits of this Report Form 10-Q). The participation interest is at 11% on the outstanding balance. We incurred approximately $0.9 million in finance costs related to the secured borrowings, these costs are being amortized to interest expense over the term of the agreements. As of September 30, 2008, we had $14.7 million in funds, including approximately $1.0 million in interest reserves, used under Inter-creditor Agreements as compared to none as of December 31, 2007. During the three months ended September 30, 2008, we paid down approximately $6.3 million of the $21.0 million in funds used under Inter-creditor Agreements.

NOTE K — NOTE PAYABLE

In May 2008, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.9%. The agreement required a down payment of $38,000 and nine monthly payments of $23,000 beginning on May 27, 2008. As of September 30, 2008, the outstanding balance of the note was approximately $93,000.

NOTE L — FAIR VALUE

As of September 30, 2008, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party. We had no assets or liabilities utilizing Level 2 inputs and assets and liabilities utilizing Level 3 inputs included investments in real estate loans, secured borrowings, real estate held for sale and junior subordinated notes payable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, FAS 157 requires that an asset or liability be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.

FAS 157 requires that the valuation techniques used by us be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.

The following table presents the valuation of our financial assets and liabilities as of September 30, 2008 measured at fair value on a recurring basis by the input levels prescribed by FAS 157:

See review report of Independent Registered Public Accounting Firm.

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	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at 09/30/2008
Assets
Investment in marketable securities - related party	$	1,203,000	$	--	$	--	$	1,203,000
Real estate held for sale	$	--	$	--	$	41,956,000	$	41,956,000
Investment in real estate loans	$	--	$	--	$	180,657,000	$	180,657,000
Assets under secured borrowings	$	--	$	--	$	14,669,000	$	14,669,000

Liabilities
Secured borrowings	$	--	$	--	$	13,651,000	$	13,651,000
Junior subordinated notes payable	$	--	$	--	$	56,350,000	$	56,350,000

NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS

On October 10, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-3 – Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of FAS 157 – Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Additionally, this FSP specifies that in situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FASB Statement No. 154, Accounting Changes and Error Corrections, paragraph 19). The adoption of FSP FAS 157-3 has not had a material impact on our financial condition or results of operation.

NOTE N — LEGAL MATTERS INVOLVING THE MANAGER

The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I and Fund III. We fully cooperated during the course of the investigation. On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”). Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.

In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC. The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007. In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities. We are not a party to the Order.

On November 21, 2005, Desert Land filed a complaint in the state District Court of Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which complaint is substantially similar to a complaint previously filed by Desert Land in the United States District Court, which complaint was dismissed by the United States Court of Appeals for the Ninth Circuit, which dismissal was upheld when the United States Supreme Court denied Desert Land’s Writ of Certiorari. The action is based upon allegations that Del Mar Mortgage, Inc and/or Vestin Mortgage charged unlawful fees on various loans arranged by them in 1999, prior to the formation of Fund II. On March 6, 2006, Desert Land amended the state court complaint to name VRM I.

See review report of Independent Registered Public Accounting Firm.

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Desert Land alleges that one or more of the defendants have transferred assets to other entities without receiving reasonable value therefore; alleges plaintiffs are informed and believe that defendants have made such transfers with the actual intent to hinder, delay or defraud Desert Land; that such transfers made the transferor insolvent and that sometime between February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that purpose.

The state court complaint further alleges that Desert Land is entitled to void such transfers and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to enjoin defendants from further disposition of assets. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the action, and Mr. Shustek has guaranteed the indemnification.

On October 16, 2008 the Court granted partial summary judgment in favor of Desert Land on a $2.5 million claim against Del Mar Mortgage Company, Inc. Judgment has not yet been entered, but the plaintiffs are asking the Court to make Vestin Mortgage, Inc., the judgment debtor, which Vestin Mortgage is opposing.

The remainder of the plaintiffs' claims have been scheduled for trial on December 4, 2008. The Defendants intend to vigorously defend the claims, as well as ask the Court to reconsider and vacate its October 16 order granting the summary judgment described in the preceding paragraph.

VRM I and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who allege, among other things, that they were wrongfully denied appraisal rights in connection with the merger of Fund I into Vestin Realty Mortgage I, Inc. The court certified a class of all former Fund I unit holders who voted against the merger of Fund I into Vestin Realty Mortgage I, Inc. The trial is currently scheduled to begin on March 27, 2009. The Defendants believe that the allegations are without merit and that they have adequate defenses. The Defendants intend to undertake a vigorous defense. The terms of VRM I’s management agreement and Fund I’s Operating Agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.

VRM I, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada. The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I. The action seeks monetary damages, punitive damages, and a rescission of the REIT conversion. The trial is currently scheduled to begin on April 19, 2010. The Defendants believe that the allegations are without merit and that they have adequate defenses. The Defendants intend to undertake a vigorous defense. The terms of VRM I’s management agreement and Fund I’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.

In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities. Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously. Other than the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.

NOTE O — LEGAL MATTERS INVOLVING THE COMPANY

See review report of Independent Registered Public Accounting Firm.

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We and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who allege, among other things, that they were wrongfully denied appraisal rights in connection with the merger of Fund II into Vestin Realty Mortgage II, Inc. The court certified a class of all former Fund II unit holders who voted against the merger of Fund II into Vestin Realty Mortgage II, Inc., and a subclass of all class members who were over the age of 60 and Nevada residents at the time of the merger. The trial is currently scheduled to begin on March 27, 2009. The Defendants believe that the allegations are without merit and that they have adequate defenses. The Defendants intend to undertake a vigorous defense. The terms of our management agreement and Fund II’s Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.

We, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by 88 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada. The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II. The action seeks monetary damages, punitive damages and a rescission of the REIT conversion. The trial is currently scheduled to begin on April 19, 2010. The Defendants believe that the allegations are without merit and that they have adequate defenses. The Defendants intend to undertake a vigorous defense. The terms of our management agreement and Fund II’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.

In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our net income in any particular period.

NOTE P — DIVIDEND REQUIREMENT

To maintain our status as a REIT, we are required to make dividend distributions, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regards to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of non-cash income over 5% of our REIT taxable income. All dividend distributions will be made at the discretion of our board of directors and will depend on our earnings, both tax and GAAP, financial condition, maintenance of REIT status and such other factors as the board of directors deems relevant.

Our Board of Directors decided to temporarily suspend the payment of dividends during June 2008. We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated.

NOTE Q — SUBSEQUENT EVENTS

During October 2009, we paid down approximately $2.1 million of the secured borrowings.

See review report of Independent Registered Public Accounting Firm.

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We, VRM I and Fund III have received a letter of intent to purchase the note and deed of trust for the Silver Star Destinations, LLC, loan dated October 22, 2008. The purchase agreement of $13.0 million, which our portion would be approximately $12.3 million, is scheduled to close on or before December 19, 2008; however, there can be no assurance that the sale will be completed.

On October 16, 2008, we, VRM I and Fund III entered into a forbearance agreement to postpone the foreclosure date on Babuski, LLC. On November 5, 2008, the guarantor paid $250,000 for cost and interest due related to the loan.

On October 30, 2008, our manager received a sales agreement to purchase Jeffrey's Court, LLC for approximately $6.3 million, of which our portion would be approximately $3.9 million. The sale is scheduled to close on December 8, 2008, where the buyer is to pay approximately $4.0 million down along with a one year note for the remaining $2.3 million. There can be no assurance that the sale will be completed.

As of November 7, 2008, four performing loans, totaling approximately $12.9 million, are delinquent in interest payments, our manager is currently working with the borrowers to receive full payment. However, no assurance can be given at this time that full payment will be received on these newly delinquent loans.

On November 7, 2008, we entered into the Taberna Letter Agreement described in Note I – Junior Subordinated Notes above.

See review report of Independent Registered Public Accounting Firm.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Vestin Realty Mortgage II, Inc.

We have reviewed the accompanying consolidated balance sheet of Vestin Realty Mortgage II, Inc. and its subsidiary as of September 30, 2008, and the related consolidated statements of operations for the three and nine month periods ended September 30, 2008 and 2007, the consolidated statement of equity and other comprehensive loss for the nine month period ended September 30, 2008 and the consolidated statements of cash flows for the nine month periods ended September 30, 2008 and 2007. All information included in these consolidated financial statements is the representation of the management of Vestin Realty Mortgage II, Inc.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vestin Realty Mortgage II, Inc. as of December 31, 2007 and the related consolidated statements of operations, equity and other comprehensive income and cash flows for the year ended December 31, 2007. We have also audited the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2007, and in our report dated March 13, 2008, we expressed an unqualified opinion on those consolidated financial statements and an unqualified opinion on the effectiveness of internal control over financial reporting. The consolidated financial statements referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Orange, California

November 10, 2008

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2008 and 2007. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2007 and our quarterly reports filed on Form 10-Q for the periods ended March 31, 2008 and June 30, 2008.

FORWARD - - LOOKING STATEMENTS

Certain statements in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Part II Item 1A Risk Factors of this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may prove erroneous, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

OVERVIEW

Our primary business objective is to generate income while preserving principal by investing in real estate loans. We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders. The loan underwriting standards utilized by our manager and Vestin Originations are less strict than those used by many institutional real estate lenders. In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders. As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks. However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio. While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.

Our operating results are affected primarily by: (i) the amount of capital we have to invest in real estate loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses which we may experience.

Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the nine months ended September 30, 2008.

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As of September 30, 2008, we had 18 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). These loans are currently carried on our books at a value of approximately $98.8 million, net of allowance for loan losses of approximately $46.0 million. These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings. As of September 30, 2008, six loans totaling approximately $62.4 million, representing approximately 27% of our portfolio’s total value, had a common guarantor, of these six loans; five loans totaling approximately $60.2 million were considered non-performing as of September 30, 2008. For additional information, see “Specific Loan Allowance” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this report Form 10-Q.

Non-performing assets, net of allowance for loan losses, totaled approximately $140.8 million or 52% of our total assets as of September 30, 2008, as compared to approximately $48.0 million or 14% of our total assets as of December 31, 2007. At September 30, 2008, non-performing assets consisted of approximately $42.0 million of real estate held for sale and approximately $98.8 million of non-performing loans, net of allowance for loan losses. See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this report Form 10-Q.

We believe that the significant increase in the level of our non-performing assets is a direct result of the deterioration of the economy and credit markets. As the economy has weakened and credit has become more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures. Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.

We expect that the weakness in the credit markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future. This may result in a further increase in defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may be required to restructure loans. This increase in loan defaults has materially harmed our operating results and led to the suspension of dividend payments to our stockholders.

As of November 10, 2008, four performing loans, totaling approximately $12.9 million, are delinquent in interest payments, our manager is currently working with the borrowers to receive full payment. However, no assurance can be given at this time that full payment will be received on these newly delinquent loans.

As of September 30, 2008, our loan-to-value ratio was 62.22%, net of allowances for loan losses, on a weighted average basis generally using appraisals prepared on an “as-if developed basis” in connection with the loan origination. Additional marked increases in loan defaults accompanied by a rapid decline in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect upon our financial condition and operating results. The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.

As of September 30, 2008, we have provided a specific reserve allowance for 11 non-performing loans and 3 performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager during the year ended December 31, 2007, and the nine months ended September 30, 2008. For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans in the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial Statements of this report Form 10-Q.

Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans. We do not have any arrangements in place, except for the funds we received pursuant to the VCT I closing and through our secured borrowing agreements, to materially increase the funds we will have available to invest from any other sources. See discussion under – “Capital and Liquidity.”

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From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans. For further information regarding related party transactions, refer to Note G – Related Party Transactions in the notes to our consolidated financials statements in Part I, Item 1 Consolidated Financial Statements of this report Form 10-Q.

As of September 30, 2008, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington. The weighted average term of our outstanding loans, including extensions, was 20 months and 19 months as of September 30, 2008 and December 31, 2007, respectively.

Comparison of Operating Results for the three and nine months ended September 30, 2008 to the three and nine months ended September 30, 2007.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007

Total revenues	$	3,687,000		$	6,939,000		$	16,759,000		$	21,861,000
Total operating expenses		23,924,000			5,162,000			50,894,000			7,781,000
Non-operating income (loss)		(2,102,000	)		793,000			(278,000	)		1,288,000
Loss from real estate held for sale		(17,807,000	)		(1,029,000	)		(31,063,000	)		(3,052,000	)

Income (loss) before provision for income taxes		(40,146,000	)		1,541,000			(65,476,000	)		12,316,000

Provision for income taxes		--			--			--			--

Net income (loss)	$	(40,146,000	)	$	1,541,000		$	(65,476,000	)	$	12,316,000

Basic and diluted earnings per common share	$	(2.72	)	$	0.10		$	(4.41	)	$	0.83
Dividends declared per common share	$	--		$	0.38		$	0.49		$	1.18
Weighted average common shares		14,772,583			14,894,003			14,844,070			14,926,027
Weighted average term of outstanding loans, including extensions	20 months			18 months			20 months			18 months

Comparison of Operating Results for the three months ended September 30, 2008 to the three months ended September 30, 2007.

Total Revenues: For the three months ended September 30, 2008, total revenues were approximately, $3.7 million compared to approximately $6.9 million during the three months ended September 30, 2007, a decrease of approximately $3.2 million or 47% due in significant part to the following factors:

Interest income from investments in real estate loans decreased to approximately $3.6 million during the three months ended September 30, 2008, compared to approximately $6.8 million during the same period in 2007, primarily due to the increase in non-performing loans during the three months ended September 30, 2008, compared to three months ended September 30, 2007. As of September 30, 2008, approximately $144.9 million of our loans were non-performing compared to approximately $29.8 million as of September 30, 2007. For additional information on our loan portfolio, see Note D – Investment Real Estate Loans of the Notes to the Consolidated Financial Statements of this Interim Report Form 10-Q.

Total Operating Expenses: For the three months ended September 30, 2008, total operating expenses were approximately $23.9 million compared to approximately $5.2 million during the three months ended September 30, 2007, an increase of approximately $18.7 million or 363% due in significant part to the following factors:

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Operating expenses increased primarily because of the recognition of provisions for loan losses. During the three months ended September 30, 2008, we recognized provisions for loan loss related to five non-performing loans and one performing loan totaling approximately $20.0 million. The significant increase in loan losses is primarily a result of declining values in real estate as reflected in updated appraisals obtained by our manager in 2008. We believe that the continued weakness in real estate markets may result in our recording additional losses related to the declining value of real estate securing our non-performing loans. See “Specific Loan Allowance “ in Note D Investment Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. During the three months ended September 30 2007, we recognized provision for loan loss of approximating $1.3 million. During the three months ended September 30, 2008, we, VRM I and Fund III foreclosed upon six loans and classified the collateralized properties as real estate held for sale. See “Specific Loan Allowance “ in Note D Investment Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

We recognized approximately $1.3 million of interest expense during the three months ended September 30, 2008 and 2007 related to the junior subordinated notes issued in connection with the trust preferred financing in June 2007. In addition, we recognized approximately $0.5 million of interest expense for the three months ended September 30, 2008 related to secured borrowings held during the period.

During the three months ended September 30, 2008 and 2007, we incurred professional fees of approximately $1.4 million and $1.8 million, respectively, primarily due to legal actions that have been filed against us in connection with the REIT conversion and foreclosure costs on non-performing loans. See Note O – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

Total Non-Operating Income (Loss): For the three months ended September 30, 2008, total non-operating loss was approximately, $2.1 million compared to income of approximately $0.8 million during the three months ended September 30, 2007, a decrease of approximately $2.9 million or 365%. This decrease is mainly due to the recognition of an other than temporary impairment of our marketable securities – related party, totaling approximately $2.2 million, for the three months ended September 30, 2008. In addition, we also experienced a decrease in interest income from banking institutions as the result of a decrease of approximately $25.2 million in cash balances from September 30, 2007 to 2008.

Total Loss from Real Estate Held for Sale: For the three months ended September 30, 2008, total losses from real estate held for sale were approximately $17.8 million compared to approximately $1.0 million during the three months ended September 30, 2007, an increase of approximately $16.8 million or 1,631%. As detailed below, such losses are primarily a result of declining real estate values as reflected in updated appraisals obtained in 2008. We believe that the continued weakness in real estate markets may result in additional losses on our real estate held for sale.

During the three months ended September 30, 2008, we, VRM I and Fund III acquired through foreclosure proceedings a 106 Unit Townhouse Project known as Cliff Shadows Townhomes located in, Las Vegas, NV, (Cliff Shadows Properties, LLC). Our manager evaluated the carrying value of the acquired property and estimated the net realizable value of the asset totaled approximately $9.7 million of which our portion totaled approximately $9.2 million. Based on this estimate, our write down on this real estate held for sale totaled approximately $7.0 million during the three months ended September 30, 2008. In October 2008, we entered into a sales contract with a third party at a price approximating the net realizable value. The sales contract requires that the buyer complete the purchase within 30 days, however, there can be no assurance that the sale will be completed.

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During the three months ended September 30, 2008, our manager evaluated the carrying value of a 25 acre parcel in Brawley, CA, (Brawley CA 122, LLC), and estimated the net realizable value of the asset totaled approximately $0.9 million of which our portion totaled approximately $0.3 million. Based on this estimate, our write down on this real estate held for sale totaled approximately $0.1 million during the three months ended September 30, 2008. In addition, our manager estimated a write down of approximately $1.7 million, of which our portion was approximately $0.8 million, related to 46.75 acres of land in Galveston, TX, based on the current sales price of $2.0 million.

During the three months ended September 30, 2008, we, VRM I and Fund III acquired through foreclosure proceedings 132.03 acres of Land within the Wolf Creek Estates Master Planned Community, located in Mesquite, NV, (MRPE, LLC). Our manager evaluated the carrying value of the acquired property and estimated the net realizable value of the asset totaled approximately $7.6 million of which our portion totaled approximately $5.4 million. Based on this estimate, our write down on this real estate held for sale totaled approximately $4.7 million during the three months ended September 30, 2008. In addition, we acquired through foreclosure proceedings three additional properties located in Mesquite, NV (The Orleans at Mesquite Estates, LLC, The Laurels at Mesquite Estates, LLC and The Sycamore Glenn at Mesquite Estates, LLC). Our manager evaluated the carrying value of the acquired properties and estimated the net realizable value of the assets totaled approximately $4.2 million. Based on this estimate, our write down on the real estate held for sale totaled approximately $4.5 million during the three months ended September 30, 2008.

We recorded a loss on sale of real estate held for sale of approximately $0.3 million during the three months ended September 30, 2008, on the sale of real estate located on Mt. Charleston, NV, (Forest Development, LLC). There was no loss on sale of real estate held for sale during the same period in 2007.

During the three months ended September 30, 2007, we wrote down approximately $0.1 on property located in Cathedral City, CA, (Rio Vista Nevada, LLC). In addition, we recognized expenses related to real estate held for sale for this property, which totaled $771,000 for the three months ended September 30, 2007.

Comparison of Operating Results for the nine months ended September 30, 2008 to the nine months ended September 30, 2007

Total Revenues: For the nine months ended September 30, 2008, total revenues were approximately, $16.8 million compared to approximately $21.9 million during the nine months ended September 30, 2007, a decrease of approximately $5.1 million or 23%. Revenues were primarily affected by the following factors:

Interest income from investments in real estate loans decreased to approximately $16.1 million during the nine months ended September 30, 2008, compared to approximately $19.9 million during the same period in 2007, primarily due to the increase in non-performing loans referred to above. Our revenue is also dependent upon the balance of our investment in real estate loans and the interest earned on these loans. As of September 30, 2008, our investment in real estate loans was approximately $233.1 million compared to our investment in real estate loans, including loans related to seller financed real estate held for sale, of approximately $262.2 million as of September 30, 2007. This decline is largely attributable to the increase in non-performing assets which has reduced the amount of cash available for investment in new loans. For additional information see Note D- Investment Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q

During the nine months ended September 30, 2007, we recognized a gain of approximately $1.0 million related to an impaired real estate loan that was paid in full. We had no related gain during the same period in 2008.

During the nine months ended September 30, 2007, we earned $0.6 million in other income from principal payments on notes receivable that were fully reserved, compared to $0.1 million during the same period in 2008.

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Total Operating Expenses: For the nine months ended September 30, 2008, total operating expenses were approximately $50.9 million compared to approximately $7.8 million during the nine months ended September 30, 2007, an increase of approximately $43.1 million or 554%. Expenses were primarily affected by the following factors in addition to the factors discussed above in Total Operating Expenses for the three months ended September 30, 2008:

Operating expenses increased primarily as a result of the recognition of provisions for loan losses. During the nine months ended September 30, 2008, we recognized provisions for loan losses totaling approximately $42.3 million, compared to $1.3 million for the same period in 2007. See “Specific Loan Allowance “ in Note D Investment Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. During the nine months ended September 30, 2008, we foreclosed upon ten loans and classified the collateralized properties as real estate held for sale. See “Specific Loan Allowance “ in Note D Investment Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

We recognized approximately $4.1 million of interest expense during the nine months ended September 30, 2008 related to the junior subordinated notes issued in connection with the trust preferred financing, compared to approximately $1.5 million during the same period in 2007.

Total Non-Operating Income (Loss): For the nine months ended September 30, 2008, total non-operating loss was approximately, $0.3 million compared to income of approximately $1.3 million during the nine months ended September 30, 2007, a decrease of approximately $1.6 million or 122%. Total Non-Operating Income (Expense) was primarily affected by the following factors in addition to the factors discussed above in Total Non-Operating Income (Loss) for the three months ended September 30, 2008:

This decrease is mainly due to the recognition of an other-than-temporary impairment of our marketable securities – related party, totaling approximately $2.2 million, for the nine months ended September 30, 2008. In addition, we experienced a decrease of approximately $0.8 million of interest income from banking institutions due to a decrease in cash balances referred to above.

The decrease was partially off set by a gain of approximately $1.6 million, relating to the purchase of outstanding debt at a discount to the face amount of such debt. No assurances can be given that any additional purchases of debt at a discount will occur in future periods.

Total Loss from Real Estate Held for Sale: For the nine months ended September 30, 2008, total losses from real estate held for sale were approximately $31.1 million compared to approximately $ 3.0 million during the nine months ended September 30, 2007, an increase of approximately $28.0 million or 918% due in significant part to the following factors:

In addition to the write downs and loss on real estate held for sale discussed above in Total Loss from Real Estate Held for Sale for the three months ended September 30, 2008, we wrote down approximately $12.8 million on four properties held for sale, totaling approximately $28.1 million for the nine months ended September 30, 2008. For additional information see Note F- Real Estate Held For Sale of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. As of September 30, 2008, we had 11 properties held for sale totaling approximately $42.0 million compared to 2 properties held for sale as of September 30, 2007 totaling approximately $28.9 million.

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We recorded a gain on sale of real estate held for sale related to seller financed loans of approximately $0.8 million during the nine months ended September 30, 2007, as a result of a seller financed loan on the 74 unit (90 bed) assisted living facility in San Bernardino, CA being paid in full. As of September 30, 2007, we had approximately $7.4 million, in real estate held for sale – seller financed. Upon the sale of real estate held for sale where we provide the financing, GAAP requires the new borrower to have a certain percentage equity ownership (ranging from 10% to 25%) to allow us to record the sale of property. In addition, the borrower must maintain a minimum commitment in the property on a continuing basis. Therefore, until the borrower meets these requirements, the proceeds received from the borrower are recorded as a deposit liability or applied to the balance of the real estate held for sale - seller financed, depending on the guidelines established by GAAP. Our revenues will continue to be impacted until we are able to convert these assets into investment in real estate loans or the loans are paid in full and we reinvest the proceeds into new loans. We have no real estate held for sale – seller financed as of September 30, 2008 and no related income during the nine months ended September 30, 2008.

Dividends to Stockholders; Reliance on Non-GAAP Financial Measurements: To maintain our status as a REIT, we are required to make distributions, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income over 5% of our REIT taxable income, determined without regard to the dividends paid and our net capital gain. Because we expect to make distributions based on these requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP. Based on our current tax estimates, all of 2007 distributions may be a return of capital.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income or cash flow from operations determined in accordance with GAAP as a measure of operating performance. Our total taxable income represents the aggregate amount of taxable income generated by us and our wholly owned taxable REIT subsidiary, TRS II, Inc. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of TRS II, Inc., which is not included in REIT taxable income until distributed to us. Subject to certain TRS value limitations, there is no requirement that the TRS II, Inc. distribute their earnings to us. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our stockholders, we believe that presenting investors with the information management uses to calculate our taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our stockholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies have identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to those reported by other companies.

In addition to satisfying the 90% taxable income distribution rule referred to above, the amount of distribution we make is ultimately based on distributing 100% of the REIT taxable income in order to limit any tax liability. The distribution of this additional 10% of REIT taxable income is typically made in the following tax year as IRC section 858 allows us to carry back distributions made, for example, in 2008 to 2007, for the purposes of zeroing out our 2007 REIT taxable income. As a result, included in the distributions of approximately $7.3 million declared during the nine months ended September 30, 2008 is approximately $0.4 million that was used to reduce our 2007 REIT taxable income to zero.

The table below reconciles the differences between reported net income and total estimated taxable income and estimated REIT taxable income for the nine months ended September 30, 2008:

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	For the Nine Months Ended
	September 30, 2008
Net loss, as reported	$	(65,476,000	)
Add (deduct):
Impairment of marketable securities - related party		2,228,000
Provision for loan losses		42,253,000
Write down on real estate held for sale		29,802,000
Net tax loss on foreclosure of real estate loans		(14,285,000	)
Book loss on sale of real estate held for sale		259,000
Tax loss on sale of real estate held for sale		(756,000	)
Recovery of allowance for doubtful notes receivable		(87,000	)
Payment on accrued legal expenses		(1,049,000	)
Total taxable loss		(7,111,000	)
Add: Taxable loss attributable to TRS II, Inc.		7,000

Estimated REIT taxable loss (prior to deductions for dividends paid)	$	(7,104,000	)

CAPITAL AND LIQUIDITY

Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate loans. Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months because our manager will manage our affairs. We may pay our manager an annual management fee of up to 0.25% of our aggregate capital received by Fund II and us from the sale of shares or membership units.

During the nine months, ended September 30, 2008, net cash flows provided by operating activities approximated $10.4 million. Operating cash flows were adversely impacted by the payment of approximately $1.9 million in legal fees relating to legal actions that have been filed against us in connection with the REIT conversion and RightStar. In addition, we incurred approximately $28.1 million in write-downs on real estate held for sale and approximately $39.5 million in provisions for loan losses, during the nine months ended September 30, 2008. Cash flows related to investing activities consisted of cash provided by loan payoffs and sales of real estate loans of approximately $89.4 million and cash used for new investments and purchases of real estate loans totaled approximately $81.8 million. Cash flows used for financing activities consisted of dividends to stockholders, net of reinvestment, of approximately $8.6 million and the purchase of debt totaled approximately $2.2 million. Financing activities also consisted of cash flows used for the purchase of our own stock totaled approximately $1.6 million.

At September 30, 2008, we had approximately $26.5 million in cash, $1.2 million in marketable securities – related party and approximately $271.0 million in total assets. We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or borrowings. We believe we have sufficient working capital to meet our operating needs in the near term, provided that payment on the junior subordinated notes discussed below is not accelerated, and provided further that there is not a significant increase in our non-performing assets.

Since we distribute most or all of our distributable cash generated by operations, our sources of liquidity include repayments of outstanding loans, dividend reinvestments by our stockholders, arrangements with third parties to participate in our loans and proceeds from issuance of note payable and secured borrowings. We rely primarily upon repayment of outstanding loans and proceeds from sales of real estate held for sale to provide capital for investment in new loans. The significant level of defaults on outstanding loans has reduced the funds we have available for investment in new loans. Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds. This has diminished our capital resources and impaired our ability to invest in new loans.

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Non-performing assets included loans in non-accrual status, net of allowance for loan losses, and real estate held for sale not sold through seller financing, totaling approximately $98.8 million and $42.0 million, respectively, as of September 30, 2008, compared to approximately $19.4 million and $28.6 million, respectively, as of December 31, 2007. It is possible that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted. Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets. Based on our estimates of the value of the underlying properties, we do not currently believe that any losses beyond those already recognized should be incurred from these assets upon final disposition. However, these estimates may prove erroneous or the value of the underlying properties may deteriorate. As a result, it is possible that we will not be able to realize the full estimated carrying values upon disposition.

As of November 107, 2008, four performing loans, totaling approximately $12.9 million, are delinquent in interest payments, our manager is currently working with the borrowers to receive full payment. However, no assurance can be given at this time that full payment will be received on these newly delinquent loans.

We have no current plans to sell any new shares except through our dividend reinvestment program. As of November 10, 2008, 2008, approximately 10% of our stockholders owning less than 1% our outstanding shares have elected to reinvest their dividends. The level of dividend reinvestment in the future will depend upon our performance, as well as the number of our stockholders who prefer to reinvest rather than receive current dividends.

On June 22, 2007 we completed the issuance of $60.1 million in unsecured trust preferred securities through the special purpose business trust, VCT I to Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding LLC. These securities have a fixed interest rate equal to 8.75% through July 2012, and thereafter are subject to a variable rate equal to LIBOR plus 3.5% per annum, resetting quarterly. VCT I used the proceeds from the sale of the trust preferred securities and the common securities to purchase our junior subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinated and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations.

The original indenture governing the notes included a number of covenants including the following financial covenants: (i) we were required to maintain a Tangible Net Worth of not less than $225 million, (ii) our trailing twelve months EBITDA was required to be not less than 2.5 times our Interest Expense and (iii) our ratio of Total Debt to Tangible Net Worth must not exceed 0.5 to 1.00. All defined terms are set forth in the indenture.

As of September 30, 2008, we were not in compliance with the tangible net worth covenant included in the indenture. On November 7, 2008, we entered into an agreement with Taberna Capital Management, LLC (“Taberna”), in its capacity as collateral manager for certain collateral debt obligation vehicles that are the holders of the junior subordinated notes, providing for an amendment of the tangible net worth covenant (the “Taberna Letter Agreement”). As amended, the tangible net worth covenant will require us to maintain Tangible Net Worth of not less than the lesser of $150 million or 2.5 times the then outstanding principal balance of junior subordinated notes (which amount is currently approximately $56.4 million.) Pursuant to the Taberna Letter Agreement, the EBITDA covenant in the indenture was also amended to provide that our EBITDA for the four preceding quarters shall not be less than 1.5 times Interest Expense for such period, provided that, for one quarter only, EBITDA shall not be less than 1.2 times Interest Expense for the four quarters ending June 30, 2009. The Taberna Letter Agreement also requires us to post a $3,750,000 letter of credit by November 12, 2008 and a $1,250,000 letter of credit by April 12, 2009. Taberna would be entitled to draw upon such letters of credit to pay principal and interest due on the junior subordinated notes if we are subject to an Event of Default under the indenture. For further information about the Taberna Letter Agreement, see Note I to our financial statements.

Our Tangible Net Worth as of September 30, 2008 ($198.6 million) was in compliance with the revised tangible net worth covenant. In addition, we believe the change to the EBITDA covenant will facilitate our compliance with such obligation in the future. However, no assurance can be given that we will maintain compliance with the revised covenants. If we do not comply and the lenders refuse to grant a waiver with respect to such non-compliance, then they could declare the junior subordinated notes to be in default and could seek to accelerate all amounts due under such notes. In such event, we could face a severe liquidity problem as we might not have sufficient cash resources to pay the amounts due on the notes.

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On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares. Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be funded from our available cash. As of September 30, 2008, we had purchased 427,411 shares as treasury stock through the repurchase program noted above. These shares are carried on our books at cost totaling approximately $3.0 million.

We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities. This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.

We may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans. The effective interest rates on all product categories range from 5% to 15%. Revenue by product will fluctuate based upon relative balances during the period. We had investments in 38 real estate loans, as of September 30, 2008, with a balance of approximately $233.1 million as compared to investments in 46 real estate loans as of December 31, 2007, with a balance of approximately $291.1 million.

As of September 30, 2008, we had 18 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). These loans are currently carried on our books at a value of approximately $98.8 million, net of allowance for loan losses of approximately $46.0 million, which does not include the allowances of approximately $4.7 million relating to the decrease in the property value for performing loans as of September 30, 2008. These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings. Our manager has evaluated these loans and, based on current estimates, believes that the value of the underlying collateral is sufficient to protect us from loss of principal. However, such estimates may prove erroneous, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.

During March 2007, our manager extended the Mid-State Raceway loan from March 31, 2007 to March 31, 2008. As of March 31, 2008, this loan had a balance of approximately $19.8 million, of which our portion was approximately $17.0 million. This loan was paid in full on April 10, 2008.

Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed. As of September 30, 2008, we have provided a specific reserve related to 11 non-performing loans and 3 performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager during the year ended December 31, 2007, and the nine months ended September 30, 2008. Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest. Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded. For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

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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.

Prevailing economic conditions;

Historical experience;

The nature and volume of the loan portfolio;

The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;

Evaluation of industry trends; and

Estimated net realizable value of any underlying collateral in relation to the real estate loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. For additional information regarding the roll-forward of the allowance for loan losses for the nine months ended September 30, 2008, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

Investments in Real Estate Held for Sale

At September 30, 2008, we held 11 properties with a total carrying value of approximately $42.0 million, which were acquired through foreclosure and recorded as investments in real estate held for sale. Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions. It is not our intent to invest in or own real estate as a long-term investment. We seek to sell properties acquired through foreclosure as quickly as circumstances permit. For additional information on our investments in real estate held for sale, refer to Note F – Real Estate Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any interests in off-balance sheet special purpose entities, other than the interest in VCT I as discussed in Note I – Junior Subordinated Notes of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. nor do we have any interests in non-exchange traded commodity contracts.

CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at September 30, 2008:

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Contractual Obligation	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years

Junior subordinated notes payable (1)	$	56,350,000	$	--	$	--	$	--	$	56,350,000
Secured borrowings (2)		13,651,000		13,651,000		--		--		--
Notes payable (3)		93,000		93,000		--		--		--
Total	$	70,094,000	$	13,744,000	$	--	$	--	$	56,350,000

(1)	See Note I – Junior Subordinated Notes of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

(2)	See Note J – Secured Borrowings of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

(3)	See Note K – Notes Payable of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

Interest income on loans is accrued by the effective interest method. We do not accrue interest income from loans once they are determined to be non-performing. A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.

The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at September 30, 2008, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption	Increase (Decrease) in Interest Income
Weighted average interest rate assumption increased by 1.0% or 100 basis points	$	2,735,000
Weighted average interest rate assumption increased by 5.0% or 500 basis points	$	13,677,000
Weighted average interest rate assumption decreased by 1.0% or 100 basis points	$	(2,735,000	)
Weighted average interest rate assumption decreased by 5.0% or 500 basis points	$	(13,677,000	)

The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results. It is not intended to imply our expectation of future revenues or to estimate earnings. We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.

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The following table presents a sensitivity analysis to show the impact on our financial condition at September 30, 2008, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption	Increase (Decrease) in Allowance for Loan Losses
Allowance for loan losses assumption increased by 1.0% of loan portfolio	$	2,331,000
Allowance for loan losses assumption increased by 5.0% of loan portfolio	$	11,657,000
Allowance for loan losses assumption decreased by 1.0% of loan portfolio	$	(2,331,000	)
Allowance for loan losses assumption decreased by 5.0% of loan portfolio	$	(11,657,000	)

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry. We, our manager and Vestin Originations generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:

Declines in real estate market conditions that can cause a decrease in expected market value;

Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and

Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Real Estate Held For Sale

Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. It is not our intent to invest in or own real estate as a long-term investment. In accordance with FAS 144 - Accounting for the Impairment or Disposal of Long Lived Assets, we seek to sell properties acquired through foreclosure as quickly as circumstances permit. The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies real estate held for sale when the following criteria are met:

Management commits to a plan to sell the properties;

The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

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An active program to locate a buyer and other actions required to complete a sale have been initiated;

The sale of the property is probable;

The property is being actively marketed for sale at a reasonable price; and

Withdrawal or significant modification of the sale is not likely.

Real Estate Held For Sale – Seller Financed

Because we occasionally foreclose on loans with raw land or developments in progress, available financing for such properties is often limited and we frequently provide financing up to 100% of the selling price on these properties. In addition, we may make additional loans to the buyer to continue development of a property. Although sales agreements are consummated at closing, they lack adequate initial investment by the buyer to qualify as a sales transaction as defined in FAS 66. These sales agreements are not recorded as a sale until the requirements of FAS 66 are met.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, primarily from changes in interest rates. We do not deal in any foreign currencies and do not own any options, futures or other derivative instruments.

Most of our assets consisted of investments in real estate loans, which from time to time include those that are financed under Inter-creditor Agreements. At September 30, 2008, our aggregate investment in real estate loans was approximately $182.5 million, net of allowance of approximately $50.7 million, with a weighted average effective interest rate of 12.18%. The weighted average interest rate of 12.18% is base on the contractual terms of the loans for the entire portfolio including non-performing loans. The weighted average interest rate on performing loans only, as of September 30, 2008, was 12.07%. Most of the real estate loans had an initial term of 12 months. The weighted average term of outstanding loans, including extensions, at September 30, 2008, was 20 months. All but one of the outstanding real estate loans at September 30, 2008, was a fixed rate loan. The variable interest rate loan was considered non-performing as of September 30, 2008, see Note D – Investments in Real Estate Loans in the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. All of the real estate loans are held for investment purposes; none are held for sale. We intend to hold such real estate loans to maturity. None of the real estate loans had prepayment penalties and 25 loans, totaling approximately $141.3 million, had an exit fee. Out of the 25 loans with an exit fee, 11 loans, totaling approximately $81.4 million, were considered non-performing as of September 30, 2008.

Market fluctuations in interest rates generally do not affect the carrying value of our investment in real estate loans. However, significant and sustained changes in interest rates could affect our operating results. If interest rates decline significantly, some of the borrowers could prepay their loans with the proceeds of a refinancing at lower interest rates. This would reduce our earnings and funds available for dividend distribution to stockholders. On the other hand, a significant increase in interest rates could result in a slowdown in real estate development activity that would reduce the demand for commercial real estate loans.

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As a result, we might encounter greater difficulty in identifying appropriate borrowers. We are not in a position to quantify the potential impact on our operating results from a material change in interest rates.

The following table contains information about the investment of real estate loans in our portfolio as of September 30, 2008. The presentation aggregates the investment in real estate loans by their maturity dates for maturities occurring in each of the years 2008 through 2012 and thereafter and separately aggregates the information for all maturities arising after 2012. The carrying values of these assets approximate their fair value as of September 30, 2008.

	Interest Earning Assets Aggregated by Maturity at September 30, 2008
Interest Earning Assets	2008		2009		2010		2011		2012		Thereafter		Total
	(a)
Investments In Real Estate Loans	$	170,295,000	$	44,886,000	$	17,964,000	$	--	$	--	$	--	$	233,145,000

Weighted Average Interest Rates		12.07%		12.80%		11.63%		--%		--%		--%		12.18%

(a)	Amounts include the balance of non-performing loans and loans that have been extended subsequent to September 30, 2008.

At September 30, 2008, we also had approximately $27.7 million invested in cash, certificates of deposit, and marketable securities – related party (VRM I). Approximately 3% of our assets will be held in such accounts as a cash reserve; additional deposits in such accounts will be made as funds are received from investors and repayment of loans pending the deployment of such funds in new real estate loans. We believe that these financial assets do not give rise to significant interest rate risk due to their short-term nature.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure. In connection with the preparation of this Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our management, including the CEO and CFO, as of September 30, 2008, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon our evaluation, our CEO and CFO concluded that, as of September 30, 2008, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected. Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management, including our CEO and CFO, does not expect that our controls and procedures will prevent all errors.

The certifications of the our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.

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Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and our CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the third fiscal quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the third fiscal quarter of 2008.

ITEM 4T.

CONTROLS AND PROCEDURES

Not applicable.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Please refer to Note N – Legal Matters Involving the Manager and Note O – Legal Matters Involving the Company in Part I, Item 1 Consolidated Financial Statements of this Form 10-Q for information regarding our legal proceedings, which are incorporated herein by reference.

ITEM 1A.

RISK FACTORS

In considering our future performance and any forward-looking statements made in this report, the material risks described below should be considered carefully. These factors should be considered in conjunction with the other information included elsewhere in this report.

RISKS RELATED TO OUR BUSINESS

Defaults on our real estate loans will decrease our revenues and our distributions to shareholders. Current economic conditions increase the risk of defaults on our loans.

We are in the business of investing in real estate loans and, as such, we are subject to risk of defaults by borrowers. Our performance will be directly impacted by any defaults on the loans in our portfolio. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the rate of default on our loans could be higher than those generally experienced in the real estate lending industry. Any sustained period of increased defaults could adversely affect our business, financial condition, liquidity and the results of our operations.

As of September 30, 2008, we had in our portfolio approximately $98.8 million in non-performing loans, net of allowance for loan losses of approximately $46.0 million, which does not include allowances of approximately $4.7 million for performing loans, and approximately $42.0 million of real estate held for sale for a total of approximately $140.8 million in non-performing assets, which represented approximately 71% of our stockholders’ equity. We believe this is largely attributable to difficulties in the real estate and credit markets. At this time, we are not able to predict how long such difficult economic conditions will continue.

Our weighted average loan-to-value ratio, not including allowance for loan losses, as of September 30, 2008, was 107.15%, as compared to 72.64% as of December 31, 2007, primarily as a result of declining real estate values, which have eroded the market value of our collateral. As a result, we may not be able to recover the full amount of our loans if the borrower defaults. Moreover, any failure of a borrower to pay interest on loans will reduce our revenues, the dividends we pay to stockholders and, most likely, the value of our stock. Similarly, any failure of a borrower to repay loans when due may reduce the capital we have available to make new loans, thereby adversely affecting our operating results. As of September 30, 2008 and December 31, 2007, we had approximately $50.7 million and $12.9 million in allowances for loan losses, respectively, resulting in net weighted average loan-to-value ratios of 62.22% and 68.52%, respectively.

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A prolonged economic slowdown, lengthy or severe recession and constraints in the credit markets could harm our business.

The risks associated with our business are more acute during periods of economic slowdown or recession because these periods can be accompanied by illiquid credit markets and declining real estate values. During the nine months ended September 30, 2008, we conducted updated appraisals on 25 properties securing our loans, representing approximately 70% of our total loan portfolio value, and concluded that the estimated value of such properties should be reduced by approximately $74.6 million, which negatively impacted our weighted average loan to value ratio. As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession. We are of the opinion that problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers. We believe this lack of available funds has led to an increase in defaults on our loans. Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers. These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary to pay back our loans. Thus, an extended period of illiquidity in the credit markets could result in a material increase in the number of our loans that are not paid back on time. Any sustained period of increased delinquencies, defaults or foreclosures will likely have an adverse affect upon our ability to originate, purchase and securitize loans, which could significantly harm our business, financial condition, liquidity and results of operations.

Our underwriting standards and procedures are more lenient than many institutional lenders, which may result in a higher level of non-performing assets and less amounts available for distribution.

There may be a greater risk of default by our borrowers, which may impair our ability to make timely distributions and which may reduce the amount we have available to distribute. Our underwriting standards and procedures are more lenient than many institutional lenders in that we will invest in loans to borrowers who may not be required to meet the credit standards of other financial institutional real estate lenders. This may lead to an increase in non-performing assets in our loan portfolio and create additional risks of return. We approve real estate loans more quickly than other lenders. We rely heavily on third-party reports and information such as appraisals and environmental reports. Because of our accelerated due diligence process, we may accept documentation that was not specifically prepared for us or commissioned by us. This creates a greater risk of the information contained therein being out of date or incorrect. Generally, we will not spend more than 20 days assessing the character and credit history of our borrowers. Due to the nature of loan approvals, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to the borrower and the security.

We depend upon our real estate security to secure our real estate loans, and we may suffer a loss if the value of the underlying property declines. We are currently experiencing a trend of declining real estate values, which increases the risk that our collateral will prove insufficient to protect our loans.

We depend upon our real estate security to protect us on the loans that we make. We depend upon the skill of independent appraisers to value the security underlying our loans. However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent events. Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower. Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals. During the past 12 months, there has been a significant decline in real estate values in many of the markets where we operate, resulting in a decline in the estimated value of the real estate securing our loans.

In addition, most of the appraisals are prepared on an as-if developed basis, which approximates the post-construction value of the collateralized property assuming such property is developed. As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes and successful development by the purchaser upon which development is dependent on availability of financing. As most of the appraisals will be prepared on an as-if developed basis, if the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute.

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We typically make “balloon payment” loans, which are riskier than loans with payments of principal over an extended period of time.

The loans we invest in or purchase generally require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. As of September 30, 2008, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. Loans with balloon payments are riskier than loans with payments of principal over an extended time period such as 15 or 30 years because the borrower’s repayment depends on its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due. The borrower’s ability to achieve a successful sale or refinancing of the property may be adversely impacted by deteriorating economic conditions or illiquidity in the credit markets. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

Our loans are not guaranteed by any governmental agency.

Our loans are not insured or guaranteed by a federally owned or guaranteed mortgage agency. Consequently, our recourse, if there is a default, may be to foreclose upon the real property securing a loan and/or pursuing the borrower’s guarantee of the principal. The value of the foreclosed property may have decreased and may not be equal to the amount outstanding under the corresponding loan, resulting in a decrease of the amount available to distribute.

Our real estate loans may not be marketable, and we expect no secondary market to develop.

We do not expect our real estate loans to be marketable, and we do not expect a secondary market to develop for them. As a result, we will generally bear all the risk of our investment until the loans mature. This will limit our ability to hedge our risk in changing real estate markets and may result in reduced returns to our investors.

We may not be able to maintain compliance with all of the financial covenants contained in the indenture governing our junior subordinated notes. Failure to comply could result in acceleration of all amounts due under such notes.

In June 2007, we completed the issuance of $60.1 million of trust preferred securities through a special purpose business trust in order to expand our capacity to invest in real estate loans. The amount currently due on such notes is approximately $56.4 million. The junior subordinated notes sold in June 2007 in connection with the trust preferred financing bear interest at a fixed rate of 8.75% through July 2012; thereafter the interest rate is LIBOR plus 3.5%, resetting quarterly. The indenture governing the junior subordinated notes sets forth a number of financial covenants. As of September 30, 2008 we were not in compliance with the tangible net worth covenant. We subsequently entered into an agreement with the agent representing the note holders providing for an amendment of such covenant as well as the EBITDA covenant. As a result, we are currently in compliance with all of the financial covenants set forth in the indenture. Nonetheless, it is possible that a further deterioration in our financial condition or operating performance could result in our violating the revised financial covenants. In such event, absent a waiver from the note holders, the lenders could declare an event of default and could seek to accelerate all amounts due under the junior subordinated notes. We might not have cash resources sufficient to pay the amounts due in the event of acceleration. As a result, our business operations would suffer severe disruption if the lenders sought to accelerate payment of the junior subordinated notes. In addition, an unresolved event of default under the indenture would prevent us from paying any dividends or other distributions to our shareholders.

The terms of our indebtedness increase our operating risk and may reduce the amount we have available to distribute to stockholders.

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We may borrow up to 70% of the fair market value of our outstanding real estate loans at any time. We currently have outstanding approximately $56.4 million of trust preferred securities bearing interest at 8.75%. These borrowings will require us to carefully manage our cost of funds. In order to benefit from the trust preferred securities, we need to loan the proceeds at rates in excess of the rates payable on the junior subordinated notes. Loans made during the nine months ended September 30, 2008 had a weighted average interest rate of 14.43%. However, no assurance can be given that we will be successful in continuing to make loans at rates in excess of our cost of funds, particularly if non-performing loans reduce our effective rate of return on our outstanding loans or if there is a continuing decline in interest rates.

In addition, the financial covenants in the indenture governing the junior subordinated notes may constrain our flexibility in operating our business. Should we breach a material covenant or if we are unable to meet our payment obligations on the junior subordinated notes, the purchasers of the trust preferred securities may declare us in default, resulting in acceleration of the principal sums due on the notes and restrictions on the payment of dividends to our stockholders.

The terms of any additional indebtedness we incur may vary. However, some lenders may require as a condition of making a loan to us that the lender will receive a priority on loan repayments received by us. As a result, if we do not collect 100% on our investments, the first dollars may go to our lenders and we may incur a loss that will result in a decrease of the amount available for distribution. In addition, we may enter into securitization arrangements in order to raise additional funds. Such arrangements could increase our leverage and adversely affect our cash flow and our ability to make distributions.

We may need cash to meet our minimum REIT distribution requirements and limit U.S. federal income taxation. Because we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) to qualify as a REIT and because we intend to distribute substantially all of our REIT taxable income and net capital gain, our ability to expand our loan portfolio will depend in large part on external sources of capital. In addition, if our minimum distribution requirements to maintain our REIT status and minimize U.S. federal income taxation become large relative to our cash flow as a result of our taxable income exceeding our cash flow from operations, then we may be required to borrow funds or raise capital by selling assets to meet those distribution requirements. Any equity financing may result in substantial dilution to our stockholders, and any debt financing may include restrictive covenants. We may not be able to raise capital on reasonable terms, if at all.

We may have difficulty protecting our rights as a secured lender.

We believe that our loan documents will enable us to enforce our commercial arrangements with borrowers. However, the rights of borrowers and other secured lenders may limit our practical realization of those benefits. For example:

Judicial foreclosure is subject to the delays of protracted litigation. Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it;

The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property;

Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights;

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The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral;

Required licensing and regulatory approvals may complicate our ability to foreclose or to sell a foreclosed property where our collateral includes an operating business. See Note O – Legal Matters Involving The Company in the notes to the consolidated financial statement under Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

We may not be able to pursue deficiency judgments after we foreclose on collateral; and

State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.

By becoming the owner of property, we may incur additional obligations, which may reduce the amount of funds available for distribution.

We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale. Acquiring a property at a foreclosure sale may involve significant costs. If we foreclose on the security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings. In addition, significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made on any property we own regardless of whether the property is producing any income. See Note F – Real Estate Held for Sale in the notes to the consolidated financial statement under Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q.

Under applicable environmental laws, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment. Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person would be able to indemnify us to the full extent of our liability. Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.

Our results are subject to fluctuations in interest rates and other economic conditions.

Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets. If the economy is healthy, we expect that more people will be borrowing money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too much and the cost of borrowing may become too expensive. Alternatively, if the economy enters a recession, real estate development may slow. A slowdown in real estate lending may mean we will have fewer loans to acquire, thus reducing our revenues and distributions to stockholders.

Interest rate fluctuations may affect our operating results as follows:

If interest rates rise, borrowers under loans with monthly or quarterly principal payments may be compelled to extend their loans to decrease the principal paid with each payment because the interest component has increased. If this happens, we are likely to be at a greater risk of the borrower defaulting on the extended loan, and the increase in the interest rate on our loan may not be adequate compensation for the increased risk. Additionally, any fees paid to extend the loan are paid to Vestin Originations or our manager, not to us. Our revenues and distributions will decline if we are unable to reinvest at higher rates or if an increasing number of borrowers default on their loans; and

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If interest rates decline, the amount we can charge as interest on our loans will also likely decline. Moreover, if a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in real estate loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. As of September 30, 2008, none of our loans had a prepayment penalty, although 25 of our loans, totaling approximately $141.3 million, had an exit fee. Out of the 25 loans with an exit fee, 11 loans, totaling approximately $81.4 million, were considered non-performing as of September 30, 2008. However, depending upon the amount by which interest rates decline, the amount of the exit fees is generally not significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.

Our loan portfolio may exhibit greater risk if it is not diversified geographically.

As of September 30, 2008, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington, with approximately 32% of our loans in Nevada. Depending on the market and on our company’s performance, we plan to expand our investments throughout the United States. However, our manager has limited experience outside of the Western and Southern United States. Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state.

Legal actions seeking damages and appraisal rights could harm our operating results and financial condition.

We are a party in several legal actions seeking damages and appraisal rights in connection with the REIT conversion. See Note N – Legal Matters Involving The Manager and Note O – Legal Matters Involving The Company in the notes to the consolidated financial statement under Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q. While we believe these actions are without merit, the defense of such actions has materially increased our legal costs and may require the substantial attention of our management. The increased legal costs have adversely impacted our operating results. As of September 30, 2008, we have incurred legal expenses of approximately $2.6 million related to such actions. Moreover, any adverse outcome in such actions could result in our having to pay substantial damages, which would reduce our cash resources and harm our financial condition.

We may have a lack of control over participations.

We will consider investing in or purchasing loans jointly with other lenders and purchasers, some of whom might be affiliates of Vestin Mortgage. We will initially have, and will maintain a controlling interest as lead lender in participations with non-affiliates. Although it is not our intention to lose control, there is a risk that we will be unable to remain as the lead lender in the loans in which we participate in the future. In the event of participation with a publicly registered affiliate, the investment objectives of the participants shall be substantially identical. There shall be no duplicate fees. The compensation to the sponsors must be substantially identical, and the investment of each participant must be on substantially the same terms and conditions.

Each participant shall have a right of first refusal to buy the other's interest if the co-participant decides to sell its interest. We will not participate in joint ventures or partnerships with affiliates that are not publicly registered except as permitted in the NASAA Guidelines or otherwise approved by our board of directors. If our co-participant affiliate determines to sell its interest in the loan, there is no guarantee that we will have the resources to purchase such interest and we will have no control over a sale to a third party purchaser.

MANAGEMENT AND CONFLICTS OF INTEREST RISKS

We rely on our manager to manage our day-to-day operations and select our loans for investment.

Our ability to achieve our investment objectives and to make distributions depends upon our manager’s and its affiliate’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers. Stockholders have no opportunity to evaluate the financial information or creditworthiness of borrowers, the terms of mortgages, the real property that is our collateral or other economic or financial data concerning our loans. We pay our manager an annual management fee of up to 0.25% of our aggregate capital received by us and Fund II from the sale of shares or membership units.

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This fee is payable regardless of the performance of our loan portfolio. Our manager’s duties to our stockholders are generally governed by the terms of the management contract, rather than by common law principles of fiduciary duty. Moreover, our manager is not required to devote its employees’ full time to our business and may devote time to business interests competitive to our business.

Our manager’s lack of experience with certain real estate markets could impact its ability to make prudent investments on our behalf.

As of September 30, 2008, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington. Depending on the market and on our company’s performance, we plan to expand our investments throughout the United States. However, our manager has limited experience outside of the Western and Southern United States. Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state. Our manager’s limited experience in most U.S. real estate markets may impact its ability to make prudent investment decisions on our behalf. Accordingly, where our manager deems it necessary, it plans to utilize independent real estate advisors and local legal counsel located in markets where it lacks experience for consultation prior to making investment decisions. Stockholders will not have an opportunity to evaluate the qualifications of such advisors and no assurance can be given that they will render prudent advice to our manager.

Our success depends on key personnel of our manager, the loss of whom could adversely affect our operating results, and on our manager’s ability to attract and retain qualified personnel.

Our success depends in part upon the continued contributions of certain key personnel of our manager, including; Michael V. Shustek (Chief Executive Officer and President), Rocio Revollo (Chief Financial Officer), and Daniel B. Stubbs (Senior Vice President, Underwriting) some of whom would be difficult to replace because of their extensive experience in the field, extensive market contacts and familiarity with our company. If any of these individuals were to cease their employment with our manager, our operating results could suffer. None of the key personnel of our manager is subject to an employment, non-competition or confidentiality agreement with our manager, or us and we do not maintain “key man” life insurance policies on any of them. Our future success also depends in large part upon our manager’s ability to hire and retain additional highly skilled managerial, operational and marketing personnel. Our manager may require additional operations and marketing people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the relevant markets. Competition for personnel is intense, and we cannot be assured that we will be successful in attracting and retaining skilled personnel. If our manager were unable to attract and retain key personnel, the ability of our manager to make prudent investment decisions on our behalf may be impaired.

Vestin Mortgage serves as our manager pursuant to a long-term management agreement that may be difficult to terminate and does not reflect arm’s length negotiations.

We have entered into a long-term management agreement with Vestin Mortgage to act as our manager. The term of the management agreement is for the duration of our existence. The management agreement may only be terminated upon the affirmative vote of a majority in interest of stockholders entitled to vote on the matter or by our board of directors for cause upon 90 days’ written notice of termination. Consequently, it may be difficult to terminate our management agreement and replace our manager in the event that our performance does not meet expectations or for other reasons unless the conditions for termination of the management agreement are satisfied. The management agreement was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s length bargaining.

Our manager will face conflicts of interest concerning the allocation of its personnel’s time.

Our manager is also the manager of VRM I, Fund III and inVestin, companies with investment objectives similar to ours. Our manager and Mr. Shustek, who indirectly owns 100% of our manager, anticipate that they may also sponsor other real estate programs having investment objectives similar to ours. As a result, our manager and Mr. Shustek may have conflicts of interest in allocating their time and resources between our business and other activities. During times of intense activity in other programs and ventures, our manager and its key people will likely devote less time and resources to our business than they ordinarily would.

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Our management agreement with our manager does not specify a minimum amount of time and attention that our manager and its key people are required to devote to our company. Thus, our manager may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives.

Our manager and its affiliates will face conflicts of interest arising from our fee structure.

Vestin Originations, an affiliate of our manager, will receive substantial fees from borrowers for transactions involving real estate loans. Many of these fees are paid on an up-front basis. In some cases, Vestin Originations or our manager may be entitled to additional fees for loan extensions or modifications and loan assumptions, reconveyances and exit fees. These and other fees are quantified and described in greater detail in our management agreement under “Management Agreement — Compensation.” Vestin Originations’ compensation is based on the volume and size of the real estate loans selected for us, regardless of their performance, which could create an incentive to make or extend riskier loans. Our interests may diverge from those of our manager, Vestin Originations and Mr. Shustek to the extent that Vestin Originations benefits from up-front fees that are not shared with us.

Vestin Originations will be receiving fees from borrowers that would otherwise increase our returns. Because Vestin Originations receives all of these fees, our interests will diverge from those of our manager, Vestin Originations and Mr. Shustek when our manager decides whether we should charge the borrower higher interest rates or our manager’ affiliates should receive higher fees from borrowers.

We paid our manager a management fee of approximately $0.8 million for the nine months ended September 30, 2008. In addition, Vestin Mortgage and Vestin Originations received a total of approximately $3.5 million and $4.1 million, respectively, in fees directly from borrowers for the nine months ended September 30, 2008. The amounts received from borrowers represent fees earned by Vestin Mortgage and Vestin Originations for loans originated for all funds managed by Vestin Mortgage, including us, VRM I, Fund III and inVestin. Our assets represented approximately 77% of the assets managed by Vestin Mortgage as of September 30, 2008.

Our manager will face conflicts of interest relating to other investments in real estate loans.

We expect to invest in real estate loans when one or more other companies managed by our manager are also investing in real estate loans. There is a risk that our manager may select for us a real estate loan investment that provides lower returns than a real estate loan investment purchased by another program or entity managed by our manager. Our manager also serves as the manager for VRM I, Fund III and inVestin, which have similar investment objectives as our company. There are no restrictions or guidelines on how our manager will determine which loans are appropriate for us and which are appropriate for VRM I, Fund III, inVestin or another company that our manager manages. Moreover, our manager has no obligation to provide us with any particular opportunities or even a pro rata share of opportunities afforded to other companies it manages.

Our manager may face conflicts of interest in considering a possible combination of the Company with VRM I.

VRM I is a company, which is engaged in making mortgage loans similar to the loans that we make and is managed by our manager. There may be cost savings and operating synergies that could be achieved by combining VRM I with VRM II. After initial exploration of a possible combination of VRM I with VRM II, our Board of Directors decided to postpone further consideration of the possible combination. Notwithstanding the postponement, our management has evaluated issues relevant to a possible combination and it is possible the potential combination will be pursued again in the future. At this time, no decision has been made with respect to whether a combination will be pursued, or with respect to the possible form of any such combination. Since our manager owes a duty to the investors in each of these entities, it could face a conflict of interest in considering such a possible combination. Any decision with respect to a proposed combination with VRM I will most likely be subject to the approval of the independent directors or stockholders of VRM I as well as the approval of our Board of Directors.

UNITED STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT QUALIFICATION

Our failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce amounts available for distribution to our stockholders.

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We have elected to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our organization and method of operation will enable us to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.

If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, and we would not be allowed to deduct distributions made to our stockholders in computing our taxable income. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify. The additional tax liability would reduce our net earnings available for investment or distribution to stockholders. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain U.S. federal, state and local taxes on our income and property.

Distributions from a REIT are currently taxed at a higher rate than corporate distributions.

Under the Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income tax rate on both distributions from certain domestic and foreign corporations and net long-term capital gain for individuals was reduced to 15% until 2008. The Tax Increase Prevention and Reconciliation Act of 2005, which signed into law on May 17, 2006, extended the 15% long-term net capital gain rate to 2010. However, this reduced rate of tax on distributions generally will not apply to our distributions (except those distributions identified by the company as “capital gain dividends” which are taxable as long-term capital gain) and therefore such distributions generally will be taxed as ordinary income. Ordinary income generally is subject to U.S. federal income tax rate at a rate of up to 35% for individuals. The higher tax rate on our distributions may cause the market to devalue our common stock relative to stock of those corporations whose distributions qualify for the lower rate of taxation. Please note that, as a general matter, distributions from a REIT will be taxed at the same rate as stockholders’ share of Vestin Realty Mortgage II’s taxable income attributable to its realized net interest income.

A portion of our business is potentially subject to prohibited transactions tax.

As a REIT, we are subject to a 100% tax on our net income from “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business. Sales by us of property in the course of our business will generally constitute prohibited transactions.

We intend to avoid the 100% prohibited transactions tax on property foreclosed upon by Fund II prior to the REIT conversion by holding and selling such properties through one or more wholly-owned taxable REIT subsidiaries. However, under the Code, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries and a taxable REIT subsidiary generally cannot operate a lodging or health care facility.

As of September 30, 2008, we held 11 properties with a total carrying value of approximately $42.0 million recorded as investments in real estate held for sale and no properties in which we or an affiliate provided the financing, recorded as real estate held for sale – seller financed. United States generally accepted accounting principals (“GAAP”) requires us to include real estate held for sale – seller financed until the borrower has met and maintained certain requirements. The real estate held for sale collectively constituted approximately 19% of our assets as of September 30, 2008.

Taxable REIT subsidiaries are subject to corporate-level tax, which may devalue our common stock relative to other companies.

Taxable REIT subsidiaries are corporations subject to corporate-level tax. Our use of taxable REIT subsidiaries may cause the market to value its common stock lower than the stock of other publicly traded REITs which may not use taxable REIT subsidiaries and lower than the equity of mortgage pools taxable as non-publicly traded partnerships such as Fund II’s intended qualification prior to the REIT conversion, which generally are not subject to any U.S. federal income taxation on their income and gain.

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Our use of taxable REIT subsidiaries may have adverse U.S. federal income tax consequences.

We must comply with various tests to continue to qualify as a REIT for U.S. federal income tax purposes, and our income from and investments in taxable REIT subsidiaries generally do not constitute permissible income and investments for purposes of the REIT qualification tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot be assured that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature.

We may endanger our REIT status if the distributions we receive from our taxable REIT subsidiaries exceed applicable REIT gross income tests.

The annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of distributions that we can receive from our taxable REIT subsidiaries and still maintain our REIT status. Generally, not more than 25% of our gross income can be derived from non-real estate related sources, such as distributions from a taxable REIT subsidiary. If, for any taxable year, the distributions we received from our taxable REIT subsidiaries, when added to our other items of non-real estate related income, represent more than 25% of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.

We may lose our REIT status if we issue shares under our stockholders’ rights plan.

Under Section 562(c) of the Code, a REIT generally cannot make a distribution unless the distribution is pro rata, with no preference to any share of stock as compared to other shares of the same class of stock. A REIT that is not in compliance with this requirement may lose its REIT status. Under our stockholders’ rights plan, upon certain events, some holders of our common stock and not others will have the right to acquire shares of Series A preferred stock. When effective, this right could be treated as a deemed distribution to those holders of our common stock entitled to the right with no distribution to other such holders. Thus, this right, when effective, could be treated as a distribution that is not consistent with the requirements of Section 562(c) of the Code, which could result in the loss of our REIT qualification.

RISK OF OWNERSHIP OF OUR COMMON STOCK

The market price and trading volume of our common stock may be volatile.

The market price of our common stock since trading commenced on May 1, 2006, to September 30, 2008, has ranged from $2.00 to $15.96 (adjusted for the 1-for-2.6 reverse stock split in December 2007). We believe the price of our stock in the months after we were listed was affected by, among other things, selling pressure from stockholders seeking immediate liquidity and the level of non-performing assets, which we own. We continue to own a significant level of non-performing assets and our sector of the market has suffered from the problems encountered by sub-prime residential lenders. Our stock price may continue to be highly volatile and subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Our Company will be dissolved on December 31, 2020 unless the holders of a majority of our common stock determine otherwise. As we move closer to the dissolution date, we expect to stop making new loans and our stock price could approach our book value per share. However, no assurance can be given that the stock price will approach book value and then prevailing market conditions may affect the price of our stock even as we near 2020.

The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors, many of which are beyond our control, that could negatively affect our stock price or result in fluctuations in the price or trading volume of our common stock include:

Increases in loans defaulting or becoming non-performing or being written off;

Actual or anticipated variations in our quarterly operating results or distributions;

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Publication of research reports about us or the real estate industry;

Changes in market valuations of similar companies;

Changes in tax laws affecting REITs;

Litigation;

Adverse market reaction to any increased indebtedness we incur in the future; and

General market and economic conditions.

Market interest rates could have an adverse effect on our stock price.

One of the factors that will influence the price of our common stock will be the dividend yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. Thus, an increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, a lack of which could adversely affect the market price of our common stock.

We are the subject of stockholder litigation, which may depress the price of our stock.

A number of lawsuits have been filed against us by stockholders who claim, among other things, that they were improperly denied dissenter’s rights in connection with the conversion of Fund II into a REIT. We believe the suits are without merit and we intend to vigorously defend against such claims. Nonetheless, the outcome of the lawsuits cannot be predicted at this time, nor can a meaningful evaluation be made of the potential impact upon us if the plaintiffs were to prevail in their claims. The resulting uncertainty may depress the price of our stock. Moreover, concerns about the costs of defense and the potential diversion of our manager’s time to deal with these lawsuits may have an adverse effect upon the price of our stock.

Our charter documents and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Our charter and bylaws and Maryland corporate law contain a number of provisions (as further described in exhibit 3.2 Bylaws of the Registrant under the Exhibit Index included in Part IV, Item 15 Exhibits and Financial Statement Schedules of this Report Form 10-K) that could delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our common stock or otherwise be in their best interests, including:

Ownership Limit. Our articles of incorporation, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than a 9.8% of the number or value, whichever is more restrictive, of the outstanding shares of our stock, unless our board of directors waives this ownership limit. However, our board of directors may not grant a waiver of the ownership limit that would permit a person to acquire more than 15% of our stock without exception. The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the interest of our stockholders (and even if such change in control would not reasonably jeopardize our REIT status).

·	Staggered Board. Our board of directors is divided into three classes, with each class serving staggered three-year terms. This classification of our board of directors may have the effect of delaying or preventing changes in our control or management.

·	Removal of Directors. Directors may be removed only for cause and only by the affirmative vote of stockholders holding at least a majority of the shares then outstanding and entitled to be cast for the election of directors.

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Stockholders’ Rights Plan. We have a stockholders’ rights plan that enables our board of directors to deter coercive or unfair takeover tactics and to prevent a person or a group from gaining control of us without offering a fair price to all stockholders. Unless our board of directors approves the person’s or group’s purchase, after that person gains control of us, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person or group. Our board of directors, however, can prevent the stockholders’ rights plan from operating in this manner. This gives our board of directors’ significant discretion to approve or disapprove a person’s or group’s efforts to acquire a large interest in us.

Duties of Directors with Respect to Unsolicited Takeovers. Under Maryland law, a director is required to perform his or her duties (a) in good faith, (b) in a manner he or she believes to be in the best interests of the corporation and (c) with the care that an ordinarily prudent person in a like position would use under similar circumstances. Maryland law provides protection for Maryland corporations against unsolicited takeovers by, among other things, retaining the same standard of care in the performance of the duties of directors in unsolicited takeover situations. The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under Maryland Business Combination Act or Maryland Control Share Acquisition Act or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition.

Moreover, under Maryland law the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.

Maryland General Corporation Law. Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and

“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

·	We have opted out of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, our board of directors may by amendment to our bylaws opt in to the control share provisions of the MGCL in the future.

·	Advance Notice of Director Nominations and Stockholder Proposals. Our bylaws impose certain advance notice requirements that must be met for nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders.

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Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

Actual receipt of an improper benefit or profit in money, property or services; or

A final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our articles of incorporation authorize us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, stockholders’ ability to recover damages from such director or officer will be limited.

ITEM 2.

UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of the company’s common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.

We are not obligated to purchase any shares. Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be financed from our available cash.

The following is a summary of our treasury stock purchases during the three months ended September 30, 2008, as required by Regulation S-K, Item 703.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or Programs
July 1 - July 31, 2008		--	$	--		--	$	8,560,000
August 1 - August 31, 2008		218,499		4.83		218,499		7,505,000
September 1 - September 30, 2008		99,278		5.13		99,278		6,996,000

Total		317,777	$	9.45		317,777	$	6,996,000

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

EXHIBIT INDEX

Exhibit No.		Description of Exhibits
2.1(2)		Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant
3.1(1)		Articles of Incorporation of the Registrant
3.2(1)		Bylaws of the Registrant
3.3(1)		Form of Articles Supplementary of the Registrant
3.4(5)		Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.
3.5(5)		Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.
3.6 (6)		Amended Articles of Incorporation of the Registrant
4.1(1)		Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2(2)		Specimen Common Stock Certificate
4.3(1)		Form of Rights Certificate
4.4(4)		Junior Subordinated Indenture
4.5		Letter Agreement dated November 7, 2008 pertaining to Junior Subordinated Indenture
10.1(1)		Form of Management Agreement between Vestin Mortgage, Inc. and the Registrant
10.2(1)		Form of Rights Agreement between the Registrant and the rights agent
10.9(4)		Form of Purchase Agreement
10.10(4)		Amended and Restated Trust Agreement
10.11(7)		Intercreditor Agreement, dated June 16, 2008, by and between Vestin Originations, Inc., Vestin Mortgage, Inc., Vestin Realty Mortgage II, Inc., and Owens Mortgage Investment Fund
21.1(2)		List of subsidiaries of the Registrant
31.1		Section 302 Certification of Michael V. Shustek
31.2		Section 302 Certification of Rocio Revollo
32		Certification Pursuant to U.S.C. 18 Section 1350
99.2R(3)		Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics

(1)		Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121).
(2)		Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121).
(3)		Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)
(4)		Incorporated herein by reference to the Current Report on Form 8-K filed on June 27, 2007 (File No. 000-51892)
(5)		Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)
(6)		Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)
(7)		Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Vestin Realty Mortgage II, Inc.

	By:	/s/ Michael V. Shustek
		Michael V. Shustek
		President and Chief Executive Officer
	Date:	November 10, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Capacity	Date

/s/ Michael V. Shustek	President and Chief Executive Officer and Director	November 10, 2008
Michael V. Shustek	(Principal Executive Officer)

/s/ Rocio Revollo	Chief Financial Officer	November 10, 2008
Rocio Revollo	(Principal Financial and Accounting Officer)

/s/ John E. Dawson	Director	November 10, 2008
John E. Dawson

/s/ Robert J. Aalberts	Director	November 10, 2008
Robert J. Aalberts

/s/ Fredrick J. Zaffarese Leavitt	Director	November 10, 2008
Fredrick J. Zaffarese Leavitt

/s/ Roland M. Sansone	Director	November 10, 2008
Roland M. Sansone

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Vestin Realty Mortgage II (VRTB) 10-Q2008 Q3 Quarterly report

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