Vestin Realty Mortgage II (VRTB) 10-Q 2009 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, 2009

Or

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 333-125121

VESTIN REALTY MORTGAGE II, INC.

(Exact name of registrant as specified in its charter)

MARYLAND	61-1502451
(State or Other Jurisdiction of	(I.R.S. 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  [   ]    No   [   ]

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

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

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

Yes  [   ]    No   [X]

As of November 3, 2009, there were 13,740,837 shares of the Company’s Common Stock outstanding.

TABLE OF CONTENTS

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	1
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2009 and 2008	2
	Consolidated Statements of Equity and Other Comprehensive Loss (unaudited) for the Nine Months Ended September 30, 2009	3
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009 and 2008	4
	Notes to Consolidated Financial Statements (unaudited)	6
	Report of Independent Registered Public Accounting Firm	42
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
Item 4T	Controls and Procedures	56
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Submission of Matters to a Vote of Security Holders	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
	SIGNATURES	72
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
	September 30, 2009			December 31, 2008
	(Unaudited)
Assets
Cash	$	1,011,000		$	8,026,000
Cash - restricted		--			5,000,000
Investment in marketable securities - related party		777,000			496,000
Interest and other receivables, net of allowance of $410,000 at September 30, 2009 and $593,000 at December 31, 2008		1,148,000			1,345,000
Notes receivable, net of allowance of $4,737,000 at September 30, 2009 and $2,340,000 at December 31, 2008		--			--
Real estate held for sale		20,977,000			24,433,000
Investment in real estate loans, net of allowance for loan losses of $65,409,000 at September 30, 2009 and $78,208,000 at December 31, 2008		77,569,000			146,834,000
Due from related parties		338,000			--
Investment in equity affiliate		--			100,000
Assets under secured borrowings		8,370,000			10,600,000
Deferred financing costs		280,000			2,504,000
Other assets		279,000			144,000
Total assets	$	110,749,000		$	199,482,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities	$	6,566,000		$	2,154,000
Due to related parties		--			522,000
Secured borrowings		7,910,000			9,907,000
Junior subordinated notes payable		--			56,350,000
Note payable		4,001,000			24,000
Total liabilities		18,477,000			68,957,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued		--			--
Treasury stock, at cost 1,256,526 shares at September 30, 2009 and 1,198,573 at December 31, 2008		(5,857,000	)		(5,692,000	)
Common stock, $0.0001 par value; 100,000,000 shares authorized; 14,997,363 shares issued and 13,740,837 outstanding at September 30, 2009 and 14,997,363 shares issued and 13,798,790 outstanding at December 31, 2008		1,000			1,000
Additional paid in capital		278,550,000			278,550,000
Accumulated deficit		(179,996,000	)		(141,627,000	)
Accumulated other comprehensive loss		(426,000	)		(707,000	)
Total stockholders' equity		92,272,000			130,525,000
Total liabilities and stockholders' equity	$	110,749,000		$	199,482,000

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

See review report of Independent Registered Public Accounting Firm.

- 1 - -

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
	For The Three Months Ended						For The Nine Months Ended
	9/30/2009			9/30/2008			9/30/2009			9/30/2008
Revenues
Interest income from investment in real estate loans	$	1,290,000		$	3,605,000		$	5,591,000		$	16,084,000
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		--			--			110,000			--
Other income		4,000			82,000			117,000			675,000
Total revenues		1,294,000			3,687,000			5,818,000			16,759,000
Operating expenses
Management fees - related party		274,000			274,000			823,000			823,000
Provision for loan loss		19,663,000			19,966,000			36,266,000			42,253,000
Interest expense		2,405,000			1,828,000			5,482,000			4,756,000
Professional fees		2,241,000			1,359,000			5,514,000			1,954,000
Professional fees - related party		153,000			47,000			409,000			110,000
Loan fees		483,000			--			1,431,000			--
Other		189,000			450,000			814,000			998,000
Total operating expenses		25,408,000			23,924,000			50,739,000			50,894,000
Loss from operations		(24,114,000	)		(20,237,000	)		(44,921,000	)		(34,135,000	)
Non-operating income (loss)
Gain on purchase of debt		17,550,000			--			27,233,000			1,556,000
Dividend income - related party		--			--			--			86,000
Interest income from banking institutions		--			126,000			22,000			308,000
Impairment of marketable securities - related party		--			(2,228,000	)		--			(2,228,000	)
Settlement expense		--			--			(76,000	)		--
Total other non-operating income (loss)		17,550,000			(2,102,000	)		27,179,000			(278,000	)
Loss from real estate held for sale
Revenue related to real estate held for sale		--			--			55,000			--
Net gain (loss) on sale of real estate held for sale		5,000			(259,000	)		(223,000	)		(259,000	)
Expenses related to real estate held for sale		(299,000	)		(525,000	)		(959,000	)		(1,002,000	)
Write-downs on real estate held for sale		(10,584,000	)		(17,023,000	)		(19,500,000	)		(29,802,000	)
Total loss from real estate held for sale		(10,878,000	)		(17,807,000	)		(20,627,000	)		(31,063,000	)
Loss before provision for income taxes		(17,442,000	)		(40,146,000	)		(38,369,000	)		(65,476,000	)
Provision for income taxes		--			--			--			--
NET LOSS	$	(17,442,000	)	$	(40,146,000	)	$	(38,369,000	)	$	(65,476,000	)
Basic and diluted loss per weighted average common share	$	(1.27	)	$	(2.72	)	$	(2.78	)	$	(4.41	)
Dividends declared per common share	$	--		$	--		$	--		$	0.49
Weighted average common shares		13,777,618			14,772,583			13,783,798			14,844,070

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

See review report of Independent Registered Public Accounting Firm.

- 2 - -

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(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, 2008		1,198,573	$	(5,692,000	)		13,798,790		$	1,000	$	278,550,000	$	(141,627,000	)	$	(707,000	)	$	130,525,000
Comprehensive Loss:
Net Loss														(38,369,000	)					(38,369,000	)
Unrealized Gain on Marketable Securities - Related Party																	281,000			281,000
Comprehensive Loss																				(38,088,000	)
Purchase of Treasury Stock		57,953		(165,000	)		(57,953	)		--										(165,000	)
Stockholders' Equity at September 30, 2009 (Unaudited)		1,256,526	$	(5,857,000	)		13,740,837		$	1,000	$	278,550,000	$	(179,996,000	)	$	(426,000	)	$	92,272,000

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

See review report of Independent Registered Public Accounting Firm.

- 3 - -

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	For The Nine Months Ended
	9/30/2009			9/30/2008
Cash flows from operating activities:
Net loss	$	(38,369,000	)	$	(65,476,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for doubtful accounts related to receivable		39,000			--
Impairment of marketable securities - related party		--			2,228,000
Write-downs on real estate held for sale		19,500,000			29,802,000
Gain on sale of real estate held for sale		(248,000	)		--
Loss on sale of real estate held for sale		471,000			259,000
Gain on purchase of debt		(27,233,000	)		(1,556,000	)
Recovery of allowance for doubtful notes receivable included in other income		(91,000	)		(87,000	)
Provision for loan loss		36,266,000			42,253,000
Amortized interest income		--			(94,000	)
Amortized financing costs, included in interest expense		2,224,000			461,000
Change in operating assets and liabilities:
Interest and other receivables		158,000			2,918,000
Due to/from related parties		(860,000	)		(192,000	)
Other assets		116,000			150,000
Accounts payable and accrued liabilities		3,520,000			(281,000	)
Net cash provided (used) by operating activities		(4,507,000	)		10,385,000
Cash flows from investing activities:
Investments in real estate loans		(17,872,000	)		(74,998,000	)
Purchase of investments in real estate loans from:
VRM I		--			(1,800,000	)
Third party		(1,996,000	)		(5,001,000	)
Proceeds from loan payoffs		15,368,000			46,784,000
Sale of investments in real estate loans to:		--
VRM I		1,000,000			500,000
Fund III		500,000			--
Third parties		6,379,000			42,155,000
Proceeds related to real estate held for sale		13,586,000			1,460,000
Proceeds from note receivable		91,000			87,000
Purchase of investments in certificates of deposit		--			(2,000	)
Proceeds from investments in certificates of deposit		--			104,000
Cash - restricted		5,000,000			--
Net cash provided by investing activities	$	22,056,000		$	9,289,000

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

See review report of Independent Registered Public Accounting Firm.

- 4 - -

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
	For The Nine Months Ended
	9/30/2009			9/30/2008
Cash flows from financing activities:
Principal payments on notes payable	$	(3,297,000	)	$	(114,000	)
Proceeds from issuance of notes payable		7,023,000			--
Cash used for purchase of debt		(28,125,000	)		(2,194,000	)
Cash used for pay down on secured borrowings		--			(898,000	)
Dividends paid to stockholders, net of reinvestments		--			(8,367,000	)
Dividends paid to stockholders - related party		--			(256,000	)
Purchase of treasury stock at cost		(165,000	)		(1,564,000	)
Net cash used in financing activities		(24,564,000	)		(13,393,000	)
NET CHANGE IN CASH		(7,015,000	)		6,281,000
Cash, beginning of period		8,026,000			20,241,000
Cash, end of period	$	1,011,000		$	26,522,000
Supplemental disclosures of cash flows information:
Interest paid	$	3,258,000		$	4,295,000
Non-cash investing and financing activities:
Reinvestment of dividends	$	--		$	183,000
Adjustment to allowance for loan losses related to sale and payment of investment in real estate loan	$	22,235,000		$	--
Impairment on restructured loan reclassified to allowance for loan loss	$	799,000		$	--
Payoff of loans funded through secured borrowings	$	2,230,000		$	6,331,000
Loans funded through secured borrowing	$	--		$	19,982,000
Interest reserves related to secured borrowings	$	--		$	1,018,000
Repurchase of interest reserves related to secured borrowings	$	233,000		$	--
Note payable relating to prepaid D & O insurance	$	251,000		$	208,000
Allowance for notes receivable related to final payment of investments in real estate loans	$	2,488,000		$	--
Real estate held for sale acquired through foreclosure, net of prior allowance	$	(32,043,000	)	$	44,915,000
Loan rewritten with same or similar collateral	$	9,171,000		$	1,690,000
Adjustment of equity investment related to the repurchase of junior subordinated notes payable	$	(100,000	)	$	--
Elimination of accrued liability related to purchase of junior subordinated notes payable	$	892,000		$	--
Write off of interest receivable and related allowance	$	221,000		$	--
Adjustment to note receivable and related allowance	$	(2,488,000	)	$	192,000
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	$	281,000		$	--

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

See review report of Independent Registered Public Accounting Firm.

- 5 - -

VESTIN REALTY MORTGAGE II, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

NOTE A — ORGANIZATION

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

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 ours, 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.

During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and Fund III.  Our CFO and the Controller of our manager became employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom were previously officers of our manager.  The same individuals who previously provided accounting and financial reporting services to us as employees of our manager, will continue to perform such duties as employees of Strategix Solutions.

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.

See review report of Independent Registered Public Accounting Firm.

- 6 - -

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

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

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.  As of September 30, 2009, there were no Junior Subordinated Notes outstanding.  All of the Junior Subordinated Notes were acquired by us in exchange for replacement securities that we had purchased in the open market.  Pursuant to the terms agreed with the representative of the Note holders, we acquired $1.00 face amount of Junior Subordinated Notes in exchange for $0.50 of replacement securities.  During the nine months ended September 30, 2009, we recognized a gain of approximately $27.2 million from such exchange.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  Interim results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with information included in the 2008 annual report filed on Form 10-K and our quarterly reports filed on Form 10-Q for the three months ended March 31, 2009 and six months ended June 30, 2009.

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

See review report of Independent Registered Public Accounting Firm.

- 7 - -

Investments in Real Estate Loans

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

Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates.  Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.

Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”).  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.

Allowance for Loan Losses

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

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

See review report of Independent Registered Public Accounting Firm.

- 8 - -

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 have and may continue to 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.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

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

· Management commits to a plan to sell the properties;

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

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

· The sale of the property is probable;

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

· Withdrawal or significant modification of the sale is not likely.

Classification of Operating Results from Real Estate Held for Sale

Generally, operating results and cash flows from long lived assets held for sale are 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

Secured borrowings provide an additional source of capital for our lending activity.  Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in.  We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue for any differential of the interest spread, if applicable.  Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings.

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.  We do not receive any revenues for entering into secured borrowing arrangements.

Investment in Marketable Securities – Related Party

Investment in marketable securities – related party consists of stock in VRM I.  The securities are stated at fair value as determined by the closing market price as of September 30, 2009.  All securities are classified as available-for-sale.

We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will 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).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.

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

· 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

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.  The established hierarchy for inputs used, in measuring fair value, 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.

If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  In addition, since we are a publicly traded company, we are required to make our fair value disclosures for interim reporting periods.

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed 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, 2009 and 2008.  The following is a computation of the EPS data for the three and nine months ended September 30, 2009 and 2008:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008
Net loss	$	(17,442,000	)	$	(40,146,000	)	$	(38,369,000	)	$	(65,476,000	)
Weighted average number of common shares outstanding during the period		13,777,618			14,772,583			13,783,798			14,844,070
Basic and diluted loss per weighted average common share	$	(1.27	)	$	(2.72	)	$	(2.78	)	$	(4.41	)

See review report of Independent Registered Public Accounting Firm.

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Common Stock Dividends

During the nine months ended September 30, 2008, cash dividends declared totaled approximately $0.49 per common share, representing ordinary income.

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

Treasury Stock

On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of September 30, 2009, we had purchased 1,242,776 shares as treasury stock through the repurchase program noted above.  These shares are carried on our books at cost totaling approximately $5.8 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of September 30, 2009, we had a total of 1,256,526 shares of treasury stock carried on our books at cost totaling approximately $5.9 million.  As of December 31, 2008, we had a total of 1,198,573 shares of treasury stock carried on our books at cost totaling approximately $5.7 million.

Segments

We operate as one business segment.

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.

Income Taxes

We are organized and conduct our operations to qualify as a 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, 2009 and 2008, was approximately zero.

See review report of Independent Registered Public Accounting Firm.

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NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments with concentration of credit and market risk include cash, marketable securities related party and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit, which at times may exceed federally insured limits.  We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk related to cash deposits based on management review of these financial institutions.  As of September 30, 2009 and December 31, 2008, we had approximately $0 and $11.4 million, respectively, in excess of the federally insured limits.

As of September 30, 2009, 41%, 15%, 12% and 12% of our loans were in Nevada, California, Arizona and Hawaii, respectively, compared to 40%, 11%, 27% and 8%, at December 31, 2008, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.

At September 30, 2009, the aggregate amount of loans to our three largest borrowers represented approximately 23% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon and Hawaii, with first lien positions, interest rates between 12% and 14%, and an aggregate outstanding balance of approximately $33.3 million.  As of September 30, 2009, our three largest loans were considered non-performing, see Note D – Investments in Real Estate Loans.  At December 31, 2008, the aggregate amount of loans to our three largest borrowers represented approximately 15% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon and Hawaii, with first lien positions, interest rates between 12% and 14%, and an aggregate outstanding balance of approximately $33.3 million.  As of December 31, 2008, our three largest loans were considered non-performing.  We have a significant concentration of credit risk with our largest borrowers.  Any additional defaults in our loan portfolio could have a material adverse effect on us.

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

Common Guarantors

As of September 30, 2009, three loans totaling approximately $18.3 million, representing approximately 12.8% of our portfolio’s total value, had a common guarantor.  All three loans were considered non-performing as of September 30, 2009.  As of December 31, 2008, we had five loans totaling approximately $23.7 million, representing approximately 10.5% of our portfolio’s total value, with the same guarantor.  All five loans were considered non-performing as of December 31, 2008.

As of September 30, 2009, four loans totaling approximately $19.8 million, representing approximately 13.8% of our portfolio’s total value, had a common guarantor.  Two of the four loans were considered performing as of September 30, 2009.  The non-performing loans totaled approximately $15.9 million.  As of December 31, 2008, we had three loans totaling approximately $17.9 million, representing approximately 7.9% of our portfolio’s total value, with the same common guarantor.  All three loans were considered performing as of December 31, 2008.

See review report of Independent Registered Public Accounting Firm.

- 13 - -

As of September 30, 2009, four loans totaling approximately $13.9 million, representing approximately 9.7% of our portfolio’s total value, had a common guarantor; of these four loans, two loans were related to our secured borrowings of approximately $8.4 million, including approximately $0.5 million in interest reserves.  These loans were considered performing as of September 30, 2009.  As of December 31, 2008, we had six loans totaling approximately $23.6 million, representing approximately 10.5% of our portfolio’s total value, with the same common guarantor; of these six loans, three loans were related to our secured borrowings of approximately $10.6 million, including approximately $0.7 million in interest reserves.  One of the six loans, totaling approximately $7.2 million, was considered non-performing as of December 31, 2008.  In July 2009, our manager negotiated the payoff of two loans for approximately the loan amount net of allowance for loan losses plus accrued interest and two 60-month promissory notes executed by the borrower and guaranteed by the main principal, totaling approximately $2.7 million, of which our portion was approximately $2.5 million.  In addition, during July 2009, our manager modified the remaining loans whereby interest payments are payable monthly at 3.0%, beginning July 2009, and accrued at 5.0% payable at the maturity of the loan.  Interest on these loans will be recorded as interest income when cash is collected.

For additional information regarding the above non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2009 and December 31, 2008, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At September 30, 2009, we had no investments in real estate loans that had interest reserves.  At December 31, 2008, we had approximately $52.7 million in investments in real estate loans that had interest reserves where the total outstanding principal due to our co-lenders and us was approximately $60.0 million.  These loans had interest reserves of approximately $5.7 million, of which our portion was approximately $4.9 million.  As of December 31, 2008, two of these loans, totaling approximately $18.8 million, which had interest reserves, were considered non-performing.  These loans’ interest reserves, totaling approximately $3.8 million, of which our portion was $3.2 million, were suspended as of December 31, 2008.

During September 2009, our manager modified the terms of a second lien position loan, totaling approximately $11.4 million, of which our portion was approximately $10.3 million, whereby the loan was extended from April 30, 2010 to December 31, 2011.  In addition the interest rate was lowered from 15%, payable monthly, to 8%, accruing and due at the end the loan.  As part of the modification the borrower is required to pay an extension fee of approximately $0.5 million, which will be added to the total loan balance and payable to the manager.  As a result of the loan modification, we recognized an impairment of approximately $1.7 million that is included in the allowance for loan losses.

As of September 30, 2009, we had five real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 8% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.

See review report of Independent Registered Public Accounting Firm.

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Loan Portfolio

Investments in real estate loans as of September 30, 2009, were as follows:

Loan Type	Number of Loans		Balance *		Weighted Average Interest Rate		Portfolio Percentage		Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
Acquisition and Development		--	$	--		--%		--%		--%
Commercial		18		93,994,000		12.56%		65.74%		65.61%
Construction		4		13,606,000		8.38%		9.52%		84.71%
Land		6		35,378,000		8.82%		24.74%		84.87%
Total		28	$	142,978,000		11.24%		100.00%		73.30%

Investments in real estate loans as of December 31, 2008, were as follows:

Loan Type	Number of Loans		Balance *		Weighted Average Interest Rate		Portfolio Percentage		Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
Acquisition and Development		1	$	13,000,000		13.00%		5.78%		92.00%
Commercial		20		107,456,000		12.64%		47.75%		81.09%
Construction		7		27,612,000		10.55%		12.27%		103.26%
Land		11		76,974,000		11.87%		34.20%		78.59%
Total		39	$	225,042,000		12.14%		100.00%		84.01%

* Please see Balance Sheet Reconciliation below.

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, 2009 and December 31, 2008, was 9.30% and 12.14%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

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

The following is a schedule of priority of real estate loans as of September 30, 2009 and December 31, 2008:

Loan Type	Number of Loans		September 30, 2009 Balance*		Portfolio Percentage		Number of Loans		December 31, 2008 Balance*		Portfolio Percentage
First deeds of trust		20	$	107,416,000		75.13%		31	$	188,219,000		83.64%
Second deeds of trust		8		35,562,000		24.87%		8		36,823,000		16.36%
Total		28	$	142,978,000		100.00%		39	$	225,042,000		100.00%

* Please see Balance Sheet Reconciliation below.

See review report of Independent Registered Public Accounting Firm.

- 15 - -

The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2009:

Non-performing and past due loans (a)	$	83,363,000
October 2009 – December 2009		12,291,000
January 2010 – March 2010		17,739,000
April 2010 – June 2010		2,190,000
July 2010 – September 2010		--
October 2010 – December 2010		12,553,000
January 2011 – March 2011		4,589,000
April 2011 – June 2011		--
Thereafter		10,253,000
Total	$	142,978,000

(a) Amounts include the balance of non-performing loans and loans that have been extended subsequent to September 30, 2009.

The following is a schedule by geographic location of investments in real estate loans as of September 30, 2009 and December 31, 2008:

	September 30, 2009 Balance *		Portfolio Percentage		December 31, 2008 Balance *		Portfolio Percentage
Arizona	$	17,052,000		11.93%	$	59,628,000		26.50%
California		21,267,000		14.88%		24,298,000		10.80%
Hawaii		17,291,000		12.09%		17,291,000		7.68%
Nevada		59,047,000		41.30%		89,917,000		39.95%
Oklahoma		--		--%		2,155,000		0.96%
Oregon		16,048,000		11.22%		16,048,000		7.13%
Texas		12,273,000		8.58%		13,904,000		6.18%
Washington		--		--%		1,801,000		0.80%
Total	$	142,978,000		100.00%	$	225,042,000		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, 2009 Balance (a)			December 31, 2008 Balance (a)
Balance per loan portfolio	$	142,978,000		$	225,042,000
Less:
Allowance for loan losses (b)		(65,409,000	)		(78,208,000	)
Balance per consolidated balance sheet	$	77,569,000		$	146,834,000

(a) As of December 31, 2008, the 2503 Panorama, LLC loan and the VBP Partners, LLC loan included an impairment reserve, applied to the loan balance, of approximately $0.3 million and $0.5 million, respectively.  During March 2009, the impairment reserves for these two loans were reclassified to their existing allowance for loan losses.  On August 31, 2009, we, VRM I and Fund III foreclosed on the 2503 Panorama, LLC loan and classified it as real estate held for sale.

(b) Please refer to Specific Reserve Allowance below.

See review report of Independent Registered Public Accounting Firm.

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Non-Performing Loans

As of September 30, 2009, we had 11 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 $35.1 million, net of allowance for loan losses of approximately $44.4 million, which does not include the allowances of approximately $21.0 million relating to performing loans as of September 30, 2009.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.  At September 30, 2009, the following loans were non-performing:

· RightStar, Inc. (Part I & Part II), are loans secured by a lien on the business and virtually all of the property of RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii with an outstanding balance of approximately $32.3 million of which our portion is approximately $17.3 million ($8.2 million for Part I and $9.1 million for Part II).  As of September 30, 2009, this loan has been considered non-performing for the last 66 months.  The lenders have commenced a judicial foreclosure on the loans, Part I and Part II.  As of September 30, 2009, based on our manager’s evaluation and an updated appraisal, our manager has provided a specific allowance of approximately $14.4 million, of which our portion is approximately $9.8 million.  See Note O – Legal Matters Involving The Company for further information.

· 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, 2009, this loan has been considered non-performing for the last 16 months.  Our manager has commenced foreclosure proceedings, and was proceeding with legal action to enforce the personal guarantees.  On June 29, 2009, the borrower filed for bankruptcy protection.  On August 18, 2009, the guarantor filed for bankruptcy protection.  As of September 30, 2009, based on our manager’s evaluation and an updated appraisal, obtained by our manager during July 2009, our manager has provided a specific allowance of approximately $1.4 million, of which our portion is approximately $1.1 million.

· 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 $5.8 million.  As of September 30, 2009, this loan has been considered non-performing for the last 16 months.  A settlement agreement was negotiated with the borrower on November 17, 2008, wherein they will be responsible for the completion of the property at the borrower’s expense, with the lenders to receive 100% of the net sales proceeds from the sale of condominiums units until the loan has been repaid in full.  As of September 30, 2009, based on our manager’s evaluation of completion costs for the project and an updated appraisal, obtained by our manager during October 2009, our manager has provided a specific allowance of approximately $1.2 million, of which our portion is approximately $1.2 million.

· 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, 2009, this loan has been considered non-performing for the last 16 months.  Our manager has commenced foreclosure proceedings, and was proceeding with legal action to enforce the personal guarantees.  On January 7, 2009, the main principal of the borrower filed for bankruptcy protection.  On March 9, 2009, the United States District Court for the District of Oregon, entered its Order Granting Preliminary Injunction and Appointing Receiver, which has the effect of enjoining us from proceeding with our foreclosure.  We have filed a motion to lift the injunction and allow us to proceed with our foreclosure.  In addition, we are in negotiations with the receiver to lift the injunction and allow us to proceed with our foreclosure.  As of September 30, 2009, based on our manager’s evaluation and an updated appraisal, obtained by our manager during August 2009, 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, 2009.

See review report of Independent Registered Public Accounting Firm.

- 17 - -

· 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, 2009, this loan has been considered non-performing for the last 15 months.  Our manager has commenced foreclosure proceedings, and has been awarded a default judgment against the guarantors for approximately $21.3 million, although it cannot be determined at this time how much, if any, can be recovered from the guarantors.  During October 2008, the tenant, who is a related party to the borrower, filed for bankruptcy protection.  On January 6, 2009, the borrower filed for bankruptcy protection and on February 11, 2009, the guarantors filed for bankruptcy protection.  The property is not currently generating any income.  As of September 30, 2009, based on our manager’s analysis, which includes a pending purchase offer, and an updated appraisal, our manager has provided a specific allowance of $12.5 million, of which our portion is approximately $9.1 million.

· Cascadia Canyon, LLC is a commercial loan to provide financing for 12.39 acres of land plus a portion of the SUMCO North Campus and SUMCO South Campus located in Salem, OR.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding balance on the loan is approximately $19.5 million, of which our portion is approximately $16.0 million.  As of September 30, 2009, this loan has been considered non-performing for the last 14 months.  Our manager has commenced foreclosure proceedings, and was proceeding with legal action to enforce the personal guarantees.  On January 7, 2009, the main principal and guarantor of the loan filed for bankruptcy protection.  On March 9, 2009, the United States District Court for the District of Oregon, entered its Order Granting Preliminary Injunction and Appointing Receiver, which has the effect of enjoining us from proceeding with our foreclosure.  We have filed a motion to lift the injunction and allow us to proceed with our foreclosure.  In addition, we are in negotiations with the receiver to lift the injunction and allow us to proceed with our foreclosure.  As of September 30, 2009, based on our manager’s analysis and current note purchase offer, our manager has provided a specific allowance totaling approximately $13.4 million, of which our portion is approximately $11.0 million.  On October 26, 2009, we, VRM I and Fund III sold this loan for $6.1 million, of which our portion was approximately $5.0 million, to an unrelated third party.  No gain or loss resulted from this transaction.

· Meadowlark Assisted Living Community, LLC is a commercial loan to provide financing for a 74 bed Assisted Living/Memory Care residential facility, located on approximately 4.35 acres of land, located in Yreka, CA.  The loan is secured by a second lien on the property, with a preexisting first lien of approximately $3.5 million, and is guaranteed by the principals of the borrower.  The outstanding balance on the second lien loan is approximately $3.8 million, of which our portion is approximately $2.2 million.  As of September 30, 2009, this loan has been considered non-performing for the last 12 months.  Our manager has commenced foreclosure proceedings, and was proceeding with legal action to enforce the personal guarantees.  On January 7, 2009, the main principal and guarantor of the loan filed for bankruptcy protection.  As of September 30, 2009, based on our manager’s evaluation and foreclosure by the first lien holder, our manager has provided a specific allowance for the full amount of the loan totaling approximately $3.8 million, of which our portion is approximately $2.2 million.

· Essex Real Estate Partners, LLC is a participation in a commercial loan on five parcels in the Inspirada Town Center Project located in Henderson, NV.  The loan is secured by a first lien on the property, and is guaranteed by principals of the borrower.  The outstanding principal balance on the loan is $3.0 million.  As of September 30, 2009, this loan has been considered non-performing for the last nine months.  The Company entered into an intercreditor agreement with another lender wherein the lender agreed to repurchase the Company’s participation interest by February 1, 2008.  The lender defaulted on its repurchase obligation and the Manager commenced legal action to enforce the intercreditor agreement.  A trial regarding the default was held in September 2009 and we are awaiting the final ruling.  As of September 30, 2009, based on our manager’s analysis, our manager has provided a specific allowance of approximately $1.5 million.

See review report of Independent Registered Public Accounting Firm.

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· Spectrum Town Center Property, LLC is a commercial loan to provide bridge financing for a multi-tenant retail property located in Gilbert, AZ.  The loan is secured by a second lien on the property, with a pre-existing first lien of $20.0 million, and is guaranteed by the principals of the borrower.  The outstanding balance on the second lien loan is approximately $14.0 million, of which our portion is approximately $12.6 million.  As of September 30, 2009, this loan has been considered non-performing for the last seven months.  Our manager has commenced foreclosure proceedings, and was proceeding with legal action to enforce the personal guarantees.  On July 18, 2009, the borrower filed for bankruptcy protection.  As of September 30, 2009, based on our manager’s evaluation and an updated appraisal, obtained by our manager during October 2009, our manager has provided a specific allowance of $5.9 million, of which our portion is approximately $5.3 million.

· ME-Buffalo, LLC is a commercial loan to provide financing for a 187,032 square foot commercial retail center, called The Edge Retail Center Phase I, located in Las Vegas, NV.  The loan is secured by a second lien on the property, with a pre-existing first lien of $20.5 million, and is guaranteed by the principals of the borrower.  The outstanding balance on the second lien loan is approximately $4.3 million, of which our portion is approximately $3.3 million.  As of September 30, 2009, this loan has been considered non-performing for the last month.  Our manager is in the process of commencing foreclosure proceedings.  On July 18, 2009, the borrower filed for bankruptcy protection.  As of September 30, 2009, based on our manager’s evaluation and an updated appraisal, obtained by our manager during October 2009, our manager has provided a specific allowance for the full amount of the loan totaling approximately $4.3 million, of which our portion is approximately $3.3 million.

The following schedule summarizes the non-performing loans as of September 30, 2009:

Loan Name	Balance at September 30, 2009		Allowance for Loan Losses *			Net Balance at September 30, 2009		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		66		45% of Part I 65% of Part II
Babuski, LLC		7,707,000		(1,105,000	)		6,602,000	6/17/2008		16		81%
South Bay Villas, LLC		5,800,000		(1,188,000	)		4,612,000	5/6/2008		16		97%
Barger Road Cottages, LLC		46,000		--			46,000	12/5/2008		16		1%
Lohrey Investments, LLC		11,600,000		(9,062,000	)		2,538,000	10/29/2008		15		73%
Cascadia Canyon, LLC		16,002,000		(11,001,000	)		5,001,000	2/12/2009		14		82%
Meadowlark Assisted Living Community, LLC		2,217,000		(2,217,000	)		--	8/7/2009		12		59%
Essex Real Estate Partners, LLC		3,000,000		(1,500,000	)		1,500,000	12/1/2008		9		100%
Spectrum Town Center Property, LLC		12,600,000		(5,342,000	)		7,258,000	4/30/2009		7		90%
ME-Buffalo, LLC		3,250,000		(3,250,000	)		--	9/19/2009		1		76%
	$	79,513,000	$	(44,422,000	)	$	35,091,000

* Please refer to Specific Reserve Allowances below.

See review report of Independent Registered Public Accounting Firm.

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Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Management’s evaluation may include, but is not limited to, appraisals, real estate broker comps, the borrower’s current financial standing and other market conditions.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  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, 2009, we have provided specific reserves, related to 10 non-performing loans and 10 performing loans, of approximately $65.4 million.  Our manager evaluated the loans and, based on current estimates regarding the value of the remaining underlying collateral or the borrowers’ ability to pay, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded in future periods.

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

Specific Reserve Allowances

The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2009.  Following the table is a discussion of the status of each identified loan that was not sold, paid in full or transferred to real estate held for sale and the reasons for the recording of additional reserves during the nine months ended September 30, 2009.

See review report of Independent Registered Public Accounting Firm.

- 20 - -

Description	Balance at December 31, 2008		Specific Reserve Allocation		Sales, Loan Pay Downs & Transfers to REO			Balance at September 30, 2009
RightStar, Inc. (Part I & Part II)	$	9,757,000	$	--	$	--		$	9,757,000
Monterrey Associates, L.P. (b)		2,155,000		--		(2,155,000	)		--
Peoria 180, LLC (b)		12,337,000		--		(12,337,000	)		--
Terravita, LLC (a)		377,000		1,225,000		--			1,602,000
Redwood Place, LLC (c)		5,284,000		--		(5,284,000	)		--
2503 Panorama, LLC (c) (d)		3,051,000		642,000		(3,693,000	)		--
3900, LLC (c)		3,276,000		--		(3,276,000	)		--
VBP Partners, LLC (a) (d)		3,430,000		1,343,000		--			4,773,000
WCP Warm Springs Holdings 1, LLC (c)		2,457,000		--		(2,457,000	)		--
Bright Haven Builders, LLC (c)		628,000		--		(628,000	)		--
Lohrey Investments, LLC		5,223,000		3,839,000		--			9,062,000
South Bay Villas, LLC		1,188,000		--		--			1,188,000
World Capital La Piazza, LLC (c)		6,836,000		--		(6,836,000	)		--
Meadowlark Assisted Living Community, LLC		2,217,000		--		--			2,217,000
WHM Copper Mountain Investments, LLC (c)		4,093,000		--		(4,093,000	)		--
Preston Hollow Assisted Living, L.P.		2,501,000		--		(2,501,000	)		--
World Capital Durango Alpha (c)		1,364,000		--		(1,364,000	)		--
Wolfpack Properties, LLC (b)		1,082,000		1,328,000		(2,410,000	)		--
ExecuSuite Properties, LLC (a)		528,000		1,533,000		--			2,061,000
SE Property Investments, LLC (a)		407,000		1,265,000		--			1,672,000
Devonshire, LLC (b)		1,493,000		1,339,000		(2,832,000	)		--
Building A, LLC (a)		90,000		--		--			90,000
Cascadia Canyon, LLC		8,434,000		2,567,000		--			11,001,000
Panorama II – 2503(a)		--		2,737,000		--			2,737,000
Babuski, LLC		--		1,105,000		--			1,105,000
Spectrum Town Center Property, LLC		--		5,342,000		--			5,342,000
ME-Buffalo, LLC		--		3,250,000		--			3,250,000
North Hills 234, LLC (a)		--		1,467,000		--			1,467,000
Southern Hills 360, LLC (a)		--		2,980,000		--			2,980,000
Presidio Hotel Fort Worth, LP (a)		--		1,705,000		--			1,705,000
Windhaven and Tollway, LLC (a)		--		1,900,000		--			1,900,000
Essex Real Estate Partners, LLC		--		1,500,000		--			1,500,000
Total	$	78,208,000	$	37,067,000	$	(49,866,000	)	$	65,409,000

(a) As of September 30, 2009, these loans were considered performing.

(b) During the nine months ended September 30, 2009, these loans were paid in full.

(c) During the nine months ended September 30, 2009, these properties were foreclosed upon and classified as real estate held for sale.

See review report of Independent Registered Public Accounting Firm.

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(d) As of December 31, 2008, the 2503 Panorama, LLC loan and the VBP Partners, LLC loan included an impairment reserve, applied to the loan balance, of approximately $0.3 million and $0.5 million, respectively.  During March 2009, the impairment reserve for these two loans was reclassified to their existing allowance for loan losses.

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 are 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 loans 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);

· 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.  The current book value of the RightStar properties, net of allowance for loan losses and including interest receivable, is approximately $14.1 million, of which our portion is approximately $8.5 million

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.

See review report of Independent Registered Public Accounting Firm.

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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 would be allocated in part to VRM I, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have received offers and are currently requesting, entertaining, and reviewing bids on the RightStar properties.  To date the auction has not been successful.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed.  The court has initiated a 21-day posting/notice period, at the end of that period the court will proceed to enter its formal order, which is expected in December 2009.

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

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

We have evaluated the estimated value of the underlying collateral and the expected cost and length of litigation.  Based on this estimate we have maintained our total specific reserve allowance for loss.  The reserve allowance includes approximately $1.0 million for estimated litigation fees and expenses that we have incurred in enforcing our rights against the underlying collateral, which were fully consumed as of December 31, 2007.  We will continue to evaluate our position in the RightStar loan as the situation progresses.  As of September 30, 2009, our specific reserve allowance on the RightStar loans totaled approximately $9.8 million.

Terravita, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance for the outstanding balance of the loan, related to a second lien position performing loan on a 100 unit condominium/apartment project in North Las Vegas, NV, totaling approximately $3.0 million, of which our portion was approximately $1.6 million.  This specific reserve allowance was based on an updated appraisal, obtained by our manager during August 2009, of the underlying collateral for this loan and evaluation of the borrower.  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.  Our manager will continue to evaluate our position in the loan.

VBP Partners, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a performing loan for the development of 4.14 acres of land located in Las Vegas, NV, of approximately $5.2 million, of which our portion is approximately $4.8 million.  In addition, during the nine months ended September 30, 2009, this loan was modified, effectively changing the status of the loan from non-performing to performing.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during August 2009.  During March 2009, we reclassified an impairment reserve of approximately $0.5 million to the specific reserve allowance.  Our manager will continue to evaluate our position in the loan.

See review report of Independent Registered Public Accounting Firm.

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Lohrey Investments, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on income producing property located in Gilroy, CA, of $12.5 million, of which our portion is approximately $9.1 million.  This specific reserve allowance was based on our manager’s analysis, which includes a pending purchase offer, and an updated appraisal.  Our manager will continue to evaluate our position in the loan.

South Bay Villas, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on a 48 unit condominium building part of the Desert Sands Condominiums Phase 2 located in Laughlin, NV, of approximately $1.2 million, of which our portion is approximately $1.2 million.  This specific reserve allowance was based on completion costs of the property evaluated by our manager during October 2008 and an updated appraisal.  Our manager will continue to evaluate our position in the loan.

Meadowlark Assisted Living Community, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance for the outstanding balance of the loan, which is a second lien position on a 74 bed Assisted Living/Memory Care residential facility, located on approximately 4.35 acres of land located in Yreka, CA, of approximately $3.8 million, of which our portion is approximately $2.2 million.  This specific reserve allowance was based on our manager’s evaluation, which included the foreclosure of the property by the first lien holder.  Our manager will continue to evaluate our position in the loan.

ExecuSuite Properties, LLC, – As of September 30, 2009, our manager provided a specific reserve allowance of approximately $2.2 million, of which our portion is approximately $2.1 million, related to a performing loan secured by a 22,000 square foot office building (Building "D") in Village Business Park located on 1.48 acres of land in Las Vegas, NV.  During March 2009, this loan was modified and the interest rate was reduced to 8% as of January 2009.  Pursuant to the modification, interest payments are payable monthly at 4.25%, beginning on January 25, 2009, and accrue at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2009, and our manager’s analysis of current market conditions.  Commencing in July 2009, the loan was further modified to provide that interest payments are payable monthly at 3% and accrue at 5% payable at maturity of the loan.  Our manager will continue to evaluate our position in the loan.

SE Property Investments, LLC, – As of September 30, 2009, our manager provided a specific reserve allowance of approximately $1.8 million, of which our portion is approximately $1.7 million, related to a performing loan secured by a 22,000 square foot office building (Building "E") in Village Business Park located on 1.48 acres of land in Las Vegas, NV.  During March 2009, this loan was modified and the interest rate was reduced to 8% as of January 2009.  Pursuant to the modification, interest payments are payable monthly at 4.25%, beginning on January 25, 2009, and accrue at 3.75% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2009, and our manager’s analysis of current market conditions.  Commencing in July 2009, the loan was further modified to provide that interest payments are payable monthly at 3% and accrue at 5% payable at maturity of the loan.  Our manager will continue to evaluate our position in the loan.

Building A, LLC – As of September 30, 2009, our manager provided a specific reserve allowance of $106,000, of which our portion is $90,000, related to a second lien position on a performing loan for a 43,549 square foot office building (Building "A") located 3.18 acres of land within the Village Business Park, in Las Vegas, NV.  During March 2009, this loan was modified and the interest rate was reduced to 8% as of January 2009.  Pursuant to the modification, interest payments are payable monthly at 3.0%, beginning on January 25, 2009, and accrue at 5.0% payable at the maturity of the loan.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2009, and our manager’s analysis of current market conditions.  Our manager will continue to evaluate our position in the loan.

See review report of Independent Registered Public Accounting Firm.

- 24 - -

Cascadia Canyon, LLC, – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan on 12.39 acres of land plus portions of the SUMCO North Campus and SUMCO South Campus located in Salem, OR, of approximately $13.4 million, of which our portion is approximately $11.0 million.  This specific reserve allowance was based on our manager’s analysis and current note purchase offer.  Our manager will continue to evaluate our position in the loan.

Panorama II – 2503 – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a performing loan to provide additional construction financing to finish Panorama Tower II, located in Las Vegas, NV, of approximately $2.7 million.  The loan is secured by a first lien on three units.  This specific reserve allowance was based on the current analysis of the underlying collateral for this loan.  Our manager will continue to evaluate our position in the loan.

Babuski, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan that provided financing for 9.23 acres of land in Las Vegas, NV, of approximately $1.4 million, of which our portion is approximately $1.1 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during July 2009.  Our manager will continue to evaluate our position in the loan.

Spectrum Town Center Property, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance related to a second lien position on a non-performing loan that provided bridge financing for a multi-tenant retail property located in Gilbert, AZ, of approximately $5.9 million, of which our portion is approximately $5.3 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during October 2009.  Our manager will continue to evaluate our position in the loan.

ME-Buffalo, LLC – As of September 30, 2009, our manager has provide a specific reserve allowance for the outstanding balance of the loan, related to a second lien position on a non-performing commercial loan for the Edge Retail Center Phase I, located in Las Vegas, NV, of approximately $4.3 million, of which our portion is $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 October 2009.  Our manager will continue to evaluate our position in the loan.

North Hills 234, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a performing loan, to provide financing for approximately 9.12 net acres of land entitled for the construction of 234 condo units, located within the Providence Master Planned Community, Las Vegas, NV, of approximately $1.5 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during August 2009.  Our manager will continue to evaluate our position in the loan.  During October 2009, this loan was modified whereby the interest rate was reduced from 13%, payable monthly, to 9%, with 5% accruing and due at the end of the loan in December 2009 and 4% will be payable monthly.  Our manager will continue to evaluate our position in the loan.

Southern Hills 360, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a performing loan, to provide financing for approximately 19.3 net acres of land entitled for the construction of 360 apartment units, located within the Mountain's Edge Master Planned Community, Las Vegas, NV, of approximately $3.0 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during August 2009.  Our manager will continue to evaluate our position in the loan.  During October 2009, this loan was modified whereby the interest rate was reduced from 13%, payable monthly, to 9%, with 5% accruing and due at the end of the loan in December 2009 and 4% will be payable monthly.  Our manager will continue to evaluate our position in the loan.

See review report of Independent Registered Public Accounting Firm.

- 25 - -

Presidio Hotel Fort Worth, LP – As of September 30, 2009, our manager has provided an impairment reserve, related to the modification of a performing loan, in a second lien position, to provide financing for the renovation and flagging of a 430-room full service hotel to be known as the Sheraton Ft. Worth Hotel and Spa located in Ft. Worth, TX, of approximately $1.9 million, of which our portion is approximately $1.7 million.  As part of the modification, the loan was extended from April 30, 2010 to December 31, 2011, and the interest rate was lowered from 15%, payable monthly, to 8%, accruing and due at the end of the loan.  Our manager will continue to evaluate our position in the loan.

Windhaven and Tollway, LLC – As of September 30, 2009, our manager has provided a specific reserve allowance, related to a performing loan, to provide financing for a 86,336 square foot commercial retail center, know as Windhaven Park, located Plano, TX, of $1.9 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during September 2009.  Our manager will continue to evaluate our position in the loan.

Essex Real Estate Partners, LLC– As of September 30, 2009, our manager has provided a specific reserve allowance, related to a non-performing loan, to provide participation financing for five parcels of the Inspirada Town Center Project, located in Las Vegas, NV, of $1.5 million.  This specific reserve allowance was based on an updated appraisal of the underlying collateral for this loan, obtained by our manager during September 2009.  Our manager will continue to evaluate our position in the loan.

As of September 30, 2009, our manager had granted extensions on 12 loans, totaling approximately $108.6 million, of which our portion was approximately $71.7 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.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.  Subsequent to their extension, 5 of the 12 loans have become non-performing.  The loans, which became non-performing after their extension, had a total principal amount at September 30, 2009, of approximately $54.0 million, of which our portion is approximately $44.1 million.

Asset Quality and Loan Reserves

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

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

· Prevailing economic conditions;

· Historical experience;

· The nature and volume of the loan portfolio;

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

· Evaluation of industry trends; and

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

See review report of Independent Registered Public Accounting Firm.

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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 loss.  The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of September 30, 2009 and December 31, 2008:

	As of September 30, 2009
	Balance		Allowance for loan losses *			Balance, net of allowance
Non-performing loans – no related allowance	$	46,000	$	--		$	46,000
Non-performing loans – related allowance		79,467,000		(44,422,000	)		35,045,000
Subtotal non-performing loans		79,513,000		(44,422,000	)		35,091,000
Performing loans – no related allowance		22,173,000		--			22,173,000
Performing loans – related allowance		41,292,000		(20,987,000	)		20,305,000
Subtotal performing loans		63,465,000		(20,987,000	)		42,478,000
Total	$	142,978,000	$	(65,409,000	)	$	77,569,000

* Please refer to Specific Reserve Allowances above.

	As of December 31, 2008
	Balance		Allowance for loan losses			Balance, net of allowance
Non-performing loans – no related allowance	$	9,230,000	$	--		$	9,230,000
Non-performing loans – related allowance		135,631,000		(71,180,000	)		64,451,000
Subtotal non-performing loans		144,861,000		(71,180,000	)		73,681,000
Performing loans – no related allowance		57,666,000		--			57,666,000
Performing loans – related allowance		22,515,000		(7,028,000	)		15,487,000
Subtotal performing loans		80,181,000		(7,028,000	)		73,153,000
Total	$	225,042,000	$	(78,208,000	)	$	146,834,000

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 change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

As of September 30, 2009, we owned 533,675 shares of VRM I’s common stock, representing approximately 8.21% of their total outstanding common stock.

We evaluated our investment in VRM I’s common stock and determined there was an other-than-temporary impairment as of September 30, 2008.  Based on this evaluation we impaired our investment to its fair value, as of September 30, 2008, to $2.25 per share.

As of September 30, 2009, our manager evaluated the near-term prospects of VRM I in relation to the severity and duration of the unrealized loss since September 30, 2008.  Based on that evaluation and our ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider our investment in VRM I to be other-than-temporarily impaired at September 30, 2009.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

See review report of Independent Registered Public Accounting Firm.

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NOTE F — REAL ESTATE HELD FOR SALE

At September 30, 2009, we held 16 properties with a total carrying value of approximately $21.0 million, which were acquired through foreclosure and recorded as investments in real estate held for sale.  One of these properties generated net income from rentals during the nine months ended September 30, 2009, totaling $55,000.  Expenses incurred during the nine months ended September 30, 2009, related to our real estate held for sale totaled approximately $20.6 million.  These expenses included approximately $19.5 million in write-downs on real estate held for sale.  The summary below includes our percentage of ownership in each of the properties.  Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  Set forth below is a roll-forward of investments in real estate held for sale during the nine months ended September 30, 2009:

Description	Date Acquired	%		Balance at 12/31/08		Acquisitions Through Foreclosure		Write Downs			Cash Reductions			Seller Financed / New Loan			Net Cash Proceeds on Sales			Gain (Loss) on Sale of Real Estate			Balance at 9/30/09
Marshall's Vista, LTD (1)	8/3/2004		100%	$	2,760,000	$	--	$	(2,116,000	)	$	--		$	--		$	--		$	--		$	644,000
Rio Vista Nevada, LLC – Land (2)	12/21/2006		86%		1,689,000		--		(1,689,000	)		--			--			--			--			--
Rio Vista Nevada, LLC – Houses (2)	12/21/2006		86%		256,000		--		--			--			--			--			--			256,000
Pirates Lake, LTD (3)	2/5/2008		48%		887,000		--		(532,000	)		--			--			--			--			355,000
Brawley CA 122, LLC (4)	5/1/2008		33%		308,000		--		(185,000	)		--			--			--			--			123,000
V & M Homes at the Palms, Inc. (5)	7/15/2008		39%		455,000		--		(89,000	)		--			--			--			--			366,000
The Orleans at Mesquite Estates, LLC (6)	8/8/2008		100%		828,000		--		(529,000	)		--			--			--			--			299,000
MRPE, LLC (7)	8/11/2008		72%		4,617,000		--		(3,298,000	)		--			--			--			--			1,319,000
The Laurels at Mesquite Estates, LLC (8)	8/11/2008		100%		920,000		--		(529,000	)		--			--			--			--			391,000
Jeffrey's Court, LLC (9)	9/3/2008		61%		2,229,000		--		(1,672,000	)		--			--			(562,000	)		5,000			--
Cliff Shadows Properties, LLC (10)	9/8/2008		95%		8,104,000		--		--			--			--			(8,131,000	)		146,000			119,000
The Sycamore Glenn at Mesquite Estates, LLC (11)	9/8/2008		100%		1,380,000		--		(920,000	)		--			--			--			--			460,000
Redwood Place, LLC (12)	1/16/2009		76%		--		6,057,000		(1,525,000	)		--			--			(4,061,000	)		(471,000	)		--
Bright Haven Builders, LLC (13)	3/6/2009		82%		--		1,173,000		(250,000	)		(173,000	)		--			--			--			750,000
World Capital La Piazza, LLC (14)	3/30/2009		100%		--		6,164,000		(2,568,000	)		(100,000	)		--			--			--			3,496,000
World Capital Durango Alpha (15)	3/30/2009		68%		--		3,482,000		(830,000	)		--			(2,190,000	)		(559,000	)		97,000			--
WCP Warm Springs Holdings 1, LLC (16)	5/7/2009		60%		--		2,657,000		(858,000	)		--			--			--			--			1,799,000
WHM Copper Mountain Investments, LLC (17)	7/23/2009		83%		--		11,462,000		(1,910,000	)		--			--			--			--			9,552,000
3900 LLC (18)	7/24/2009		100%		--		--		--			--			--			--			--			--
2503 Panorama, LLC (19)	8/31/2009		76%		--		1,048,000		--			--			--			--			--			1,048,000
				$	24,433,000	$	32,043,000	$	(19,500,000	)	$	(273,000	)	$	(2,190,000	)	$	(13,313,000	)	$	(223,000	)	$	20,977,000

(1) Marshall's Vista, LTD – During the nine months ended September 30, 2009, a potential buyer informed us that they were not in a position to close and that they could no longer continue to make extension payments and the sale was cancelled.  Our manager has evaluated the carrying value of the property and based on its estimate and appraisal the property was written down approximately $2.1 million during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $3.0 million.

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 approximately 95 acres of land comprised of 480 partially completed residential building lots and two single family dwellings in Rio Vista Village Subdivision in Cathedral City, CA.  During the nine months ended September 30, 2009, our manager evaluated the carrying value of real estate acquired through foreclosure located in Cathedral City, California.  Based on our manager’s evaluation of the property, outstanding liability and negotiations with a prospective purchaser that were subsequently terminated, our manager valued the land portion of the property at zero and the two single family homes at approximately $300,000, of which our portion is $256,000, during the nine months ended September 30, 2009.  On October 13, 2009, we, VRM I and Fund III entered into a letter of intent for the sale of the subject property for $850,000, with an approximate closing date of November 20, 2009; however, there can be no guarantee the sale will be completed.

(3) Pirates Lake, LTD – During February 2008, we, VRM I and Fund III acquired through foreclosure proceedings approximately 46.75 acres of land in Galveston, TX.  During the nine months ended September 30, 2009, our manager has evaluated the carrying value of the property and based on a current sales contract and updated appraisal, the property was written down approximately $1.1 million, of which our portion was $0.5 million.  The property is currently under contract for sale at $0.8 million, with an estimated closing date of November 9, 2009; however, there can be no guarantee the sale will be completed.

(4) Brawley CA 122, LLC – During May 2008, we, VRM I and Fund III acquired through foreclosure proceedings a 25 acre proposed 122 single-family subdivision to be known as River Drive Subdivision in Brawley, CA.  Our manager has evaluated the carrying value of the property and based on the current list price and appraisal, the property was written down approximately $0.6 million, of which our portion was approximately $0.2 million during the nine months ended September 30, 2009.  The property is currently listed for sale for $0.5 million.

(5) V & M Homes at the Palms, Inc. – During July 2008, we, VRM I and Fund III acquired through foreclosure proceedings an 80 acre parcel of land in Florence, AZ.  Our manager has evaluated the carrying value of the property and based on an updated appraisal obtained by our manager during August 2009, the property was written down $230,000, of which our portion was $89,000 during the nine months ended September 30, 2009.  The property is currently listed for sale at $0.7 million.

(6) The Orleans at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 21.7 gross acres of the Mesquite Estates Planned Unit Development with 65 "paper" lots, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property and based on its estimate, updated appraisal obtained by our manager during August 2009, and current list price, the property was written down approximately $0.5 million during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $0.5 million.

(7) MRPE, LLC – During August 2008, we, VRM I and Fund III acquired through foreclosure proceedings 132.03 acres of land within the Wolf Creek Estates Master Planned Community, located in Mesquite, NV.  Our manager has evaluated the carrying value of the property and based on its analysis, an updated appraisal obtained by our manager during August 2009, and the current list price, the property was written down $4.6 million, of which our portion was approximately $3.3 million, during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $2.0 million, which approximates the total book value, plus selling costs, for this property held by us, VRM I and Fund III.

(8) The Laurels at Mesquite Estates, LLC – During August 2008, we acquired through foreclosure proceedings 26.5 gross acres of the 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, an updated appraisal obtained by our manager during August 2009, and the current list price, the property was written down approximately $0.5 million during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $0.6 million.

See review report of Independent Registered Public Accounting Firm.

- 29 - -

(9) Jeffrey's Court, LLC – During September 2008, we, VRM I and Fund III acquired through foreclosure proceedings 4.92 acres of land to be developed into 119 condominium units in Las Vegas, NV.  We, VRM I and Fund III pledged this property as security for a loan from unrelated third parties totaling $225,000, of which our portion is $135,000.  These notes had terms of six and 12 months with monthly interest payments at 12%.  On August 6, 2009, we, VRM I and Fund III sold the Jeffrey’s Court, LLC property for approximately $1.0 million, which resulted in a net gain of $9,000 of which our portion was $5,000.  In addition, the notes payable totaling $225,000, which were secured by this property were paid in full.

(10) Cliff Shadows Properties, LLC – During September 2008, we, VRM I and Fund III acquired through foreclosure proceedings a 106 Unit Townhouse Project known as Cliff Shadows Townhomes located in Las Vegas, NV.  Our manager has evaluated the carrying value of the property and based on an updated appraisal obtained by our manager during September 2008 and the current sales agreement, no write-down was deemed necessary as of September 30, 2009.  During January 2009, our manager received a sales agreement to purchase the property for approximately $9.6 million, of which our portion would be approximately $9.1 million.  Between March 2009 and May 2009, we, VRM II and Fund III completed the sale of all but one unit, which resulted in a net gain of $152,000, of which our portion was $146,000.  As of September 30, 2009, the remaining unit is held for sale.

(11) The Sycamore Glenn at Mesquite Estates, LLC – During September 2008, we acquired through foreclosure proceedings 32.3 gross acres of the 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, an updated appraisal obtained by our manager during August 2009, and the current list price, the property was written down approximately $0.9 million during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $0.8 million.

(12) Redwood Place, LLC – On January 16, 2009, we, VRM I and Fund III, acquired through foreclosure proceedings a 186-unit apartment complex located in Phoenix, Arizona.  During the nine months ended September 30, 2009, this property generated net income of $55,000.  In June 2009, the property was sold for $5.4 million, of which our portion was approximately $4.1 million.  The sale resulted in a net loss of $0.6 million of which our portion was approximately $0.5 million.

(13) Bright Haven Builders, LLC – On March 6, 2009, we and, VRM I, acquired through foreclosure proceedings 10 single family homes, in various stages of completion, located within Cherry Meadows Subdivision located in Yelm, WA.  During April 2009, our manager sold one of the single family homes for $235,000.  Our manager has evaluated the carrying value of the property and based on its estimate and an updated appraisal, obtained by our manager during September 2009, the property was written down $304,000, of which our portion was $250,000 during the nine months ended September 30, 2009.

(14) World Capital La Piazza, LLC – On March 30, 2009, we acquired through foreclosure proceedings 8.44 net acres of land located in Henderson, NV.  Our manager has evaluated the carrying value of the property and based on its estimate and updated appraisal obtained by our manager during June 2009, the property was written down approximately $2.6 million during the nine months ended September 30, 2009.  The property is currently listed for sale at approximately $4.0 million, which approximates the total book value, plus selling costs, for this property.  On September 3, 2009, we mortgaged this property for $0.8 million.  The note bears an interest rate of 15%, payable monthly, and is due on January 2, 2010.  In addition, we paid $68,000 in loan fees.

(15) World Capital Durango Alpha – On March 30, 2009, we, VRM I and Fund III acquired through foreclosure proceedings 9.27 acres of land located in Las Vegas, NV.  Our manager evaluated the carrying value of the property and based on its estimate, the property was written down approximately $1.2 million, of which our portion was approximately $0.8 million during the nine months ended September 30, 2009.  During May 2009, the property was sold for approximately $4.0 million to an unrelated third party.  As part of the sale the buyer paid us, VRM I and Fund III approximately $0.8 million, of which our portion was approximately $0.6 million.  The remaining $3.2 million balance was financed by us, VRM I and Fund III through a 15 month loan with a stated interest rate of 8%.  As a result of the transaction, we, VRM I and Fund III recorded a net gain of $134,000, of which our portion was $97,000.

See review report of Independent Registered Public Accounting Firm.

- 30 - -

(16) WCP Warm Springs Holdings 1, LLC – On May 7, 2009, we, VRM I and Fund III acquired through foreclosure proceedings 10 acres of vacant land located in Las Vegas, NV.  Our manager has evaluated the carrying value of the property and based on its estimate and updated appraisal obtained by our manager during August 2009, the property was written down approximately $1.4 million, of which our portion was approximately $0.9 million, during the nine months ended September 30, 2009.  On October 15, 2009, we, VRM I and Fund III entered into an agreement to sell the subject property for approximately $3.1 million, with an anticipated closing date of December 15, 2009; however, there can be no guarantee the sale will be completed.

(17) WHM Copper Mountain Investments, LLC – On July 23, 2009, we and VRM I acquired through foreclosure proceedings various parcels of land within Copper Mountain Ranch Master Planned Community totaling approximately 2,330 acres lying within sections 15, 16, 21, 28 & 33 of the Copper Mountain Ranch Master Planned Community located in Casa Grande, AZ.  Our manager has evaluated the carrying value of the property and based on its estimate the property was written down $2.3 million, of which our portion was approximately $1.9 million, during the nine months ended September 30, 2009.  On October 1, 2009, we and VRM I received an letter of intent to purchase the subject property for approximately $12.4 million; however, there can be no guarantee the sale will be completed.

(18) 3900, LLC – On July 24, 2009, we foreclosed upon our second position lien related to an approximate 7.66 acre neighborhood retail center, located in Tempe, Arizona and classified it as real estate held for sale, with a zero balance.  Although we foreclosed upon a second position loan, we were subject to a first position loan on the majority of the property.  Subsequently, the first position lien holder concluded their foreclosure on the collateral securing their loan.  The portion of this property not subject to the first lien holder is currently owned by us and consists of three non-contiguous parcels of commercial land for mixed-use development with a combined area of approximately 29,595 net square feet.

(19) 2503 Panorama, LLC – On August 31, 2009, we, VRM I and Fund III acquired through foreclosure proceedings a 5,700 square foot penthouse located on the 25th floor of the Panorama Towers I, located in Las Vegas, NV.  Our manager has evaluated the carrying value of the property and based on its estimate no write-down was necessary as of September 30, 2009.

NOTE G — RELATED PARTY TRANSACTIONS

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

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the three and nine months ended September 30, 2009, were approximately $274,000 and $823,00, respectively, for each period.  The amount of management fees paid to our manager for the three and nine months ended September 30, 2008, were approximately $274,000 and $823,00, respectively, for each period.

As of September 30, 2009 and 2008, our manager owned 92,699 of our common shares.  For the three and nine months ended September 30, 2009, we did not declare or pay any dividends.  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.

See review report of Independent Registered Public Accounting Firm.

- 31 - -

On March 6, 2009, we, VRM I and Fund III completed the sale of 105 of the 106 Cliff Shadows Properties, LLC units, to an unrelated third party, the remaining unit is held for sale.  In accordance with our management agreement, we, VRM I and Fund III paid our manager an administrative fee of $282,000, shared pro-rata among us, VRM I and Fund III.

As of September 30, 2009, we owed our manager $1,000.  As of December 31, 2008, we owed our manager $623,000, primarily related to loan extension fees.

Transactions with Other Related Parties

As of September 30, 2009 and 2008, we owned 533,675 common shares of VRM I, representing approximately 8.21% and 7.76%, respectively, of their total outstanding common stock.  For the three and nine months ended September 30, 2009, VRM I did not declare any dividends.  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.

As of September 30, 2009 and 2008, VRM I owned 225,134 of our common shares, representing approximately 1.64% and 1.51%, respectively, of our total outstanding common stock.  For the three and nine months ended September 30, 2009, we did not declare any dividends.  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.

During the nine months ended September 30, 2009, we sold $1.0 million in real estate loans to VRM I.  During the nine months ended September 30, 2008, we sold $0.5 million in real estate loans to VRM I.  No gain or loss resulted from these transactions.

As of September 30, 2009, we had receivables from VRM I of $330,000, primarily related to legal fees.  As of December 31, 2008, we had receivables from VRM I of $92,000

As of September 30, 2009 and 2008, Fund III owned 114,117 of our common shares, representing approximately 0.83% and 0.77%, respectively, of our total outstanding common stock.  For the three and nine months ended September 30, 2009, we did not declare any dividends.  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.

During the nine months ended September 30, 2009, we sold approximately $0.5 million in real estate loans to Fund III.  No gain or loss resulted from these transactions.  There were no similar transactions during the nine months ended September 30, 2008.

As of September 30, 2009, we had receivables from Fund III of $8,000.  As of December 31, 2008, we had receivables from Fund III of $9,000.

During the three and nine months ended September 30, 2009, we incurred $153,000 and $409,000, 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, 2008, we incurred $47,000 and $110,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz.

On March 23, 2009, our board of directors authorized us to enter into a consulting agreement with the former COO of the Manager to assist us in the repurchase of the Junior Subordinated Notes.  The consulting fees paid will be up to three and half percent of the discounted amount of the repurchase.  During June 2009, we paid $317,000 in consulting fees.  During the three months ended September 30, 2009, we accrued an additional $575,000 in consulting fees to be paid before January 1, 2010.

See review report of Independent Registered Public Accounting Firm.

- 32 - -

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, 2009, we have received $104,000 in principal payments.  Payments will be recognized as income when received.  The balance of $336,000 was fully reserved as of September 30, 2009.

During March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for approximately $5.5 million of which our share of the proceeds were approximately $3.8 million, which resulted in a loss of approximately $0.8 million.  In addition, during June 2005, we and VRM I entered into a settlement agreement with the guarantors of the loan in the amount of $2.0 million in exchange for a release of their personal guarantees, of which our share was approximately $1.4 million.  The balance is secured by a second deed of trust, with a first installment of $100,000 due in July 2005 and monthly interest only payments of 5% on $1.1 million from July 2005 through July 2008, at which time the entire balance was due.  As of September 30, 2009, we have received $616,000 in principal payments.  Payments will be recognized as income when received.  The balance of $745,000 was fully reserved as of September 30, 2009.

During December 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, 2009, we had received $92,000 in principal payments.  Payments will be recognized as income when received.  The balance of approximately $1.2 million was fully reserved as of September 30, 2009.

During July 2009, we, VRM I and Fund III entered into a promissory note, totaling approximately $1.4 million, of which our portion is approximately $1.3 million, with the borrowers of the Wolfpack Properties, LLC loan, as part of the repayment terms of the loan.  In addition, we received a principal pay off on the loan of approximately $3.9 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $2.4 million.  The promissory note will accrue interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of approximately $1.3 million was fully reserved as of September 30, 2009.

During July 2009, we, VRM I and Fund III entered into a promissory note, totaling approximately $1.3 million, of which our portion is approximately $1.2 million, with the borrowers of the Devonshire, LLC loan, as part of the repayment terms of the loan.  In addition, we received a principal pay off on the loan of approximately $1.6 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $2.8 million.  The promissory note will accrue interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of approximately $1.2 million was fully reserved as of September 30, 2009.

NOTE I — JUNIOR SUBORDINATED NOTES

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

See review report of Independent Registered Public Accounting Firm.

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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 matched the terms of the trust preferred securities.  The notes were 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 required quarterly interest distributions beginning July 30, 2007.  For the nine months ended September 30, 2009, interest expense on the Junior Subordinated Notes totaled approximately $2.4 million.  For the nine months ended September 30, 2008, interest expense on the Junior Subordinated Notes totaled approximately $3.8 million.  As of September 30, 2009, there were no Junior Subordinated Notes outstanding.  All of the Junior Subordinated Notes were acquired by us in exchange for replacement securities that we had purchased in the open market.  Pursuant to the terms agreed with the representative of the Noteholders, we acquired $1.00 face amount of Junior Subordinated Notesi n exchange for $0.50 of replacement securities.  During the nine months ended September 30, 2009, we recognized a gain of approximately $27.2 million from such exchange.

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.  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.

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.  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.  We do not receive any revenues for entering into secured borrowings arrangements.

During June 2008, we, our manager, and Vestin Originations entered into an intercreditor agreement with an unrelated third party related to the funding of six real estate loans.  (See exhibit 10.5 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, 2009, and December 31, 2008, we had approximately $8.4 million and $10.6 million, respectively, in funds, including approximately $0.5 million and $0.7 million, respectively in interest reserves, used under Inter-creditor agreements.

See review report of Independent Registered Public Accounting Firm.

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NOTE K — NOTES 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.  During March 2009, the outstanding balance of the note was paid in full.  In April 2009, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 4.9%.  The agreement required a down payment of $45,000 and nine monthly payments of $28,000 beginning on May 27, 2009.  As of September 30, 2009, the outstanding balance of the note was $113,000.

On March 25, 2009, we borrowed $3.0 million from an unaffiliated party pursuant to an unsecured promissory note which was paid in full on May 7, 2009, with an exit fee of $0.6 million.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  See Note I – Junior Subordinated Notes.

During May 2009, we, VRM I and Fund III, mortgaged our real estate held for sale known as Redwood Place, LLC for approximately $3.2 million, of which our portion was approximately $2.4 million.  Interest, loan fees and property taxes related to the mortgage totaled $234,000, of which our portion was $178,000.  This mortgage was paid in full during June 2009, as part of the sale of Redwood Place, LLC.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  See Note I – Junior Subordinated Notes.

On May 14, 2009 we commenced contacting potential investors in connection with efforts to raise up to $15 million through a private placement of short term unsecured notes bearing a 20% interest rate.  As of September 30, 2009, we have raised approximately $1.1 million, in connection with this private placement.  On October 26, 2009, all the private placement notes, of approximately $1.1 million, were paid in full.

During April and May 2009, we, VRM I and Fund III borrowed $225,000, of which our portion is $135,000, secured by our real estate held for sale known as Jeffrey's Court.  The maturity terms of the notes were six and 12 months with an annual interest rate of 12%.  The notes require monthly interest only payments and principal due at maturity.  On August 6, 2009, we, VRM I and Fund III sold the Jeffrey’s Court, LLC property for approximately $1.0 million, resulting in a gain of $9,000, of which our portion was $5,000.  In addition, the notes payable totaling $225,000, which were secured by this property were paid in full.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  See Note I – Junior Subordinated Notes.

On September 3, 2009, we mortgaged our real estate held for sale known as World Capital La Piazza, LLC for $0.8 million.  The note bears an interest rate of 15%, payable monthly, and is due on January 2, 2010.  In addition, we paid $68,000 in loan fees.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  See Note I – Junior Subordinated Notes.

On August 20, 2009, we borrowed $2.0 million from an unaffiliated party pursuant to an unsecured promissory note, which is due on November 20, 2009.  The note required us to pay a loan fee of $140,000 and bears no interest if paid upon maturity.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  See Note I – Junior Subordinated Notes.

NOTE L — FAIR VALUE

As of September 30, 2009, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs and assets and liabilities utilizing Level 3 inputs included investments in real estate loans, secured borrowings and Junior Subordinated Notes payable.

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

See review report of Independent Registered Public Accounting Firm.

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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.

Our valuation techniques will 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, 2009, measured at fair value on a recurring basis by input levels:

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at 09/30/2009		Carrying Value on Balance Sheet at 09/30/2009
Assets
Investment in marketable securities - related party	$	777,000	$	--	$	--	$	777,000	$	777,000
Investment in real estate loans	$	--	$	--	$	76,308,000	$	76,308,000	$	77,569,000
Assets under secured borrowings	$	--	$	--	$	8,370,000	$	8,370,000	$	8,370,000
Liabilities
Secured borrowings	$	--	$	--	$	7,910,000	$	7,910,000	$	7,910,000

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30, 2009 to September 30, 2009:

See review report of Independent Registered Public Accounting Firm.

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	Assets
	Investment in real estate loans			Assets under secured borrowings
Balance on June 30, 2009	$	118,678,000		$	10,600,000
Change in temporary valuation adjustment included in net loss
Increase in allowance for loan losses		(19,663,000	)		--
Purchase and additions of assets
Transfer of real estate loans to real estate held for sale		(23,571,000	)		--
Transfer of allowance on real estate loans to real estate held for sale		11,062,000			--
New mortgage loans and mortgage loans bought		487,000			--
Sales, pay downs and reduction of assets
Collections of principal and sales of investment in real estate loans		(13,472,000	)		--
Reduction of allowance for loan losses related to sales an d payments of investment in real estate loans		5,242,000			--
Payment on assets under secured borrowings		(2,230,000	)		(2,230,000	)
Temporary change in estimated fair value based on future cash flows		(225,000	)		--
Transfer to Level 1		--			--
Transfer to Level 2		--			--
Balance on September 30, 2009, net of temporary valuation adjustment	$	76,308,000		$	8,370,000

	Liabilities
	Secured borrowings			Junior subordinated notes payable
Balance on June 30, 2009	$	9,907,000		$	18,155,000
Purchase of secured borrowings		(2,230,000	)		--
Reduction of interest reserves related to secured borrowings		233,000			--
Gain on repurchase of junior subordinated notes payable		--			17,550,000
Payment on junior subordinated notes payable		--			(36,310,000	)
Temporary change in estimated fair value		--			605,000
Transfer to Level 1		--			--
Transfer to Level 2		--			--
Balance on September 30, 2009, net of temporary valuation adjustment	$	7,910,000		$	--

NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (the “Codification”). Effective July 1, 2009, the Codification is the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. We adopted the Codification during the third quarter of 2009 and the adoption did not materially impact our financial statements, however our references to accounting literature within our notes to the condensed consolidated financial statements have been revised to conform to the Codification classification.

See review report of Independent Registered Public Accounting Firm.

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In June 2009, the FASB issued Statement of Financial Accounting Standards (“FAS”) 166, “ Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 ” (“FAS 166”), which is not yet included in the Codification. FAS 166 modifies the financial components approach, removes the concept of a qualifying special purpose entity, and clarifies and amends the derecognition criteria for determining whether a transfer of a financial asset or portion of a financial asset qualifies for sale accounting. FAS 166 also requires expanded disclosures regarding transferred assets and how they affect the reporting entity. FAS 166 is effective for us beginning January 1, 2010. We do not expect the adoption of FAS 166 to have a material effect on our financial statements.

In June 2009, the FASB issued FAS 167, “Amendments to FASB Interpretation No. 46R” (“FAS 167”), which is not yet included in the Codification. FAS 167 changes the consolidation analysis for VIEs and requires a qualitative analysis to determine the primary beneficiary of the VIE. The determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or the right to receive benefits, of the VIE which could potentially be significant to the VIE. FAS 167 requires an ongoing reconsideration of the primary beneficiary and also amends the events triggering a reassessment of whether an entity is a VIE. FAS 167 requires additional disclosures for VIEs, including disclosures about a reporting entity’s involvement with VIEs, how a reporting entity’s involvement with a VIE affects the reporting entity’s financial statements, and significant judgments and assumptions made by the reporting entity to determine whether it must consolidate the VIE. FAS 167 is effective for us beginning January 1, 2010. We are currently evaluating the effects, if any, this statement may have on our financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which provides alternatives to measuring the fair value of liabilities when a quoted price for an identical liability traded in an active market does not exist. The alternatives include using the quoted price for the identical liability when traded as an asset or the quoted price of a similar liability or of a similar liability when traded as an asset, in addition to valuation techniques based on the amount an entity would pay to transfer the identical liability (or receive to enter into an identical liability). The amended guidance is effective for us beginning October 1, 2009, and we do not expect the effects to have a material impact on our financial statements.

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.  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.

See review report of Independent Registered Public Accounting Firm.

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The state court complaint further alleges that Desert Land is entitled to void such transfers and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to enjoin defendants from further disposition of assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the action, and Mr. Shustek has guaranteed the indemnification.  In December 2008, this lawsuit was settled.  The settlement has no effect on us.

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

VRM I, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I.  The action seeks monetary damages, punitive damages, and rescission.  The trial is currently scheduled to begin on September 6, 2010.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of VRM I’s management agreement and Fund I’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by VRM I with respect to the above actions.

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

NOTE O — LEGAL MATTERS INVOLVING THE COMPANY

In April 2006, the lenders of the loans made to RightStar, Inc. (“RightStar”) 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 would be allocated in part to VRM I, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others, while mutually releasing each other and RightStar from all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have received offers and are currently requesting, entertaining, and reviewing bids on the RightStar properties.  To date the auction has not been successful.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed.  The court has initiated a 21-day posting/notice period, at the end of that period the court will proceed to enter its formal order, which is expected in December 2009.

See review report of Independent Registered Public Accounting Firm.

- 39 - -

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.  The trial is currently scheduled to begin in December 2009.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants are undertaking a vigorous defense.  The terms of our management agreement and Fund II’s Operating Agreement contain indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.

We, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”),in District Court for Clark County, Nevada.  The Plaintiffs allege, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II.  The action seeks monetary damages, punitive damages and rescission.  The trial is currently scheduled to begin on September 6, 2010.  The Defendants believe that the allegations are without merit and that they have adequate defenses.  The Defendants intend to undertake a vigorous defense.  The terms of our management agreement and Fund II’s operating agreement contain indemnity provisions whereby Vestin Mortgage and Michael V. Shustek may be eligible for indemnification by us with respect to the above actions.  We, Vestin Mortgage, Inc. and Michael Shustek have entered into confidential settlement agreements with individual plaintiffs who collectively held approximately 10% of the total shares at issue in the action.  In addition, four individual plaintiffs have voluntarily withdrawn their claims against us, Vestin Mortgage, Inc. and Michael Shustek with prejudice.

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

NOTE P — DIVIDEND REQUIREMENT

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

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

NOTE Q — SUBSEQUENT EVENTS

The following subsequent events have been evaluated through November 2, 2009, the date our financial statements were filed with the SEC.  Events after this date have not been evaluated in the set of financial statements being presented for the three and nine months ended September 30, 2009.

During October 2009, our manager modified the North Hills 234, LLC loan, whereby the interest rate was reduced from 13%, payable monthly, to 9%, with 5% accruing and due at the end the loan in December 2009 and 4% will be payable monthly.  Our manager will continue to evaluate our position in the loan.

See review report of Independent Registered Public Accounting Firm.

- 40 - -

During October 2009, our manager modified the Southern Hills 360, LLC loan, whereby the interest rate was reduced from 13%, payable monthly, to 9%, with 5% accruing and due at the end the loan in December 2009 and 4% will be payable monthly

On October 26, 2009, we, VRM I and Fund III sold the Cascadia Canyon, LLC loan for $6.1 million, of which our portion was approximately $5.0 million, to an unrelated third party.  No gain or loss resulted from this transaction.

On October 26, 2009, all the private placement notes, of approximately $1.1 million, were paid in full.

See review report of Independent Registered Public Accounting Firm.

- 41 - -

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, 2009, and the related consolidated statements of operations for the three and nine month periods ended September 30, 2009 and 2008, the consolidated statements of equity and other comprehensive loss for the nine month period ended September 30, 2009, and the consolidated statements of cash flows for the nine month periods ended September 30, 2009 and 2008. All information included in these consolidated financial statements is the representation of the management of Vestin Realty Mortgage II, Inc.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vestin Realty Mortgage II, Inc. as of December 31, 2008 and the related consolidated statements of operations, equity and other comprehensive income (loss) and cash flows for the year ended December 31, 2008.  We have also audited the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2008, and in our report dated March 26, 2009, we expressed an unqualified opinion on those consolidated financial statements and an unqualified opinion on the effectiveness of internal control over financial reporting. The consolidated financial statements referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Moore Stephens Wurth Frazer and Torbet, LLP

Orange, California

November 2, 2009

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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, 2009 and 2008.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2008 and our quarterly report filed on Form 10-Q for the three months ended March 31, 2009 and the six months ended June 30, 2009.

FORWARD-LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

OVERVIEW

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

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

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Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets.  This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations.  As of September 30, 2009, we had 11 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 $35.1 million, net of allowance for loan losses of approximately $44.4 million.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.

Non-performing assets, net of allowance for loan losses, totaled approximately $56.1 million or 51% of our total assets as of September 30, 2009, as compared to approximately $98.1 million or 49% of our total assets as of December 31, 2008.  At September 30, 2009, non-performing assets consisted of approximately $21.0 million of real estate held for sale and approximately $35.1 million of non-performing loans, net of allowance for loan losses.  One of the real estate held for sale properties generated net income from rentals totaling $55,000, during the nine months ended September 30, 2009.  None of the other properties held for sale generated net income during such time period.  See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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

We expect that the weakness in the credit markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future.  This may result in a further increase in defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may be required to restructure loans.  This increase in loan defaults has materially affected our operating results and led to the suspension of dividends to our stockholders.  For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

As of September 30, 2009, our loan-to-value ratio was 73.30%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional marked increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect upon our financial condition and operating results.  The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.

As of September 30, 2009, we have provided a specific reserve allowance for 10 non-performing loans and 10 performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans in the notes to our consolidated financial statements in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans.

As of September 30, 2009, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oregon and Texas.

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SUMMARY OF FINANCIAL RESULTS

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008
Total revenues	$	1,294,000		$	3,687,000		$	5,818,000		$	16,759,000
Total operating expenses		25,408,000			23,924,000			50,739,000			50,894,000
Non-operating income (loss)		17,550,000			(2,102,000	)		27,179,000			(278,000	)
Loss from real estate held for sale		(10,878,000	)		(17,807,000	)		(20,627,000	)		(31,063,000	)
Loss before provision for income taxes		(17,442,000	)		(40,146,000	)		(38,369,000	)		(65,476,000	)
Provision for income taxes		--			--			--			--
Net loss	$	(17,442,000	)	$	(40,146,000	)	$	(38,369,000	)	$	(65,476,000	)
Basic and diluted loss per common share	$	(1.27	)	$	(2.72	)	$	(2.78	)	$	(4.41	)
Dividends declared per common share	$	--		$	--		$	--		$	0.49
Weighted average common shares		13,777,618			14,772,583			13,783,798			14,844,070
Weighted average term of outstanding loans, including extensions	22 months			20 months			22 months			20 months

Comparison of Operating Results for the three months ended September 30, 2009, to the three months ended September 30, 2008.

Total Revenues:  For the three months ended September 30, 2009, total revenues were approximately $1.3 million compared to approximately $3.7 million for the same period in 2008, a decrease of approximately $2.4 million or 65% compared to the same period in 2008 due in significant part to the following factor:

· Interest income from investments in real estate loans was approximately $1.3 million during the three months ended September 30, 2009 compared to approximately $3.6 million during the same period in 2008.  Our revenue is dependent upon the balance of our investment in real estate loans and our ability to collect the interest earned on these loans.  As of September 30, 2009, our investment in real estate loans was approximately $143.0 million.  As of September 30, 2008, our investment in real estate loans was approximately $233.1 million.  The decline in interest income is largely attributable to the increase in non-performing assets, which has reduced our interest income as well as the amount of cash available for investment in new loans and the increase of real estate owned properties acquired through the foreclosures of our investments in real estate loans.  For additional information on our loan portfolio, see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements of this Quarterly Report Form 10-Q.

Total Operating Expenses:  For the three months ended September 30, 2009, total operating expenses were approximately $25.4 million compared to approximately $23.9 million during the three months ended September 30, 2008, an increase of approximately $1.5 million or 6%.  Expenses were primarily affected by the following factors:

· During the three months ended September 30, 2009, we recognized a provision for loan loss totaling approximately $19.7 million and approximately $20.0 million for the same period in 2008.  The significant recognition in loan losses is primarily a result of declining values in real estate reflected in updated appraisals obtained by our manager in 2009.  We believe that the continued weakness in real estate market may result in our recording additional losses related to the declining value of real estate securing our non-performing loans.  See “Specific Reserve Allowances” in Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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· We recognized approximately $2.0 million of interest expense during the three months ended September 30, 2009, related to the Junior Subordinated Notes issued during June 2007, in connection with the trust preferred financing, compared to approximately $1.3 million during the same period in 2008.  All of the Junior Subordinated Notes have been fully retired.  In September 2009, we exchanged $36.3 million of the Junior Subordinated notes for certain replacement securities, which we acquired for approximately $18 million.  This exchange resulted in a gain of approximately $17.6 million.  As a result of the repurchase of all of the Junior Subordinated Notes, we expensed the full amount outstanding of the deferred financing costs of approximately $1.8 million related to the Junior Subordinated Notes.

· Professional fees increased approximately $1.0 million the during three months ended September 30, 2009, compared to the same period in 2008, primarily due to legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion.  During the quarter ended September 30, 2009, we received, subject to a reservation of rights, payment of approximately $0.7 million from our Directors and Officers insurance carrier in respect of legal fees incurred in the defense of such actions.  No assurance can be made regarding future reimbursement of legal fees.  See Note O – Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income:  During the three months ended September 30, 2009, total non-operating income was approximately $17.6 million compared to non-operating loss of $2.1 million during the three months ended September 30, 2008, an increase of $19.7 million or 93%.  The increase in non-operating income is due to the recognition of a gain of approximately $17.6 million, relating to the retirement of $36.3 million of Junior Subordinated Notes at a discount.

Total Loss from Real Estate Held for Sale:  For the three months ended September 30, 2009, total losses from real estate held for sale were approximately $10.9 million compared to approximately $17.8 million for the three months ended September 30, 2008, a decrease of approximately $6.9 million or 39% due in significant part to the following factors:

· We wrote down approximately $10.6 million on 10 properties held for sale during the three months ended September 30, 2009, compared to approximately $17.0 million on seven properties held for sale during the three months ended September 30, 2008.  These write-downs resulted from declining real estate values which adversely impacted the value of the properties we acquired through foreclosure.  For additional information see Note F – Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

· We recorded a net loss of approximately $0.3 million on the sale of three real estate held for sale properties during the three months ended September 30, 2008.  For additional information see Note F – Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Comparison of Operating Results for the nine months ended September 30, 2009, to the nine months ended September 30, 2008.

Total Revenues:  For the nine months ended September 30, 2009, total revenues were approximately $5.8 million compared to approximately $16.8 million during the nine months ended September 30, 2008, a decrease of approximately $11.0 million or 65%.  Revenues were primarily affected by the following factor in addition to the factors discussed above in Total Revenues for the nine months ended September 30, 2009:

· Interest income from investments in real estate loans decreased to approximately $5.6 million during the nine months ended September 30, 2009, compared to approximately $16.1 million during the same period in 2008, primarily due to the increase in non-performing loans referred to above.  For additional information see 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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Total Operating Expenses:  For the nine months ended September 30, 2009, total operating expenses were approximately $50.7 million and approximately $50.9 million during nine months ended September 30, 2008, a decrease of approximately $0.2 million or less than 1%.  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, 2009:

· We recognized approximately $4.3 million of interest expense during the nine months ended September 30, 2009 related to the Junior Subordinated notes issued in connection with the trust preferred financing, compared to approximately $4.1 million during the same period in 2008.  During the nine months ended September 30, 2009, we exchanged $56.4 million of the Junior Subordinated notes for certain replacement securities, which we acquired for approximately $28.2 million.  This exchange resulted in a net gain of approximately $27.2 million.  In addition, we incurred approximately $1.4 million in loan fee expense related to the retirement of the Junior Subordinated notes during the nine months ended September 30, 2009

· During the nine months ended September 30, 2009, we recognized approximately $1.1 million of interest expenses related to secured borrowings held during the period compared to approximately $0.6 million for the same period in 2008.

· During the nine months ended September 30, 2009, we recognized a provision for loan loss totaling approximately $36.3 million, compared to approximately $42.3 million for the same period in 2008.  It is premature at this time for us to determine whether or not the reduction in provision for loan loss during the nine months ended September 30, 2009, as compared to the same period in 2008, is indicative of a trend.  See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

· Professional fees increased approximately $3.9 million during the nine months ended September 30, 2009, compared to the same period in 2008, primarily due to the legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion.  See Note O – Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income:  For the nine months ended September 30, 2009, total non-operating income was approximately $27.2 million compared to total non-operating loss of approximately $0.3 million during the nine months ended September 30, 2008, an increase of approximately $27.5 million or 9,877%.  This increase is due to the gain on the purchase of Junior Subordinated Notes at a discount as discussed above.

Total Loss from Real Estate Held for Sale:  For the nine months ended September 30, 2009, total losses from real estate held for sale were approximately $20.6 million compared to approximately $31.1 million during the nine months ended September 30, 2008, a decrease of approximately $10.5 million or 34%.  The loss from real estate held for sale is due to the write-down on 16 real estate held for sale properties, of approximately $19.5 million, during the nine months ended September 30, 2009.  During the nine months ended September 30, 2008, total write-downs on real estate held for sale was approximately $29.8 million on nine real estate held for sale properties.

Dividends to Stockholders; Reliance on Non-GAAP Financial Measurements:  To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income over 5% of our REIT taxable income, determined without regard to the dividends paid and our net capital gain.  Because we expect to declare dividends based on these requirements, and not based on our earnings computed in accordance with GAAP, we expect that our dividends may at times be more or less than our reported earnings as computed in accordance with GAAP.  During the nine months ended September 30, 2009, we did not declare any cash dividends.

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

The table below reconciles the differences between reported net income and total estimated taxable income and estimated REIT taxable income for the nine months ended September 30, 2009:

	For the Nine Months Ended
	September 30, 2009
Net loss, as reported	$	(38,369,000	)
Add (deduct):
Provision for loan loss		36,266,000
Write-down on real estate held for sale		19,500,000
Net tax loss on foreclosure of real estate loans		(29,985,000	)
Book loss on sale of real estate held for sale		223,000
Net Tax loss on sale of real estate held for sale		(3,429,000	)
Book loss (gain) on sale of real estate loan		(110,000	)
Tax loss on sale of real estate loan		(14,837,000	)
Recovery of allowance for doubtful notes receivable		(14,000	)
Provision for doubtful accounts related to receivable		53,000
Total taxable loss		(30,702,000	)
Less : Taxable income attributable to TRS II, Inc.		105,000
Estimated REIT taxable loss	$	(30,597,000	)

CAPITAL AND LIQUIDITY

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

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During the nine months ended September 30, 2009, net cash flows used by operating activities approximated $4.5 million.  Operating cash flows were adversely impacted by increased legal fees and the decrease in interest income, related to the decrease in our investments in real estate loans, of approximately $10.5 million during the nine months ended September 30, 2009, compared to the same period in 2008.  In addition, we incurred approximately $19.5 million in write-downs on real estate held for sale and approximately $36.3 million in provisions for loan losses during the nine months ended September 30, 2009.  These write-downs and allowances represent the decreases in the fair value of these properties, which are expected to affect the amount of proceeds we will receive from future sales of these assets.  Cash flows related to investing activities consisted of cash provided by loan payoffs, sales of real estate loans and proceeds for sales of real estate held for sale of approximately $36.8 million and cash used for new investments and purchases of real estate loans totaling approximately $19.9 million.  Cash flows from financing activities consisted of notes payable of approximately $7.0 million and payment on notes payable of approximately $31.4 million.  Financing activities also consisted of a purchase of treasury stock totaling $165,000.

At September 30, 2009, we had approximately $1.0 million in cash, $0.8 million in marketable securities – related party and approximately $110.7 million in total assets.  As of September 30, 2009, we have retired all of our Junior Subordinated Notes and recorded a total net gain of approximately $28.8 million.  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 during the next 12 months.

Since we comply with the REIT requirements and distribute at least ninety percent (90%) of our annual taxable income, our sources of liquidity include; repayments of outstanding loans, dividend reinvestments by our stockholders, arrangements with third parties to participate in our loans and proceeds from issuance of note payable and secured borrowings.  We rely primarily upon repayment of outstanding loans and proceeds from sales of real estate held for sale to provide capital for investment in new loans.  The significant level of defaults on outstanding loans has reduced the funds we have available for investment in new loans.  Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds.  This has diminished our capital resources and impaired our ability to invest in new loans.  During June 2008, our Board of Directors decided to suspend the payment of dividends.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our annual taxable income.

Non-performing assets included loans in non-accrual status, net of allowance for loan losses, and real estate held for sale totaling approximately $35.1 million and $21.0 million, respectively, as of September 30, 2009, compared to approximately $73.7 million and $24.4 million, respectively, as of December 31, 2008.  It is possible that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted.  Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets.  We believe that the continued weakness in real estate markets may result in additional losses on our real estate held for sale.

As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures our losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.  Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.

We have no current plans to sell any new shares.  Although a small percentage of our shareholders have elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume.  Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the near future.

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We are considering various options to enhance the Company’s capital resources.  We have and may continue to raise funds through the issuance of promissory notes secured by certain of our real estate owned properties.

On March 25, 2009, we borrowed $3.0 million from an unaffiliated party pursuant to an unsecured promissory note which was paid in full on May 7, 2009, with an exit fee of $0.6 million.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.  Per the terms of the loan, all subsequent proceeds from loan repayments and sales of property were used to pay down the note.

On May 14, 2009, we commenced contacting potential investors in connection with efforts to raise up to $15 million in a private placement of short term unsecured notes bearing a 20% coupon.  As of September 30, 2009, we have raised approximately $1.1 million, in connection with these private placement notes.

On August 20, 2009, we borrowed $2.0 million from an unaffiliated party pursuant to an unsecured promissory note, which is due on November 20, 2009.  The note required us to pay a loan fee of $140,000 and bears no interest if paid upon maturity.  We used these funds to purchase a portion of the Junior Subordinated Notes referred to above.

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, 2009, we had purchased 1,242,776 shares as treasury stock through the repurchase program noted above.  These shares are carried on our books at cost totaling approximately $5.8 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of September 30, 2009, we had a total of 1,256,526 shares of treasury stock carried on our books at cost totaling approximately $5.9 million.  As of December 31, 2008, we had a total of 1,198,573 shares of treasury stock carried on our books at cost totaling approximately $5.7 million.

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.  As of November 3, 2009, we meet our 3% reserve requirement.

When economic conditions permit, 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 8% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We had investments in 28 real estate loans, as of September 30, 2009, with a balance of approximately $143.0 million as compared to investments in 39 real estate loans, as of December 31, 2008, with a balance of approximately $225.0 million.

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As of September 30, 2009, we had 11 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 $35.1 million, net of allowance for loan losses of approximately $44.4 million, which does not include the allowances of approximately $21.0 million relating to the decrease in the property value for performing loans as of September 30, 2009.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.  Our manager has evaluated these loans and, based on current estimates, believes that the value of the underlying collateral is sufficient to protect us from loss of principal.  However, such estimates may change, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.

Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  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, 2009, we have provided a specific reserve related to 10 non-performing loans and 10 performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager.  Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded.

During the nine months ended September 30, 2009, we foreclosed upon eight properties, totaling approximately $32.0 million, and classified them as real estate held for sale.  For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans and Note F – Real Estate Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Asset Quality and Loan Reserves

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

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

· Prevailing economic conditions;

· Historical experience;

· The nature and volume of the loan portfolio;

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

· Evaluation of industry trends; and

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

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  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, 2009, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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Investments in Real Estate Held for Sale

At September 30, 2009, we held 16 properties with a total carrying value of approximately $21.0 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 taking into account current economic conditions.  For additional information on our investments in real estate held for sale, refer to Note F – Real Estate Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at September 30, 2009:

Contractual Obligation	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Secured borrowings (1)	$	8,370,000	$	8,370,000	$	--	$	--	$	--
Notes payable (2)		4,001,000		4,001,000		--		--		--
Total	$	12,371,000	$	12,371,000	$	--	$	--	$	--

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

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

RELATED PARTY TRANSACTIONS

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

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

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

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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, 2009, 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	$	2,100,000
Weighted average interest rate assumption increased by 5.0% or 500 basis points	$	10,499,000
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points	$	20,998,000
Weighted average interest rate assumption decreased by 1.0% or 100 basis points	$	(2,100,000	)
Weighted average interest rate assumption decreased by 5.0% or 500 basis points	$	(10,499,000	)
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points	$	(20,998,000	)

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

Allowance for Loan Losses

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

The following table presents a sensitivity analysis to show the impact on our financial condition at September 30, 2009, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption	Increase (Decrease) in Allowance for Loan Losses
Allowance for loan losses assumption increased by 1.0% of loan portfolio	$	1,430,000
Allowance for loan losses assumption increased by 5.0% of loan portfolio	$	7,149,000
Allowance for loan losses assumption increased by 10.0% of loan portfolio	$	14,298,000
Allowance for loan losses assumption decreased by 1.0% of loan portfolio	$	(1,430,000	)
Allowance for loan losses assumption decreased by 5.0% of loan portfolio	$	(7,149,000	)
Allowance for loan losses assumption decreased by 10.0% of loan portfolio	$	(14,298,000	)

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;

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

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

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

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

Real Estate Held for Sale

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

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

· Management commits to a plan to sell the properties;

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

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

· The sale of the property is probable;

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

· Withdrawal or significant modification of the sale is not likely.

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 consist of investments in real estate loans, which from time to time include those that are financed under Inter-creditor Agreements.  At September 30, 2009, our aggregate investment in real estate loans was approximately $77.6 million, net of allowance of approximately $65.4 million, with a weighted average effective interest rate of 11.24%.  The weighted average interest rate of 11.24% 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, 2009, was 9.30%.  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, 2009, was 22 months.  All of the outstanding real estate loans at September 30, 2009, were fixed rate loans.  All of the real estate loans are held for investment purposes; none are held for sale.  We intend to hold such real estate loans to maturity.  As of September 30, 2009, none of our loans had a prepayment penalty, although 15 of our loans, totaling approximately $67.5 million, had an exit fee.  Out of the 15 loans with an exit fee, four loans, totaling approximately $25.8 million, were considered non-performing as of September 30, 2009.

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Market fluctuations in interest rates generally do not affect the carrying value of our investment in real estate loans.  However, significant and sustained changes in interest rates could affect our operating results.  If interest rates decline significantly, some of the borrowers could prepay their loans with the proceeds of a refinancing at lower interest rates.  This would reduce our earnings and funds available for dividend distribution to stockholders.  On the other hand, a significant increase in interest rates could result in a slowdown in real estate development activity that would reduce the demand for commercial real estate loans.  As a result, we might encounter greater difficulty in identifying appropriate borrowers.  We are not in a position to quantify the potential impact on our operating results from a material change in interest rates.

The following table contains information about the investment of real estate loans in our portfolio as of September 30, 2009.  The presentation aggregates the investment in real estate loans by their maturity dates for maturities occurring in each of the years 2009 through 2013 and thereafter and separately aggregates the information for all maturities arising after 2013.  The carrying values of these assets approximate their fair value as of September 30, 2009.  See Note L – Fair Value of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

	Interest Earning Assets Aggregated by Maturity at September 30, 2009
Interest Earning Assets	2009		2010		2011		2012		2013		Thereafter		Total
	(a)
Investments In Real Estate Loans	$	95,654,000	$	32,482,000	$	14,842,000	$	--	$	--	$	--	$	142,978,000
Weighted Average Interest Rates		12.86%		8.76%		6.21%		--%		--%		--%		11.24%

(a) Amounts include the balance of non-performing loans and loans that have been extended subsequent to September 30, 2009.

At September 30, 2009, we also had approximately $1.8 million invested in cash 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, 2009, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon our evaluation, our CEO and CFO concluded that, as of September 30, 2009, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

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

Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and our CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the third fiscal quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the third fiscal quarter of 2009.

ITEM 4T. CONTROLS AND PROCEDURES

Not applicable.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

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

As of September 30, 2009, our non-performing assets were approximately $56.1 million, representing approximately 61% of our stockholders’ equity.  Non-performing assets included approximately $35.1 million in non-performing loans, net of allowance for non-performing loan losses of approximately $44.4 million, and approximately $21.0 million of real estate held for sale.  We believe that the level of non-performing assets is largely attributable to difficulties in the real estate and credit markets.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures.  At this time, we are not able to predict how long such difficult economic conditions will continue.  We have not paid any dividends since June 2008 and do not anticipate paying dividends in the foreseeable future.

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As of September 30, 2009 and December 31, 2008, we had approximately $65.4 million and $78.2 million in allowances for loan losses, respectively, resulting in net weighted average loan-to-value ratios of 73.30% and 84.01%, respectively.  Not including allowance for loan losses, our weighted average loan-to-value ratio, as of September 30, 2009 and December 31, 2008, was 132.06% and 175.12%, respectively, primarily as a result of declining real estate values that have eroded the market value of our collateral.  As a result, we may not be able to recover the full amount of our loans if the borrower defaults.  Moreover, any failure of a borrower to pay interest on loans will reduce our revenues, the dividends we pay to stockholders and, most likely, the value of our stock.  Similarly, any failure of a borrower to repay loans when due may reduce the capital we have available to make new loans, thereby adversely affecting our operating results.

The current recession and constraints in the credit markets are adversely affecting our operating results and financial condition.

As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, an extended period of illiquidity in the credit markets has resulted in a material increase in the number of our loans that are not paid back on time.  A continuation of increased delinquencies, defaults or foreclosures will have an adverse affect upon our ability to originate, purchase and securitize loans, which could significantly harm our business, financial condition, liquidity and results of operations.

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

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

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

We depend upon our real estate security to protect us on the loans that we make.  We depend upon the skill of independent appraisers to value the security underlying our loans.  However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent events.  Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower.  Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals.  Since the summer of 2007, there has been a significant decline in real estate values in many of the markets where we operate, resulting in a decline in the estimated value of the real estate securing our loans.  Such decline appears to be continuing in several of the principal markets in which we operate.

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

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, 2009, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.  Loans with balloon payments are riskier than loans with payments of principal over an extended time period such as 15 or 30 years because the borrower’s repayment depends on its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due.  The borrower’s ability to achieve a successful sale or refinancing of the property may be adversely impacted by deteriorating economic conditions or illiquidity in the credit markets.  There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments.  Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due.  As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

An increased percentage of our loan portfolio consists of second deeds of trust which generally entail a higher degree of risk than first deeds of trust.

We invest in second deeds of trust and, in rare instances, wraparound, or all-inclusive, real estate loans.  Our board is required to approve our investing more than 10% of our assets in second deeds of trust.  During September 2008, the board authorized us to allow loans secured by second deeds of trust to constitute up to 15% of our loans, due to loan restructuring and current business opportunities.  In a second deed of trust, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the first deed of trust.  In a wraparound real estate loan, our rights will be similarly subject to the rights of a first deed of trust, but the aggregate indebtedness evidenced by our loan documentation will be the first deed of trust plus the new funds we invest.  We would receive all payments from the borrower and forward to the senior lender its portion of the payments we receive.  Because both of these types of loans are subject to the first deed of trust’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans that we will not be able to collect the full amount of our loan and may provide an allowance for the full amount of the loan.  If we are unable to collect the amounts secured by second deeds of trust, our operating results will suffer and we will have less funds available to distribute to shareholders.  As of September 30, 2009, approximately 24.9% of our loans were secured by a second deed of trust.  When funded, such loans constituted less than 15% of our loans.  The percentage of our loans in second deeds of trust have increased primarily due to the decrease in loans secured by first deeds of trust through sales, foreclosures and modifications.  As of September 30, 2009, three of our eight loans secured by second deeds of trust were considered non-performing.  These non-performing loans totaled approximately $22.0 million, of which our portion is approximately $18.1 million.  Our book value, net of allowance for loan losses, for these three non-performing loans is approximately $7.2 million.

Our loans are not guaranteed by any governmental agency.

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

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

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

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

We may borrow up to 70% of the fair market value of our outstanding real estate loans at any time.  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 10.5 Intercreditor Agreement  under the Exhibit Index included in Part II, Item 6 – Exhibits of this Quarterly Report Form 10-Q).  The participation interest is at 11% on the outstanding balance.  We incurred approximately $0.9 million in finance costs related to the secured borrowings, these costs are being amortized to interest expense over the term of the agreements.  As of September 30, 2009, and December 31, 2008, we had $8.4 million and $10.6 million, respectively, in funds, including approximately $0.5 million and $0.7 million, respectively, in interest reserves, used under Inter-creditor Agreements.

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

There is a substantial risk that we would be unable to raise additional funding if needed to meet our obligations or expand our loan portfolio.

We may need cash to meet our minimum REIT distribution requirements and limit U.S. federal income taxation.  Because we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) to qualify as a REIT and because we intend to distribute substantially all of our REIT taxable income and net capital gain, our ability to expand our loan portfolio will depend in large part on external sources of capital.  In addition, if our minimum distribution requirements to maintain our REIT status and minimize U.S. federal income taxation become large relative to our cash flow as a result of our taxable income exceeding our cash flow from operations, then we may be required to borrow funds or raise capital by selling assets to meet those distribution requirements.

Our ability to borrow funds for this purpose, or to expand our loan portfolio, is doubtful in light of current market conditions.  In addition, our ability to raise funds through an equity financing would be hindered by the current price of our stock.  If we raise capital through an equity offering, this may result in substantial dilution to our current stockholders.  Any debt financing may be expensive and might include restrictive covenants that would constrain our ability to declare dividends to our shareholders.  We may not be able to raise capital on reasonable terms, if at all, in the current market environment.  We are currently seeking to raise up to $15 million through the private placement of short term, unsecured notes bearing interest at an annual rate of 20%.

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;

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

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

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

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

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

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

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

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

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

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

Interest rate fluctuations may affect our operating results as follows:

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

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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, 2009, none of our loans had a prepayment penalty, although 15 of our loans, totaling approximately $67.5 million, had an exit fee.  Out of the 15 loans with an exit fee, 4 loans, totaling approximately $25.8 million, were considered non-performing as of September 30, 2009.  However, depending upon the amount by which interest rates decline, the amount of the exit fees is generally not significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.

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

As of September 30, 2009, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oregon and Texas, with approximately 41% of our loans in Nevada.  Our loan concentration in these Western states has increased our vulnerability to the troubled real estate markets in such states.  Depending on the market and on our company’s performance, we may expand our investments throughout the United States.  However, our manager has limited experience outside of the Western and Southwestern United States.  Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state.

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

We are a party in several legal actions seeking damages and appraisal rights in connection with the REIT conversion.  See Note N – Legal Matters Involving The Manager and Note O – Legal Matters Involving The Company in the notes to the consolidated financial statement under Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.  While we believe these actions are without merit, the defense of such actions has materially increased our legal costs and may require the substantial attention of our management.  The increased legal costs have and may continue to adversely impact our operating results.  As of September 30, 2009, we have incurred legal expenses of approximately $6.6 million related to such actions and have received reimbursement, subject to a reservation of rights, of approximately $2.2 million of such fees from our Directors and Officers insurance carrier.  No assurance can be made regarding future reimbursement of legal fees.   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 the independent members of our board of directors.  If our co-participant affiliate determines to sell its interest in the loan, there is no guarantee that we will have the resources to purchase such interest and we will have no control over a sale to a third party purchaser.

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MANAGEMENT AND CONFLICTS OF INTEREST RISKS

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

Our ability to achieve our investment objectives and to pay dividends to our shareholders depends upon our manager’s and its affiliate’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers.  Stockholders have no opportunity to evaluate the financial information or creditworthiness of borrowers, the terms of mortgages, the real property that is our collateral or other economic or financial data concerning our loans.  We pay our manager an annual management fee of up to 0.25% of our aggregate capital received by us and Fund II from the sale of shares or membership units.  This fee is payable regardless of the performance of our loan portfolio.  Our manager’s duties to our stockholders are generally governed by the terms of the management contract, rather than by common law principles of fiduciary duty.  Moreover, our manager is not required to devote its employees’ full time to our business and may devote time to business interests competitive to our business.

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

As of September 30, 2009, our loans were in the following states:  Arizona, California, Hawaii, Nevada, Oregon and Texas.  Depending on the market and on our company’s performance, we may expand our investments throughout the United States.  However, our manager has limited experience outside of the Western and Southwestern United States.  Real estate markets vary greatly from location to location and the rights of secured real estate lenders vary considerably from state to state.  Our manager’s limited experience in most U.S. real estate markets may impact its ability to make prudent investment decisions on our behalf.  Accordingly, where our manager deems it necessary, it plans to utilize independent real estate advisors and local legal counsel located in markets where it lacks experience for consultation prior to making investment decisions.  Stockholders will not have an opportunity to evaluate the qualifications of such advisors and no assurance can be given that they will render prudent advice to our manager.

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

Our success depends in part upon the continued contributions of certain key personnel of our manager, including; Michael V. Shustek (Chief Executive Officer and President) and Daniel B. Stubbs (Senior Vice President, Underwriting).  Both Mr. Shustek and Mr. Stubbs have extensive experience in our line of business, extensive market contacts and familiarity with our company.  We also rely upon Rocio Revollo who is our Chief Financial Officer and who has extensive familiarity with the company and our accounting systems.  Ms. Revollo’s services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions, LLC.  If Mr. Shustek or Mr. Stubbs were to cease their employment with our manager, or if Ms. Revollo’s services were no longer available through Strategix Solutions, they might be difficult to replace and our operating results could suffer.  None of the key personnel of our manager is subject to an employment, non-competition or confidentiality agreement with our manager, or us and we do not maintain “key man” life insurance policies on any of them.  Strategix Solutions has the right to terminate its agreement with our manager on 90 days notice.  Ms. Revollo does not have an employment agreement with Strategix Solutions.  Our future success also depends in large part upon our manager’s ability to hire and retain additional highly skilled managerial, operational and marketing personnel.  Our manager may require additional operations and marketing people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the relevant markets.  Competition for personnel is intense, and we cannot be assured that we will be successful in attracting and retaining skilled personnel.  If our manager were unable to attract and retain key personnel, the ability of our manager to make prudent investment decisions on our behalf may be impaired.

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

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

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

Our manager is also the manager of VRM I, Fund III and inVestin, companies with investment objectives similar to ours.  Our manager and Mr. Shustek, who indirectly owns 100% of our manager, anticipate that they may also sponsor other real estate programs having investment objectives similar to ours.  As a result, our manager and Mr. Shustek may have conflicts of interest in allocating their time and resources between our business and other activities.  During times of intense activity in other programs and ventures, our manager and its key people will likely devote less time and resources to our business than they ordinarily would.  Our management agreement with our manager does not specify a minimum amount of time and attention that our manager and its key people are required to devote to our company.  Thus, our manager may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives.

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

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

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, 2009.  In addition, Vestin Mortgage and Vestin Originations received a total of approximately $2.3 million and $0.6 million, respectively, in fees directly from borrowers for the nine months ended September 30, 2009.  The amounts received from borrowers represent fees earned by Vestin Mortgage and Vestin Originations for loans originated for all funds managed by Vestin Mortgage, including us, VRM I, Fund III and inVestin.  Our assets represented approximately 71% of the assets managed by Vestin Mortgage as of September 30, 2009.

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

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

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

VRM I is a company which engages 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 us with VRM I.  Our management has evaluated issues relevant to a possible combination and 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.

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

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

Dividends from a REIT are currently taxed at a higher rate than corporate dividends.

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

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.

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We intend to avoid the 100% prohibited transactions tax on property foreclosed upon by Fund II prior to the REIT conversion by holding and selling such properties through one or more wholly-owned taxable REIT subsidiaries.  However, under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries and a taxable REIT subsidiary generally cannot operate a lodging or health care facility.

As of September 30, 2009, we held 16 properties with a total carrying value of approximately $21.0 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 principles (“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 21% of our assets as of September 30, 2009.

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

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

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

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

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

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

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.

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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, 2009, has ranged from $1.54 to $15.96 (adjusted for stock splits and reverse stock splits).  We believe the price of our stock in the months after we were listed was affected by, among other things, selling pressure from stockholders seeking immediate liquidity and the level of non-performing assets, which we own.  We continue to own a significant level of non-performing assets and our sector of the market has suffered from the problems encountered by sub-prime lenders.  Our stock price may be highly volatile and subject to wide fluctuations.  In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur.  Our Company will be dissolved on December 31, 2020 unless the holders of a majority of our common stock determine otherwise.  As we move closer to the dissolution date, we expect to stop making new loans and our stock price could approach our book value per share.  However, no assurance can be given that the stock price will approach book value and then prevailing market conditions may affect the price of our stock even as we near 2020.

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

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

· Actual or anticipated variations in our quarterly operating results or dividends;

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

· Changes in market valuations of similar companies;

· Changes in tax laws affecting REITs;

· Litigation;

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

· General market and economic conditions.

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

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

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.

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

Our charter and bylaws and Maryland corporate law contain a number of provisions (as further described in exhibit 3.2 Bylaws of the Registrant under the Exhibit Index included in Part II, Item 6 of this Quarterly Report Form 10-Q) that could delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our common stock or otherwise be in their best interests, including:

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

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

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

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

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

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:

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

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

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

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

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

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

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

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

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

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 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.

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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, 2009, we had purchased 1,242,776 shares as treasury stock through the repurchase program noted above.  These shares are carried on our books at cost totaling approximately $5.8 million.  In addition, as part of a settlement agreement, we repurchased 13,750 shares of stock, during January 2009, and classified them as treasury stock and incurred $76,000 in settlement expenses.  These shares are carried on our books at cost totaling $42,000 and are not part of the repurchase program.  As of September 30, 2009, we had a total of 1,256,526 shares of treasury stock carried on our books at cost totaling approximately $5.9 million.

The following is a summary of our stock purchases during the three months ended September 30, 2009, as required by Regulation S-K, Item 703.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or Programs
July 1 – July 31, 2009		--	$	--		--	$	4,308,000
August 1 – August 31, 2009		--		--		--		4,308,000
September 1 – September 30, 2009		44,203		2.78		44,203		4,185,000
Total		44,203	$	2.78		44,203	$	4,185,000

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.
3.6 (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 (8)	Letter Agreement dated November 7, 2008 pertaining to Junior Subordinated Indenture
4.6 (9)	First Supplemental Indenture dated of February 3, 2009 pertaining to Junior Subordinated Indenture
4.7 (9)	Letter Agreement dated March 25, 2009 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
10.3 (4)	Form of Purchase Agreement
10.4 (4)	Amended and Restated Trust Agreement
10.5 (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
10.6 (10)	Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.
10.7 (11)	Second Supplemental Indenture, dated as of May 27, 2009 pertaining to Junior Subordinated Indenture
10.8 (11)	First Amendment to Amended and Restated Trust Agreement, dated as of May 27, 2009
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

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(1)	Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121)
(2)	Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121)
(3)	Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)
(4)	Incorporated herein by reference to the Current Report on Form 8-K filed on June 27, 2007 (File No. 000-51892)
(5)	Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)
(6)	Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)
(7)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892)
(8)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on November 10, 2008 (File No. 000-51892)
(9)	Incorporated herein by reference to the Annual Report on Form 10-K filed on March 26, 2009 (File No. 000-51892)
(10)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51892)
(11)	Incorporated herein by reference to the Current Report on Form 8-K filed on June 10, 2009 (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 3, 2009

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

Signature	Capacity	Date
/s/ Michael V. Shustek	President and Chief Executive Officer and Director	November 3, 2009
Michael V. Shustek	(Principal Executive Officer)
/s/ Rocio Revollo	Chief Financial Officer	November 3, 2009
Rocio Revollo	(Principal Financial and Accounting Officer)
/s/ John E. Dawson	Director	November 3, 2009
John E. Dawson
/s/ Robert J. Aalberts	Director	November 3, 2009
Robert J. Aalberts
/s/ Fredrick J. Zaffarese Leavitt	Director	November 3, 2009
Fredrick J. Zaffarese Leavitt
/s/ Roland M. Sansone	Director	November 3, 2009
Roland M. Sansone

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